UNITED STATES
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934




For the
quarterly period ended September 30, 2009




OR




[_]
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files)


Yes [_]
No [_]




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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. (Check one):


Large
accelerated filer [_]     Accelerated filer
[_]


Non-accelerated
filer [_]       Smaller reporting company
[X]




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.)


Yes [_]
No [X]




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. 144,380,967 common shares issued and
outstanding as of November 20, 2009









PART I –
FINANCIAL INFORMATION





ITEM
1.  CONSOLIDATED FINANCIAL STATEMENTS





ERF
WIRELESS, INC.


CONSOLIDATED
BALANCE SHEETS


SEPTEMBER
30, 2009, AND DECEMBER 31, 2008


($ in
thousands except share data)





September
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008(unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                  
                  
                  $
                  162
                  
                  
                  $
                  348Accounts
      receivable, net
                  
                  
                  
                  322
                  
                  
                  
                  248Accounts
      receivable, other
                  
                  
                  
                  167
                  
                  
                  
                  52Inventories
                  
                  
                  
                  273
                  
                  
                  
                  193Costs
      and profits in excess of billings
                  
                  
                  
                  86
                  
                  
                  
                  427Prepaid
      expenses and other current assets
                  
                  
                  
                  312
                  
                  
                  
                  494Total
      current assets
                  
                  
                  
                  1,322
                  
                  
                  
                  1,762Property
      and equipmentProperty
      and equipment
                  
                  
                  
                  8,834
                  
                  
                  
                  7,751Less:
      accumulated depreciation
                  
                  
                  
                  (3,171
                  )
                  
                  
                  (1,649
                  )Net
      property and equipment
                  
                  
                  
                  5,663
                  
                  
                  
                  6,102Goodwill
                  
                  
                  
                  1,255
                  
                  
                  
                  436Intangible
      assets, net
                  
                  
                  
                  869
                  
                  
                  
                  1,059Other
      assets
                  
                  
                  
                  245
                  
                  
                  
                  264Total
      assets
                  
                  
                  $
                  9,354
                  
                  
                  $
                  9,623LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Notes
      payable and current portion of long-term debt
                  
                  
                  $
                  1,846
                  
                  
                  $
                  702Capital
      leases and current portion of long-term capital leases
                  
                  
                  
                  901
                  
                  
                  
                  861Accounts
      payable
                  
                  
                  
                  869
                  
                  
                  
                  981Accrued
      expenses
                  
                  
                  
                  1,573
                  
                  
                  
                  1,269Derivative
      liabilities
                  
                  
                  
                  328
                  
                  
                  
                  78Deferred
      liability and revenue
                  
                  
                  
                  530
                  
                  
                  
                  237Total
      current liabilities
                  
                  
                  
                  6,047
                  
                  
                  
                  4,128Long-term
      debt of line of credit, net of current portion
                  
                  
                  
                  4,143
                  
                  
                  
                  2,183Long-term
      debt, net of current portion
                  
                  
                  
                  632
                  
                  
                  
                  661Long-term
      capital leases, net of current portion
                  
                  
                  
                  969
                  
                  
                  
                  1,581Deferred
      liability and revenue, net of current portion
                  
                  
                  
                  190
                  
                  
                  
                  316Total
      liabilities
                  
                  
                  
                  11,981
                  
                  
                  
                  8,869CommitmentsShareholders’
      equity (deficit):Preferred
      stock  -  $.001 par valueSeries
      A authorized  25,000,000 shares
                    Issued
      and outstanding at September 30, 2009, and
                    December
      31, 2008, 3,043,580 and 4,085,514, respectively
                  
                  
                  
                  3
                  
                  
                  
                  4Common
      stock  -  $.001 par valueAuthorized
      475,000,000 shares
                    Issued
      and outstanding at September 30, 2009, and
                    December
      31, 2008, 134,006,097 and 101,884,119, respectively
                  
                  
                  
                  134
                  
                  
                  
                  102Additional
      paid in capital
                  
                  
                  
                  31,073
                  
                  
                  
                  27,504Accumulated
      deficit
                  
                  
                  
                  (33,837
                  )
                  
                  
                  (26,856
                  )Total
      shareholders’ equity (deficit)
                  
                  
                  
                  (2,627
                  )
                  
                  
                  754Total
      liabilities and shareholders' equity (deficit)
                  
                  
                  $
                  9,354
                  
                  
                  $
                  9,623
 
 See
accompanying notes to consolidated financial
statements.




2


ERF
WIRELESS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR THE
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Unaudited)


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







For
      the Three Months
              
              
              For
      the Nine MonthsEnded
      September 30,
              
              
              Ended
      September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Sales:Products
              
              $
              75
              
              
              $
              40
              
              
              $
              230
              
              
              $
              480Services
              
              
              1,429
              
              
              
              1,101
              
              
              
              3,875
              
              
              
              3,341Total
      sales
              
              
              1,504
              
              
              
              1,141
              
              
              
              4,105
              
              
              
              3,821Costs
      of goods sold:Products
      and integration services
              
              
              356
              
              
              
              374
              
              
              
              1,012
              
              
              
              953Rent,
      repairs and maintenance
              
              
              124
              
              
              
              103
              
              
              
              330
              
              
              
              299Salary
      and related cost
              
              
              2
              
              
              
              18
              
              
              
              18
              
              
              
              74Depreciation
              
              
              333
              
              
              
              239
              
              
              
              894
              
              
              
              646Other
      cost
              
              
              20
              
              
              
              -
              
              
              
              86
              
              
              
              181Total
      costs of goods sold
              
              
              835
              
              
              
              734
              
              
              
              2,340
              
              
              
              2,153Gross
      profit
              
              
              669
              
              
              
              407
              
              
              
              1,765
              
              
              
              1,668Operating
      expenses:Selling,
      general and administrative
              
              
              2,422
              
              
              
              2,116
              
              
              
              6,761
              
              
              
              6,345Depreciation
      and amortization
              
              
              379
              
              
              
              208
              
              
              
              1,101
              
              
              
              674Total
      operating expenses
              
              
              2,801
              
              
              
              2,324
              
              
              
              7,862
              
              
              
              7,019Loss
      from operations
              
              
              (2,132
              )
              
              
              (1,917
              )
              
              
              (6,097
              )
              
              
              (5,351
              )Other
      income (expense):Interest
      expense, net
              
              
              (347
              )
              
              
              (262
              )
              
              
              (890
              )
              
              
              (616
              )Derivative
      income (expense)
              
              
              (47
              )
              
              
              8
              
              
              
              (2
              )
              
              
              287Gain
      on sale of assets
              
              
              -
              
              
              
              25
              
              
              
              -
              
              
              
              25Other
      income
              
              
              3
              
              
              
              2
              
              
              
              8
              
              
              
              10Total
      other income (expense)
              
              
              (391
              )
              
              
              (227
              )
              
              
              (884
              )
              
              
              (294
              )Net
      loss
              
              $
              (2,523
              )
              
              $
              (2,144
              )
              
              $
              (6,981
              )
              
              $
              (5,645
              )Net
      loss per common share:Basic
              
              $
              (0.02
              )
              
              $
              (0.03
              )
              
              $
              (0.06
              )
              
              $
              (0.08
              )Diluted
              
              $
              (0.02
              )
              
              $
              (0.03
              )
              
              $
              (0.06
              )
              
              $
              (0.08
              )


See accompanying notes to
consolidated financial statements.


3





ERF
WIRELESS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Unaudited)


($ in
thousands)


2009
              
              
              2008Cash
      flows from operating activitiesNet
      loss
              
              $
              (6,981
              )
              
              $
              (5,645
              )Adjustments
      to reconcile net loss to net cashused by operating
      activities:Gain
      on sale of assets
              
              
              -
              
              
              
              (25
              )Amortization
      of debt discount
              
              
              149
              
              
              
              27Depreciation
      and amortization
              
              
              1,996
              
              
              
              1,320Stock
      issued for services rendered and interest
              
              
              1,976
              
              
              
              1,819Derivative
      (income) expense
              
              
              2
              
              
              
              (287
              )Bad
      debt expense
              
              
              90
              
              
              
              165Changes
      in:Accounts
      receivable, net
              
              
              (131
              )
              
              
              (330
              )Accounts
      receivable, other
              
              
              (110
              )
              
              
              (22
              )Inventories
              
              
              (80
              )
              
              
              (102
              )Prepaid
      expenses
              
              
              182
              
              
              
              134Costs
      and profits in excess of billings
              
              
              341
              
              
              
              234Accounts
      payable
              
              
              (112
              )
              
              
              (271
              )Accrued
      expenses
              
              
              304
              
              
              
              110Deferred
      liability and revenue
              
              
              167
              
              
              
              (131
              )Total
      adjustment
              
              
              4,774
              
              
              
              2,641Net
      cash used by operating activities
              
              
              (2,207
              )
              
              
              (3,004
              )Cash
      flows from investing activitiesProceeds
      from sale of assets
              
              
              -
              
              
              
              27Purchase
      of property and equipment
              
              
              (645
              )
              
              
              (617
              )Business
      acquisitions, net of cash acquired
              
              
              (167
              )
              
              
              (171
              )Change
      in other assets
              
              
              19
              
              
              
              (90
              )Net
      cash used by investing activities
              
              
              (793
              )
              
              
              (851
              )Cash
      flows from financing activitiesNet
      proceeds from line of credit
              
              
              1,960
              
              
              
              2,134Proceeds
      from notes payable
              
              
              150
              
              
              
              50Proceeds
      from long-term debt obligations
              
              
              1,390
              
              
              
              -Payment
      of long-term debt obligations
              
              
              (364
              )
              
              
              (214
              )Payment
      on capital lease obligations
              
              
              (656
              )
              
              
              (401
              )Proceeds
      from sale of common stock, net
              
              
              334
              
              
              
              270Net
      cash provided by financing activities
              
              
              2,814
              
              
              
              1,839Net
      decrease in cash
              
              
              (186
              )
              
              
              (2,016
              )Cash
      and cash equivalents at the beginning of the period
              
              
              348
              
              
              
              2,211Cash
      and cash equivalents at the end of the period
              
              $
              162
              
              
              $
              195Supplemental
      disclosure of cash flow information:Net
      cash paid during the year for:Interest
              
              $
              254
              
              
              $
              186Income
      taxes
              
              $
              -
              
              
              $
              -Supplemental
      non-cash investing and financing activities:Conversion
      of debt through issuance of common stock
              
              $
              320
              
              
              $
              167Issuance
      of shares for asset acquisition
              
              $
              884
              
              
              $
              400Property
      acquired under capital lease
              
              $
              68
              
              
              $
              1,191Note
      payable for acquisition
              
              $
              444
              
              
              $
              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. (“Company” or “ERF Wireless”) provides secure, high-capacity
wireless products and services to a broad spectrum of customers in primarily
underserved, rural and suburban parts of the United States.  We
provide our customers with high quality broadband services and basic
communications services to residential, oil and gas, and bank customers in the
areas that otherwise would not be able to receive such
services.   We are also a comprehensive solutions provider to
other enterprise customers, providing them with a wide array of communications
services including high speed broadband, voice over Internet Protocol (VOIP)
telephone and facsimile service, and video security.




Historically,
our revenues have been generated primarily from Internet and construction
services.  Our Internet revenues have resulted from our offering of
broadband and basic communications services to residential and enterprise
customers.  Our construction revenues typically have consisted of
revenues generated from the construction of bank networks and other services
associated with providing wireless products and services to the regional banking
industry.




Our
revenues are principally internet and construction. Our internet revenues are
recorded in our subsidiary, Wireless Bundled Services, Inc. (“WBS”),
construction of bank networks in our subsidiary, Enterprise Network Services,
Inc. (“ENS”) and other construction in our subsidiary, Wireless Messaging
Services, Inc. (“WMS”). Please refer to segment footnote 10 for additional
information regarding the Company’s operating divisions.




We have
evaluated subsequent events through November 20, 2009, the date the consolidated
financial statements were available to be issued.




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 consolidated
financial statements and notes thereto contained in the Company's annual report
for the year ended December 31, 2008 filed with the SEC on Form 10-K. 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. Notes to the
financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal year
ended December 31, 2008 as reported in form 10-K have been omitted.




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 as of September 30, 2009 and December 31, 2008, in
thousands:




September
      30,
              
              
              December
      31,2009
              
              
              2008Raw
      material
              
              $
              100
              
              
              $
              113Finished
      goods
              
              
              173
              
              
              
              80$
              273
              
              
              $
              193






The
Company has pledged all the inventory of WBS of $173,000 and $56,000 as
collateral against outstanding notes as of September 30, 2009 and December 31,
2008, respectively.




RECENT
ACCOUNTING PRONOUNCEMENTS




In
July 2009, the FASB established the FASB Accounting Standards CodificationTM
(“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in accordance with generally accepted accounting principles
(“GAAP”) in the United States. This guidance was included in the Codification
under FASB Accounting Standard Codification (“ASC”) Topic 105, Generally
Accepted Accounting Principles. All prior accounting
standard documents were superseded by the Codification and any accounting
literature not included in the Codification is no longer authoritative. Rules
and interpretive releases of the SEC issued under the authority of federal
securities laws will continue to be sources of authoritative GAAP for SEC
registrants. The Codification became effective for the Company beginning with
the third quarter of 2009. Therefore, beginning with the third quarter of 2009,
all references made by the Company in its consolidated condensed financial
statements use the new Codification numbering system. The Codification does not
change or alter existing GAAP and, therefore, did not have a material impact on
the Company’s consolidated condensed financial statements.




5


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


In April
2008, the FASB issued a pronouncement on what is now codified as FASB ASC
Topic 350,Intangibles – Goodwill
and Other.  This pronouncement amends the factors to be considered in
determining the useful life of intangible assets accounted for pursuant to
previous topic guidance. Its intent is to improve the consistency between
the useful life of an intangible asset and the period of expected cash flows
used to measure its fair value. This pronouncement is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and interim
periods within those fiscal years, and its adoption had no effect on the
Company’s consolidated financial statements.





In March
2008, the FASB issued a pronouncement on what is now codified as FASB ASC Topic
815, Derivatives and Hedging. This pronouncement requires enhanced
disclosure about an entity’s derivative and hedging activities and thereby
improves the transparency of financial reporting. The objective of the
pronouncement is to provide adequate information about how derivative and
hedging activities affect an entity’s financial position, financial performance,
and cash flows. This pronouncement became effective in the first quarter of
2009, and its adoption from January 1, 2009 had no effect on the Company’s
consolidated financial statements.





On
January 1, 2009, the Company adopted Accounting Standards Codification
(“ASC”) Topic 810-10-65, “Noncontrolling Interests in Consolidated Financial
Statements — An Amendment to ARB No. 51”. The objective of this guidance
was to improve the relevance, comparability and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements by establishing accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. ASC 810-10-65 requires the reclassification of noncontrolling
interests, also referred to as minority interest, to the equity section of the
consolidated balance sheet presented upon adoption. Minority interest expense is
no longer separately reported as a reduction to net income on the consolidated
income statement, but is instead shown below net income under the heading “net
earnings (loss) attributable to noncontrolling interests.” Total provision
for income taxes remains unchanged; however, the Company’s effective tax rate as
calculated from the balances shown on the consolidated income statement has
changed as net earnings (loss) attributable to noncontrolling interests is
no longer included in the determination of income from continuing operations.
The Company has changed the presentation of its noncontrolling interests in
compliance with this requirement.




In
February 2008, the FASB issued ASC 820 — 10 (formerly “Financial Staff Position
SFAS No. 157-2”), which delayed the effective date of ASC 820 - 10 (formerly
“SFAS No. 157”) for all non-financial assets and non-financial liabilities
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until fiscal years
beginning after November 15, 2008. Nonfinancial assets and liabilities that
the Company measures at fair value on a non-recurring basis consist primarily of
property and equipment, goodwill, and intangible assets, which are subject to
fair value adjustments in certain circumstances (for example, when there is
evidence of impairment).The adoption of the provisions of ASC 820-10 did not
have a material impact on the Company’s consolidated financial position and
results of operations or cash flows.




Effective
June 30, 2009, the Company adopted guidance issued by the FASB and included in
ASC 855-10, “Subsequent Events,” which establishes general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before the financial statements are issued or are available to be issued. It
requires the disclosure of the date through which an entity has evaluated
subsequent events.




NOTE 2 - 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 500,000,000, of which 25,000,000 are shares of preferred
stock with a par value of $.001 per share ("Preferred Stock"), and 475,000,000
are shares of common stock with a par value of $.001 per share.




6


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







COMMON
STOCK




As of
September 30, 2009, there were 134,006,097 shares of common stock issued and
outstanding.




During
the nine months ended September 30, 2009, the Company issued 7,473,000 shares of
common stock which was valued at the closing market price on the date of
issuance of such shares, which were issued in lieu of cash as payment for the
following (in thousands):




September
      30, 2009
              
              Supplemental
                Non-Cash
                DisclosureProfessional
      fees
              
              $
              1,043Settlements
              
              
              32Salary
      and compensation
              
              
              608Other
      services rendered
              
              
              293Total
      for services, interest, liabilities and compensation
              
              $
              1,976Notes
      payable
              
              $
              320






During
the nine months ended September 30, 2009, the Company issued 3,273,000 shares of
common stock in lieu of cash for asset acquisitions of $884,000.  The
value of the 3,273,000 common shares was based on the average market price of
the Company’s common shares over the 2-day period before and after the terms of
the acquisition were agreed to and announced.




During
the nine months ended September 30, 2009, we issued to various accredited
investors an aggregate of 1,918,000 shares of restricted common stock for net
consideration of $334,000. We relied on Section 4(2) of the Securities Act in
effecting this transaction.




PREFERRED
STOCK




The
Company has 3,043,580 shares of Series A Preferred Stock issued and outstanding
as of September 30, 2009. 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 September 30, 2009, the Company would be
required to issue 56,842,956 shares of its common stock, subject to certain
contractually imposed conversion restrictions as described herein. During the
fourth quarter 2005, all of the Series A Preferred Stock holders entered into a
conversion restriction agreement whereby all Series A Preferred Stock holders,
as a group, are prohibited from converting more than 5% of the total
outstanding  Series A Preferred Stock holdings in any one calendar
quarter. During the nine months of 2009, we issued 19,458,000 shares of common
stock upon conversion of 1,041,934 Series A Preferred Stock.




WARRANTS




The
Company had warrants outstanding to third parties to purchase 6,750,210 shares
of common stock as of September 30, 2009.




Warrants
to purchase 389,999 shares of common stock at a purchase price of $3.57 per
share were issued by the Company in September 2005 and November 2005.
Specifically, the Company issued convertible notes for $1,500,000 to accredited
investors and issued warrants to purchase 389,999 shares of common stock at
$3.57 per share, subject to adjustment, expiring September 2010, as additional
consideration.




Warrants
to purchase 1,558,297 shares of common stock at a purchase price of $.45 per
share were issued by the Company through the nine months ended September 30,
2009. The Company issued convertible subordinated notes for $1,390,000 to
accredited investors and issued warrants to purchase 1,558,297 shares of common
stock at $.45 per share subject to adjustment from future equity financing if
below their exercise price, expiring three years from issuance, as additional
consideration.




Warrants
to purchase 4,801,914 shares of Common stock at a purchase price $5.00 per share
were issued by the Company during 2006 thru 2009. For the nine months ending
September 30, 2009, the Company has attributed $55,000 in warrant
expense.




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




Exercise
      Price
              
              Expiration
      Date
              
              December
      31, 2008
              
              
              Issued
              
              
              Exercised
              
              
              September
      30, 20093.57
              
              Sep-10
              
              
              389,999
              
              
              
              -
              
              
              
              -
              
              
              
              389,9990.45
              
              Mar-12
              
              
              -
              
              
              
              1,558,297
              
              
              
              -
              
              
              
              1,558,2975.00
              
              August-11
      thru May-14
              
              
              3,775,272
              
              
              
              1,026,642
              
              
              
              -
              
              
              
              4,801,9144,165,271
              
              
              
              2,584,939
              
              
              
              -
              
              
              
              6,750,210




7




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


NOTE
3 – STOCK PLAN AND EMPLOYEE STOCK OPTIONS




In April
2008, the Board of directors adopted a Non-Qualified Stock Option Plan whereby
15,000,000 shares were reserved for issuance. As of September 30, 2009, under
the 2008 Non-Qualified Stock Option Plans, 7,637,712 shares were issued and
outstanding by certain employees and consultants for services
rendered.




Stock
Plan activity was as follows for the nine months ended September 30,
2009:




2008PlanShares
      initially reserved
              
              
              15,000,000Remaining
      shares January 01, 2009
              
              
              12,018,541Shares
      issued during 2009
              
              
              4,656,253Remaining
      shares to be issued at September 30, 2009
              
              
              7,362,288Shares
      issued and outstanding as of September 30, 2009
              
              
              7,637,712






The
Company has granted to certain officers and employees 125,000 stock options
which are currently exercisable. Option activity was as follows for the nine
months ended September 30, 2009:




Shares
              
              Weighted-Average
      Exercise PriceOutstanding
      at beginning of year
              
              500,000
              
              $
              0.57Granted
              
              -
              
              
              -Exercised
              
              -
              
              
              -Forfeited/cancelled
              
              (375,000
              )
              
              0.61Outstanding
      at the end of period
              
              125,000
              
              $
              0.43Exercisable
      at September 30, 2009
              
              125,000
              
              $
              0.43


Information
about options outstanding was as follows at September 30, 2009:




Remaining
              
              
              
              AverageClass
              
              Number
              
              Average
      Contractual
              
              Number
              
              ExerciseExercise
      Price
              
              Outstanding
              
              Life
      in Years
              
              Exercisable
              
              Price$    
      0.43
              
              125,000
              
              1.33
              
              125,000
              
              $        0.43






8


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







NOTE
4 - 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 nine months ended September 30, 2009Income
              
              
              Shares
              
              
              Per-Share(Numerator)
              
              
              (Denominator)
              
              AmountBasic
      EPS:Loss
      available to common stockholders
              
              $
              (6,981
              )
              
              
              116,908
              
              
              $
              (0.06
              )Effect
      of dilutive securities
              
              
              -
              
              
              
              -
              
              
              
              -Diluted
      EPS:Loss
      available to common stockholders and assumed conversions
              
              $
              (6,981
              )
              
              
              116,908
              
              
              $
              (0.06
              )




For
      the nine months ended September 30, 2008Income
              
              
              Shares
              
              
              Per-Share(Numerator)
              
              
              (Denominator)
              
              AmountBasic
      EPS:Loss
      available to common stockholders
              
              $
              (5,645
              )
              
              
              74,141
              
              
              $
              (0.08
              )Effect
      of dilutive securities
              
              
              -
              
              
              
              -
              
              
              
              -Diluted
      EPS:Loss
      available to common stockholders and assumed conversions
              
              $
              (5,645
              )
              
              
              74,141
              
              
              $
              (0.08
              )





For
      the three months ended September 30, 2009Income
              
              
              Shares
              
              
              Per-Share(Numerator)
              
              
              (Denominator)
              
              AmountBasic
      EPS:Loss
      available to common stockholders
              
              $
              (2,523
              )
              
              
              130,312
              
              
              $
              (0.02
              )Effect
      of dilutive securities
              
              
              -
              
              
              
              
              
              
              
              -Diluted
      EPS:Loss
      available to common stockholders and assumed conversions
              
              $
              (2,523
              )
              
              
              130,312
              
              
              $
              (0.02
              )





For
      the three months ended September 30, 2008Income
              
              
              Shares
              
              
              Per-Share(Numerator)
              
              
              (Denominator)
              
              AmountBasic
      EPS:Loss
      available to common stockholders
              
              $
              (2,144
              )
              
              
              80,755
              
              
              $
              (0.03
              )Effect
      of dilutive securities
              
              
              -
              
              
              
              
              
              
              
              -Diluted
      EPS:Loss
      available to common stockholders and assumed conversions
              
              $
              (2,144
              )
              
              
              80,755
              
              
              $
              (0.03
              )





For the
nine months ended September 30, 2009, dilutive securities existed. Diluted
earnings per share reflect the potential dilution of security that could share
in the earnings of an entity, such as convertible preferred stock, stock
options, warrants or convertible securities.




The
calculation of diluted earnings per share for the nine months ended September
30, 2009 does not include 151,515 shares of common stock assuming all debt
instruments were converted; 350,000 shares of common stock assuming all employee
stock options were exercised; 6,750,210 shares of common stock assuming all
warrants were exercised; 11,368,592 shares of common stock assuming all Series A
Preferred Stock (limited to 20% per year based on restrictive covenant) were
converted due to their anti-dilutive effect.




9


ERF
WIRELESS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




NOTE
5 - MAJOR CUSTOMERS




The
Company had gross sales of approximately $4,105,000 and $3,821,000 for the nine
months ended September 30, 2009 and 2008, respectively. The Company did not have
any customers that represented 10% of the gross sales in the nine months ended
September 30, 2009. The Company had one customer that represented approximately
14% of gross sales for the nine months ended September 30, 2008.




NOTE
6 – NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES




Notes
payable, long-term debts and capital leases consist of the following as of
September 30, 2009 (in thousands):




Terms
              Maturity
      Date
              
              Interest
      Rate
              
              
              Gross
      Balance
              
              
              Debt
      Discount
              
              
              Net
      BalanceBancleasing,
      Inc.
              $10,660
      / Month including interest
              October-14
              
              
              11.62%
              
              
              $
              507
              
              
              $
              -
              
              
              $
              507Agility
      Capital Lease
              $91,457
      / Month including interest
              Various
              
              
              18.82%
              
              
              
              1,350
              
              
              
              -
              
              
              
              1,350Balboa
      Lease
              $225
      / Month including interest
              June-10
              
              
              27.74%
              
              
              
              2
              
              
              
              -
              
              
              
              2De
      Lage Landen Lease
              $691
      / Month including interest
              December-10
              
              
              19.12%
              
              
              
              11
              
              
              
              -
              
              
              
              11Toyota
              $517
      / Month including interest
              December-10
              
              
              8.01%
              
              
              
              8
              
              
              
              -
              
              
              
              8Blanco
      National Bank
              $3,913
      / Month including interest
              August-10
              
              
              9.50%
              
              
              
              34
              
              
              
              -
              
              
              
              34Robert
      McClung, Momentum
              $23,476
      / Quarterly including interest
              October-10
              
              
              7.50%
              
              
              
              111
              
              
              
              -
              
              
              
              111George
      Kemper, TSTAR
              $38,254
      / Quarterly including interest
              April-10
              
              
              7.50%
              
              
              
              115
              
              
              
              -
              
              
              
              115Shane
      Griffths, Crosswind
              $13,911
      / Quarterly including interest
              December-10
              
              
              7.50%
              
              
              
              80
              
              
              
              -
              
              
              
              80Centramedia
              $56,342
      / Quarterly including interest
              December-11
              
              
              7.50%
              
              
              
              509
              
              
              
              -
              
              
              
              509Frontier
      Internet LLC
              $33,846
      / Quarterly including interest
              May-12
              
              
              6.00%
              
              
              
              341
              
              
              
              -
              
              
              
              341Ronnie
      D Franklin
              $6,054
      / Quarterly including interest
              May-12
              
              
              6.00%
              
              
              
              61
              
              
              
              -
              
              
              
              61Convertible
      Subordinated Financing
              1
      year
              Demand
              
              
              10.00%
              
              
              
              1,390
              
              
              
              195
              
              
              
              1,195Line
      of credit
              2
      years/ Quarterly interest (See below)
              March-11
              
              
              12.00%
              
              
              
              4,143
              
              
              
              -
              
              
              
              4,143E-bond
      investor notes
              3
      years/ Semiannual interest (See below)
              Various
              
              
              10.00%
              
              
              
              25
              
              
              
              1
              
              
              
              24Total
      debt
              
              
              
              
              
              
              
              $
              8,687
              
              
              $
              196
              
              
              
              8,491Less
      current maturities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,747
              )Add
      back debt discount current maturities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              196Long-term
      debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              5,940







INVESTOR
NOTES




The following table summarizes
the convertible debt derivative liability activity for the period December 31,
2008, to September 30, 2009 (in thousands):




Description
              
              Investor
      Notes
              
              
              Warrant
      Liabilities
              
              
              Compound
                Derivative
      Liability
              
              
              TotalFair
      value at December 31, 2008
              
              $
              -
              
              
              $
              29
              
              
              $
              -
              
              
              $
              2901-01-09
      to 03-31-09 change in fair value
              
              
              -
              
              
              
              (5
              )
              
              
              -
              
              
              
              (5
              )04-01-09
      to 06-30-09 change in fair value
              
              
              -
              
              
              
              (13
              )
              
              
              -
              
              
              
              (13
              )07-01-09
      to 09-30-09 change in fair value
              
              
              -
              
              
              
              (3
              )
              
              
              -
              
              
              
              (3
              )Fair
      value at September 30, 2009
              
              $
              -
              
              
              $
              8
              
              
              $
              -
              
              
              $
              8







For the
year to date ended September 30, 2009 and 2008, net derivative income was
$21,000 and $254,000, respectively.





The
following assumptions were used in the fair value determination of warrants
liabilities at September 30, 2009:




WarrantsAssumptions
              
              3/31/2009
              
              
              6/30/2009
              
              
              9/30/2009Dividend
      yield
              
              
              0.00%
              
              
              
              0.00%
              
              
              
              0.00%Risk-free
      rate for term
              
              
              0.81%
              
              
              
              0.56%
              
              
              
              0.40%Volatility
              
              
              140.00%
              
              
              
              140.00%
              
              
              
              140.00%Maturity
      date
              
              1.43
      years
              
              
              1.19
      years
              
              
              0.93
      years







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




10


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





LINE
OF CREDIT




During
2008, the Company increased its unsecured revolving credit facility with certain
private investors from $3 million to $6.5 million maturing March 31, 2011. The
terms of the unsecured revolving credit facility allow the Company to draw upon
the facility as financing requirements dictate and provide for quarterly
interest payments at a 12% rate per annum. At September 30, 2009, the line of
credit of totaled $4,143,000.




E-SERIES
BOND INVESTOR NOTE




The
Company issued to certain accredited investors a principal amount of $1,200,000
of E-series bonds (the "Bonds") between May 2006 and June 2009, of which
$1,175,000 has been converted to common stock leaving a principal amount of
$25,000 of Bonds outstanding as of September 30, 2009. The Bonds are due and
payable upon maturity, a three-year period from the issuance date. Interest on
the Bonds is payable at the rate of 10% per annum, and is payable semiannually.
The Bondholder may require the Company to convert the Bond (including any unpaid
interest) into shares of common stock at any time only during the first year. If
the Bonds are converted under this option, the Company will issue shares
representing 100% of the Bond principal and unpaid interest calculated through
maturity. The value of the common stock issued under this option will be the
lesser of $1.50 or the 20-day trailing average per share closing price of common
stock preceding the notice of conversion. If the Bond is converted the Company
will issue 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.




At the
Company's discretion at any time after the first year, the Bonds, including the
interest payments calculated through the date of conversion may be repaid in
cash or in shares of our common Stock, which shares will be valued at the
average last sales price of our common stock over the 60-trading-day period
preceding any prepayment date. If the Company elects to issue shares of our
common stock as repayment of the Bond, we will issue shares representing a value
equal to 125% of the Bond principal. If the Company elects to issue shares of
our common stock as payment of interest, we will issue shares representing a
value equal to 100% of the interest due.




The 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 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 $41,186 for the nine
months ended September 30, 2009, and the estimated debt accretion for 2009 is
$607.




The
following table summarizes the convertible debt activity for the period December
31, 2008, to September 30, 2009 (in thousands):




Description
              
              E-Series
      Bonds
              
              
              Compound
                Derivative
      Liability
              
              
              TotalFair
      value at December 31, 2008
              
              $
              165
              
              
              $
              49
              
              
              $
              214Fair
      value issuance at inception
              
              
              118
              
              
              
              -
              
              
              
              11801-01-09
      to 03-31-09 change in fair value
              
              
              36
              
              
              
              (1
              )
              
              
              3504-01-09
      to 06-30-09 change in fair value
              
              
              5
              
              
              
              (41
              )
              
              
              (36
              )07-01-09
      to 09-30-09 change in fair value
              
              
              -
              
              
              
              -
              
              
              
              -Conversions
      during 2009
              
              
              (300
              )
              
              
              -
              
              
              
              (300
              )Fair
      value at September 30, 2009
              
              $
              24
              
              
              $
              7
              
              
              $
              31







For the
year to date ended September 30, 2009 and 2008, net derivative income was
$42,000 and $60,000, respectively.





CONVERTIBLE
SUBORDINATED FINANCING





During
the period ended September 30, 2009, the Company entered into an agreement with
an investment banking firm to raise up to $3,000,000 in convertible subordinated
promissory notes.  These notes are unsecured, bear interest at 10% and are
due upon the earlier of one year or completion of second private
placement.  The note holder has the option of exchanging their notes
for an equivalent amount of the subsequent funding transaction or being repaid
the principal and interest at this second funding date. In connection with the
issuance of the convertible subordinated promissory notes the investors will be
issued common stock purchase warrants to purchase up to 1,558,297 shares of
common stock that are exercisable at $.45 per share subject to adjustment from
future equity financing if below their exercise price, and expire three years
from issuance.




11


ERF
WIRELESS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Based on
the guidance in ASC 815-10 (formerly SFAS 133)  and ASC 815-40-15
(formerly EITF 07-05), the Company concluded the warrants are required to be
accounted for as derivatives as of the issue date due to the reset feature on
the exercise price.  At the date of issuance the convertible subordinated
financing, warrant derivative liabilities were measured at fair value using
either quoted market prices of financial instruments with similar
characteristics or other valuation techniques. The Company records the fair
value of these derivatives on its balance sheet at fair value with changes in
the values of these derivatives reflected in the consolidated statements of
operations as “Gain (loss) on derivative liabilities.”  These derivative
instruments are not designated as hedging instruments under ASC 815-10 (formerly
SFAS 133) and are disclosed on the balance sheet under Derivative
Liabilities.





The
Company uses the effective interest method to record interest expense and
related debt accretion which was $107,963 for the nine months ended September
30, 2009, and the estimated debt accretion for 2009 and 2010 are $117,156 and
$57,228, respectively.




The
following table summarizes the convertible debt activity for the period March
18, 2009, to September 30, 2009 (in thousands):




Description
              
              Bridge
      Note
              
              
              Warrant
      Liabilities
              
              
              TotalFair
      value issuance at inception
              
              $
              1,087
              
              
              $
              304
              
              
              $
              1,39103-18-09
      to 03-31-09 change in fair value
              
              
              4
              
              
              
              (4
              )
              
              
              -04-01-09
      to 06-30-09 change in fair value
              
              
              44
              
              
              
              (37
              )
              
              
              707-01-09
      to 09-30-09 change in fair value
              
              
              60
              
              
              
              50
              
              
              
              110Conversions
      from inception to date
              
              
              -
              
              
              
              -
              
              
              
              -Fair
      value at September 30, 2009
              
              $
              1,195
              
              
              $
              313
              
              
              $
              1,508






For the
year to date ended September 30, 2009 and 2008, net derivative expense was
$9,469 and $0, respectively.




Frontier
Internet, LLC.




On June
1, 2009, the Company issued a note to Frontier Internet LLC., totaling $369,000
bearing interest at 6.0% and are secured by the equipment acquired, payable in
twelve quarterly payments of $33,846 plus interest.




Ronnie
D. Franklin




On June
1, 2009, the Company issued a note to Ronnie D. Franklin., totaling $66,000
bearing interest at 6.0% and are secured by the equipment acquired, payable in
twelve quarterly payments of $6,054 plus interest.




CAPITAL
LEASES




Agility Lease Fund, LLCIncluded in property and equipment at September 30, 2009, is $1,286,000
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.




Bancleasing Inc.,Included in
property and equipment at June 30, 2009, is $610,900 capitalized equipment, net
of amortization. The equipment is the primary collateral securing the
financing.




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
September 30, 2009 (in thousands):




Year
      Ending  December 31,2009
              
              $
              3012010
              
              
              1,0542011
              
              
              5242012
              
              
              1412013
              
              
              128Thereafter
              
              
              139Total
      minimum lease payments
              
              
              2,287Less
      amount representing interest
              
              
              (417
              )Present
      value of net minimum lease payments
              
              
              1,870Current
      maturities of capital lease obligations
              
              
              (901
              )Long-term
      portion of capital lease obligations
              
              $
              969




12




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





NOTE
7 – UNCOMPLETED CONTRACTS




Costs,
estimated earnings and billings on uncompleted contracts as of September 30,
2009 and December 31, 2008 are summarized as follows (in
thousands):






September
      30,
              
              
              December
      31,2009
              
              
              2008Costs
      incurred on uncompleted contracts
              
              $
              2,898
              
              
              $
              2,953Estimated
      profit
              
              
              473
              
              
              
              656Gross
      revenue
              
              
              3,371
              
              
              
              3,609Less:
      billings to date
              
              
              3,285
              
              
              
              3,182Costs
      and profit in excess of billings
              
              $
              86
              
              
              $
              427





Such
amounts are included in the accompanying balance sheets at September 30, 2009
and December 31, 2008 are summarized as follows (in thousands):




September
      30,
                
                
                December
      31,2009
                
                
                2008Cost
      and estimated earnings in excess of billings on uncompleted
      contracts
                
                $
                86
                
                
                $
                427Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                
                
                -
                
                
                
                -$
                86
                
                
                $
                427






NOTE
8 - COMMITMENTS




LEASES
AND LICENSE AGREEMENTS




For the
nine months ended September 30, 2009 and 2008, rental expenses of approximately
$605,000 and $464,000, 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 2018, and requiring payment of property taxes,
insurance, maintenance and utilities.




Future
minimum lease payments under non-cancelable operating leases at September 30,
2009, were as follows (in thousands):




Period
      Ending December 31,
              
              Amount2009
              
              $
              1562010
              
              
              5952011
              
              
              4072012
              
              
              562013
              
              
              14Thereafter
              
              
              43Total
              
              $
              1,271









NOTE
9 - 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.




13


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





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.




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.




Oil
& Gas Division (O&G)




O&G
provides wireless connectivity to rural oil and gas locations primarily via
Mobile Broadband Trailers (MBT’s). O&G provides wireless broadband products
and services focusing primarily on commercial customers providing high speed
bandwidth to rural North America to serve the Oil and Gas sector. All sales from
external customers are located within the United States. The O&G division is
a division of WBS.


For the
nine months ended September 30, 2009 (in thousands)




WMS
              
              
              WBS
              
              
              O&G
              
              
              ENS
              
              
              TotalRevenue
              
              $
              136
              
              
              $
              3,543
              
              
              $
              128
              
              
              $
              298
              
              
              $
              4,105Segment
      (loss) income
              
              
              (100
              )
              
              
              (1,893
              )
              
              
              (109
              )
              
              
              (642
              )
              
              
              (2,744
              )Segment
      assets
              
              
              -
              
              
              
              6,980
              
              
              
              284
              
              
              
              1,797
              
              
              
              9,061Capital
      expenditures
              
              
              -
              
              
              
              767
              
              
              
              -
              
              
              
              233
              
              
              
              1,000Depreciation
      and amortization
              
              
              11
              
              
              
              1,861
              
              
              
              49
              
              
              
              11
              
              
              
              1,932









Nine
      Months EndedReconciliation
      of Segment Loss from Operations to Net Loss
              
              September
      30, 2009Total
      segment loss from operations
              
              $
              (2,744
              )Total
      corporate overhead including other, net
              
              
              (4,237
              )Net
      loss
              
              $
              (6,981
              )




Reconciliation
      of Segment Assets to Total Assets
              
              September
      30, 2009Total
      segment assets
              
              $
              9,061Total
      corporate assets
              
              
              293Consolidated  assets
              
              $
              9,354




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 September 30, 2009, one customer accounts for $143,000 of
Enterprise Network Services Division revenues.






14


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


NOTE
10 – BUSINESS COMBINATIONS





FRONTIER
INTERNET, LLC, AND ITEXAS NET ACQUISITION




PURCHASE PRICE




On June
1, 2009, ERF Wireless, Inc completed the purchase of assets from Frontier
Internet, LLC and iTexas net, which are related companies under an Asset
Purchase Agreement dated June 1, 2009. Under the Asset Purchase Agreement, ERF
Wireless, Inc acquired the wireless internet service provider ("WISP"), which
includes all of the current customers, contract rights, inventory, equipment and
network infrastructure equipment. The acquisition will increase the Company's
footprint covering geographic areas in certain cities in North Texas within
Hood, Somervell, Johnson and Parker Counties, Texas including portions of the
Barnett Shale area that covers approximately 6,000 square miles of natural gas
production territory. At the time of the transaction, there were no material
relationships between the seller and ERF Wireless, Inc or any of its affiliates,
or any director or officer of ERF Wireless, Inc, or any associate of any such
officer or director. ERF Wireless, Inc paid $1,485,000 in cash, notes and
securities and assumed $25,000 in note payables and capital leases.




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






Frontier/ItexasAccounts
      receivable
              
              $
              33Note
      receivable
              
              
              5Property
      and equipment
              
              
              370Goodwill
              
              
              819Identifiable
      intangible assets
              
              
              283Note
      payable
              
              
              (25
              )Total
      adjusted purchase price
              
              $
              1,485





SUPPLEMENTAL
SCHEDULE OF ASSETS ACQUIRED RECONCILING CASH PAID





On June
1, 2009, ERF Wireless, Inc completed the purchase of assets from Frontier
Internet LLC and iTexas.net. The schedule below reflects the fair value of
assets acquired, liabilities assumed, common stock issued and note payable
issued.







Fair
      value of assets acquired
              
              
              1,510Liabilities
      assumed
              
              
              (25
              )Common
      stock issued for acquisition
              
              
              (884
              )Note
      payable issued for acquisition
              
              
              (434
              )Cash
      paid for acquisition
              
              $
              167





NOTE
11 - SUBSEQUENT EVENTS




During
the fourth fiscal quarter 2009, the Company issued 10,374,870 shares of common
stock for services rendered, debt, exchange of liabilities, and conversion of
preferred stock.








15




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




Historically,
our revenues have been generated primarily from Internet and construction
services.  Our Internet revenues result from our offering of broadband and
basic communications services to residential and enterprise customers.  Our
construction revenues result from the construction of bank networks and other
services associated with providing wireless products and services to the
regional banking industry.  During the nine months ended September 30,
2009, approximately 94% of our revenues were generated from internet services or
WBS and 6% of our revenues were generated from banking construction services or
ENS. We expect that our internet services will experience the most growth during
fiscal 2009, as we expect to devote significant capital resources to developing
the oil and gas market utilizing wireless services.





During
the third quarter of fiscal 2009, the Company made significant progress with its
strategic business plan as evidenced by the completion and announcement of
numerous agreements and activities. These include:





·
            The
      submittal of a first round application for $24.6 million of broadband
      stimulus funding in a two-state region under the Broadband Initiatives
      Program (“BIP”) for Louisiana and parts of East
  Texas.


·
            The
      Company registered and obtained FCC approval for nearly 90 WiMAX 3.665 GHz
      transmission locations in strategic oil and natural gas development and
      production areas in the United States that are targeted by ERF Wireless to
      enhance their already accelerated technology deployment and planned
      revenue growth via wireless broadband
services.


·
            The
      announcement of a Master Services Agreement with Platinum Communications
      for the provisioning and delivery of bandwidth services to mobile and
      static oil and gas sites throughout the Canadian Province of
      Alberta.  Platinum’s network extends from north of Edmonton to
      south of Calgary, covering 65,000 square miles and services more than
      8,500 customers and 170 communities from 122 service delivery
      locations.


·
            The
      announcement of a Master Services Agreement with Partnership Broadband to
      deliver digital oilfield solutions in north central
      Texas.  Partnership’s network currently serves more than 10,000
      customers from 160 towers that cover more than 15,000 square miles and
      includes the Barnett Shale in the greater Dallas and Ft. Worth
      area.





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.




16




RESULTS
OF OPERATIONS




THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009, COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2008




The
following table sets forth summarized consolidated financial information for the
three months and nine months ended September 30, 2009 and 2008:







Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,($
      in thousands)
              
              2009
              
              
              2008
              
              
              $
      Change
              
              
              %
      Change
              
              
              2009
              
              
              2008
              
              
              $
      Change
              
              
              %
      ChangeTotal
      sales
              
              $
              1,504
              
              
              $
              1,141
              
              
              $
              363
              
              
              
              32%
              
              
              $
              4,105
              
              
              $
              3,821
              
              
              $
              284
              
              
              
              7%Cost
      of goods sold
              
              
              835
              
              
              
              734
              
              
              
              101
              
              
              
              14%
              
              
              
              2,340
              
              
              
              2,153
              
              
              
              187
              
              
              
              9%Gross
      profit
              
              
              669
              
              
              
              407
              
              
              
              262
              
              
              
              64%
              
              
              
              1,765
              
              
              
              1,668
              
              
              
              97
              
              
              
              6%Percent
      of total sales
              
              
              44%
              
              
              
              36%
              
              
              
              
              
              
              
              
              
              
              
              43%
              
              
              
              44%Operating
      expenses
              
              
              2,801
              
              
              
              2,324
              
              
              
              477
              
              
              
              21%
              
              
              
              7,862
              
              
              
              7,019
              
              
              
              843
              
              
              
              12%Loss
      from operations
              
              
              (2,132
              )
              
              
              (1,917
              )
              
              
              (215
              )
              
              
              11%
              
              
              
              (6,097
              )
              
              
              (5,351
              )
              
              
              (746
              )
              
              
              14%Other
      income/(expense)
              
              
              (391
              )
              
              
              (227
              )
              
              
              (164
              )
              
              
              72%
              
              
              
              (884
              )
              
              
              (294
              )
              
              
              (590
              )
              
              
              201%Net
      loss
              
              
              (2,523
              )
              
              
              (2,144
              )
              
              
              (379
              )
              
              
              18%
              
              
              
              (6,981
              )
              
              
              (5,645
              )
              
              
              (1,336
              )
              
              
              24%


For the
three months ended September 30, 2009, the Company's business operations
reflected an increase in sales for Wireless Bundled Services with an offset of
decreased sales of Enterprise Network Services and for Wireless Messaging
Services. For the three months ended September 30, 2009, the Company's
consolidated operations generated net sales of $1,504,000 compared to prior year
net sales of $1,141,000. The $363,000 increase in net sales is primarily
attributable to $443,000 increase in recurring wireless WISP services with the
increased growth attributed to recent WISP acquisitions offset with decrease
sales in banking network installation and services of $60,000 and decrease in
Wireless Messaging Services of $20,000 attributable to prior year sales with the
El Dorado Golf and Beach Club of San Jose del Cabo, Mexico project, without
similar sales comparison in the same quarter 2009.  Product sales
increase $35,000 and services and other sales increase $328,000. The increase is
primarily due to recurring wireless WISP services with the increase growth
attributed to recent WISP acquisitions. For the three months ended September 30,
2009, the Company had a gross profit margin of 44%, compared to a gross profit
margin 36% for the prior year. The $262,000 increase in gross profit margin is
primarily due to net increase in sales volume which attributed to margins as
follows; (i) approximately $212,000 increase in gross margin attributable to
increase recurring customers as result of recent WISP acquisitions (ii) $25,000
increase in gross margins for banking network services due to proficient
execution of current banking contracts, and (iii) $25,000 increase in gross
margins for wireless paging.




For the
nine months ended September 30, 2009, the Company's business operations
reflected an increase in sales for Wireless Bundled Services and increase sales
for Enterprise Network Services with an offset of decreased sales for Wireless
Messaging Services. For the nine months ended September 30, 2009, the Company's
consolidated operations generated net sales of $4,105,000 compared to prior year
net sales of $3,821,000. The $284,000 increase in net sales is primarily
attributable to $55,000 increase in banking network installation and services
and increase of $726,000 in recurring wireless WISP services with the increased
growth attributed to recent WISP acquisitions offset with a $497,000 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.  Product
sales decrease $250,000 and offset with services and other increase sales of
$534,000. The increase is primarily due to recurring wireless WISP services with
the increase growth attributed to recent WISP acquisitions. For the nine months
ended September 30, 2009, the Company had a gross profit margin of 43%, compared
to a gross profit margin of 44% for the prior year. The $97,000 increase in
gross profit margin percentage is primarily due to net increase in sales volume
which attributed to margins as follows; (i) approximately $262,000 increase in
gross margin attributable to increase recurring customers base as result of
recent acquisitions (ii) $150,000 increase in gross margins for banking network
services due to proficient execution of current banking contracts, and (iii)
offset by approximately $315,000 decreased in gross margin due to lower sales
expectation in our wireless infrastructure construction.




The
Company incurred a net loss of $2,523,000 for the three months ended September
30, 2009. The Company's principal components of the net loss for the three
months ended September 30, 2009, included approximately $712,000 in depreciation
and amortization expenses, $347,000 of interest expense, and $441,000 of other
general and administrative expense, $1,332,000 in employment expenses and
$538,000 in professional services expense.




The
Company incurred a net loss of $6,981,000 for the nine months ended September
30, 2009. The Company's principal components of the net loss for the nine months
ended September 30, 2009, included approximately $1,995,000 in depreciation and
amortization expenses, $890,000 of interest expense, and $1,269,000 of other
general and administrative expense, $3,664,000 in employment expenses and
$1,493,000 in professional services expense.







17




SALES
INFORMATION




Set forth
below is a table presenting summarized sales information for our business
segments for the three and nine months ended September 30, 2009 and
2008:


($
      in thousands)
              
              Three
      Months Ended September 30,Business
      Segment
              
              
              2009
              
              %
      of Total
              
              
              2008
              
              %
      of Total
              
              $
      Change
              
              
              %
      ChangeWireless
      Messaging Services
              
              $
              45
              
              3%
              
              $
              65
              
              6%
              
              $
              (20
              )
              
              -31%Wireless
      Bundled Services
              
              
              1,404
              
              93%
              
              
              961
              
              84%
              
              
              443
              
              
              46%Enterprise
      Network Services
              
              
              55
              
              4%
              
              
              115
              
              10%
              
              
              (60
              )
              
              -52%Total
      Sales
              
              $
              1,504
              
              100%
              
              $
              1,141
              
              100%
              
              $
              363
              
              
              32%






($
      in thousands)
              
              Nine
      Months Ended September 30,Business
      Segment
              
              
              2009
              
              %
      of Total
              
              
              2008
              
              %
      of Total
              
              $
      Change
              
              
              %
      ChangeWireless
      Messaging Services
              
              $
              136
              
              3%
              
              $
              633
              
              17%
              
              $
              (497
              )
              
              -79%Wireless
      Bundled Services
              
              
              3,671
              
              91%
              
              
              2,945
              
              77%
              
              
              726
              
              
              25%Enterprise
      Network Services
              
              
              298
              
              6%
              
              
              243
              
              6%
              
              
              55
              
              
              23%Total
      Sales
              
              $
              4,105
              
              100%
              
              $
              3,821
              
              100%
              
              $
              284
              
              
              7%
  For the
three months ended September 30, 2009, net sales increased to $1,504,000 from
$1,141,000 for the three months ended September 30, 2008. The overall increase
of 32% was attributable to an increase of $443,000 of Wireless Bundled Services
and offset with a decrease $60,000 in Enterprise Network Services and a decrease
in Wireless Messaging Services of $20,000. The $20,000 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, without similar
sales comparison in the same year in 2009 and the $60,000 decrease in banking
network installation and services due to lower than expected sales during the
quarter. The $443,000 increase was primarily attributable to recurring wireless
WISP services with recent WISP asset acquisitions.




For the
nine months ended September 30, 2009, net sales increased to $4,105,000 from
$3,821,000 for the nine months ended September 30, 2008. The overall increase of
7% was attributable to an increase of $726,000 of Wireless Bundled Services and
a $55,000, increase in Enterprise Network Services offset with a decrease in
Wireless Messaging Services of $497,000. The $497,000 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, without similar
sales comparison in the same year in 2009. The $55,000 increase in banking
network installation and services was primarily attributable to executing
current bank contracts. The $726,000 increase was primarily attributable to
recurring wireless WISP services with recent WISP asset
acquisitions.




COST
OF GOODS SOLD




The
following tables set forth summarized cost of goods sold information for the
three months ended September 30, 2009 and 2008:


($
      in thousands)
              
              Three
      Months Ended September 30,Business
      Segment
              
              
              2009
              
              %
      of Total
              
              
              2008
              
              %
      of Total
              
              $
      Change
              
              
              %
      ChangeWireless
      Messaging Services
              
              $
              40
              
              5%
              
              $
              85
              
              11%
              
              $
              (45
              )
              
              -53%Wireless
      Bundled Services
              
              
              743
              
              89%
              
              
              513
              
              70%
              
              
              230
              
              
              45%Enterprise
      Network Services
              
              
              52
              
              6%
              
              
              136
              
              19%
              
              
              (84
              )
              
              -62%Total
      cost of sales
              
              $
              835
              
              100%
              
              $
              734
              
              100%
              
              $
              101
              
              
              14%






Three
      Months Ended September 30,($
      in thousands)
            
            2009
            
            
            2008
            
            
            $
      Change
            
            
            %
      ChangeProducts
      and integration service
            
            $
            356
            
            
            $
            436
            
            
            $
            (80
            )
            
            
            -18%Rent
      and maintenance
            
            
            124
            
            
            
            103
            
            
            
            21
            
            
            
            20%Salary
      and related cost
            
            
            2
            
            
            
            18
            
            
            
            (16
            )
            
            
            -89%Depreciation
            
            
            333
            
            
            
            239
            
            
            
            94
            
            
            
            39%Other
      costs
            
            
            20
            
            
            
            (62
            )
            
            
            82
            
            
            
            -132%Total
      cost of sales
            
            $
            835
            
            
            $
            734
            
            
            $
            101
            
            
            
            14%






18


The
following tables set forth summarized cost of goods sold information for the
nine months ended September 30, 2009 and 2008:




($
      in thousands)
                
                Nine
      Months Ended September 30,Business
      Segment
                
                
                2009
                
                %
      of Total
                
                
                2008
                
                %
      of Total
                
                $
      Change
                
                
                %
      ChangeWireless
      Messaging Services
                
                $
                139
                
                6%
                
                $
                320
                
                15%
                
                $
                (181
                )
                
                -57%Wireless
      Bundled Services
                
                
                1,985
                
                85%
                
                
                1,522
                
                71%
                
                
                463
                
                
                30%Enterprise
      Network Services
                
                
                216
                
                9%
                
                
                311
                
                14%
                
                
                (95
                )
                
                -31%Total
      cost of sales
                
                $
                2,340
                
                100%
                
                $
                2,153
                
                100%
                
                $
                187
                
                
                9%







Nine
      Months Ended September 30,($
      in thousands)
              
              2009
              
              
              2008
              
              
              $
      Change
              
              
              %
      ChangeProducts
      and integration service
              
              $
              1,012
              
              
              $
              953
              
              
              $
              59
              
              
              
              6
              %Rent
      and maintenance
              
              
              330
              
              
              
              299
              
              
              
              31
              
              
              
              10
              %Salary
      and related cost
              
              
              18
              
              
              
              74
              
              
              
              (56
              )
              
              
              -76
              %Depreciation
              
              
              894
              
              
              
              646
              
              
              
              248
              
              
              
              38
              %Other
      costs
              
              
              86
              
              
              
              181
              
              
              
              (95
              )
              
              
              -52
              %Total
      cost of sales
              
              $
              2,340
              
              
              $
              2,153
              
              
              $
              187
              
              
              
              9
              %







For the
three months ended September 30, 2009, cost of goods sold increase by $101,000,
or 14%, to $835,000 from $734,000 as compared to the three months ended
September 30, 2008. The increase of $101,000 in cost of goods sold is primarily
attributable to an increase of $230,000 in WBS due to increase depreciation and
other cost as a result of recent acquisitions, and offset with a decrease of
$84,000 in ENS and a decrease of $45,000 in WMS.





For the
nine months ended September 30, 2009, cost of goods sold increase by $187,000,
or 9%, to $2,340,000 from $2,153,000 as compared to the nine months ended
September 30, 2008. The increase of $187,000 in cost of goods sold is primarily
attributable to an increase of $463,000 in WBS due to primarily with an increase
depreciation and third party and services as a result of recent acquisitions,
offset with a decrease of cost of goods sold of $95,000 in ENS and a decrease of
$181,000 in WMS in cost of goods sold due to decrease sales over the same period
last year.




OPERATING
EXPENSES




The
following table sets forth summarized operating expense information for the
three and nine months ended September 30, 2009 and 2008:




Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,($
      in thousands)
              
              2009
              
              
              2008
              
              
              $
      Change
              
              
              %
      Change
              
              
              2009
              
              
              2008
              
              
              $
      Change
              
              
              %
      ChangeEmployment
      expenses
              
              $
              1,332
              
              
              $
              1,193
              
              
              $
              139
              
              
              
              12%
              
              
              $
              3,664
              
              
              $
              3,433
              
              
              $
              231
              
              
              
              7%Professional
      services
              
              
              538
              
              
              
              452
              
              
              
              86
              
              
              
              19%
              
              
              
              1,493
              
              
              
              1,423
              
              
              
              70
              
              
              
              5%Rent
      and maintenance
              
              
              111
              
              
              
              98
              
              
              
              13
              
              
              
              13%
              
              
              
              335
              
              
              
              281
              
              
              
              54
              
              
              
              19%Research
      and development
              
              
              -
              
              
              
              6
              
              
              
              (6
              )
              
              
              100%
              
              
              
              -
              
              
              
              25
              
              
              
              (25
              )
              
              
              100%Depreciation
      and amortization
              
              
              379
              
              
              
              208
              
              
              
              171
              
              
              
              82%
              
              
              
              1,101
              
              
              
              674
              
              
              
              427
              
              
              
              63%Other
      general and administrative
              
              
              441
              
              
              
              367
              
              
              
              74
              
              
              
              20%
              
              
              
              1,269
              
              
              
              1,183
              
              
              
              86
              
              
              
              7%Total
      operating expenses
              
              $
              2,801
              
              
              $
              2,324
              
              
              $
              477
              
              
              
              21%
              
              
              $
              7,862
              
              
              $
              7,019
              
              
              $
              843
              
              
              
              12%


19







For the
three months ended September 30, 2009, operating expenses increased by 21% to
$2,801,000, as compared to $2,324,000 for the three months ended September 30,
2008. The increases that occurred, as evidenced by the immediately preceding
table, are discussed below:




·
            A
      $139,000 increase in employment expense. The increase is primarily
      attributable to growth of the company through recent
      acquisitions;




·
            A
      $86,000 increase in professional services. The increase  is
      primarily related to investor relations
  expenses;




·
            A
      $13,000 increase in rent and maintenance. The increase is primarily
      attributable to growth of the company through recent
      acquisitions;




·
            A
      $171,000 increase in depreciation and amortization; The increase is
      primarily attributable to growth of the company through recent
      acquisitions; and




·
            A
      $74,000 increase in other general and administrative
    expense.




For the
nine months ended September 30, 2009, operating expenses increased by 12% to
$7,862,000, as compared to $7,019,000 for the nine months ended September 30,
2008. The increases that occurred, as evidenced by the immediately preceding
table, are discussed below:




·
            A
      $231,000 increase in employment expense. The increase is primarily
      attributable to growth of the company through recent
      acquisitions;




·
            A
      $70,000 increase in professional services. The increase  is
      primarily related to investor relations
  expenses;




·
            A
      $54,000 increase in rent and maintenance. The increase is primarily
      attributable to growth of the company through recent
      acquisitions;




·
            A
      $427,000 increase in depreciation and amortization; The increase is
      primarily attributable to growth of the company through recent
      acquisitions; and




·
            A
      $86,000 increase in other general and administrative
    expense.




OTHER
(INCOME) EXPENSE, NET




For the
nine months ended September 30, 2009, the increase in other expense is primarily
attributable to interest expense, net on debt obligations totaling $890,000 and
a net derivative income of $2,000 as compared to interest expense, net of
$616,000 and derivative income of $287,000 for the nine months ended September
30, 2008. The derivative expense/income represents the net unrealized (non-cash)
charge during the nine months ended September 30, 2009 and 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
nine months ended September 30, 2009, our net loss was $6,981,000 compared to a
loss of $5,645,000 for the nine months ended September 30, 2008. The increase in
the loss for the nine months ended September 30, 2009, as compared to the nine
months ended September 30, 2008 is primarily attributable to increase in
employment, other general administrative and depreciation and
amortization.




CASH
FLOWS




The
Company's operating activities decreased net cash used by operating activities
to $2,207,000 in the nine months ended September 30, 2009, compared to net cash
used of $3,004,000 in the nine months ended September 30, 2008. The decrease in
net cash used by operating activities was primarily attributable to fund an
increase in the company's net operating loss of $6,981,000, net of $4,213,000
non-cash charges and combine with $561,000 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.




The
Company's investing activities used net cash of $793,000 in the nine months
ended September 30, 2009, compared to use of net cash of $851,000 in the nine
months ended September 30, 2008. The increase in investing activities is
primarily growing WISP capabilities through expansion of our infrastructure in
Texas, New Mexico and Louisiana.




The
Company's financing activities provided net cash of $2,814,000 in the nine
months ended September 30, 2009, compared to $1,839,000 of cash provided in the
nine months ended September 30, 2008. The cash provided in the nine months ended
September 30, 2009, was primarily associated with the proceeds from equity
financings, subordinated promissory financing, convertible debt financing and
the line of credit, net.







20




LIQUIDITY
AND CAPITAL RESOURCES




At
September 30, 2009, the Company's current assets totaled $1,322,000 (including
cash and cash equivalents of $162,000); total current liabilities were
$6,047,000, resulting in negative working capital of $4,725,000. The Company has
funded operations to date primarily through a combination of utilizing cash on
hand, borrowings and raising additional capital through the sale of its
securities. The Company operation for the nine months ended September 30, 2009,
was primarily funded by proceeds from the Company's line of credit totaling
$1,960,000, subordinated promissory financing of $1,390,000, sale of restricted
common stock, net to accredited investors of $334,000 and convertible debt
financing of $150,000.




CURRENT
DEBT FACILITY




At
September 30, 2009, the Company had approximately $2,357,000 available on a $6.5
million unsecured revolving credit facility with Angus Capital Partners, which
matures in March 2011. 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.




ISSUANCE
OF COMMON STOCK




During
the three months ended September 30, 2009, we issued 318,000 shares for services
rendered and debt conversions, and 11,700,000 shares upon conversion of Series A
Preferred Stock. We relied on Section 4(2) of the Securities Act in effecting
these transactions. During the three months ended September 30, 2009, we issued
1,692,000 shares of common stock to employees and business consultants, for
aggregate consideration of $488,000 of services rendered, pursuant to a
registration statement on form S-8.




During
the nine months ended September 30, 2009, we issued to various accredited
investors and third parties (i) 1,918,000 shares of restricted common stock for
net consideration of $334,000, (ii) 6,090,000 shares for services rendered and
debt conversions, and (iii) 19,458,000 shares upon conversion of Series A
Preferred Stock. We relied on Section 4(2) of the Securities Act in effecting
these transactions. During the nine months ended September 30, 2009, we issued
4,656,000 shares of common stock to employees and business consultants, for
aggregate consideration of $1,466,000 of services rendered, pursuant to a
registration statement on form S-8.




USE
OF WORKING CAPITAL




We
believe our cash and available credit facilities afford us adequate liquidity
for the balance of fiscal 2009.  We anticipate that we will need
additional capital in the future to continue to expand our business operations,
which expenditures may include acquisitions and capital
expenditures.  We have historically financed our operations through
private equity and debt financings. We do not have any commitments for
significant 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 curtail operations.




CONTRACTUAL
OBLIGATIONS




The
following table sets forth contractual obligations as of September 30,
2009:


Payments
      Due by PeriodTotal
              
              
              Less
      than 1 Year
              
              
              1-3
      Years
              
              
              3-5
      Years
              
              
              More
      than 5 YearsContractual
      obligations:Long-term
      debt obligations
              
              $
              7,845
              
              
              $
              2,086
              
              
              $
              5,759
              
              
              $
              -
              
              
              $
              -Capital
      lease obligations
              
              
              2,287
              
              
              
              302
              
              
              
              1,718
              
              
              
              256
              
              
              
              11Operating
      lease obligations
              
              
              1,271
              
              
              
              156
              
              
              
              1,058
              
              
              
              24
              
              
              
              33Total
      contractual obligations
              
              $
              11,403
              
              
              $
              2,544
              
              
              $
              8,535
              
              
              $
              280
              
              
              $
              44






The
Company's contractual obligations consist of long-term debt of $6,621,000,
derivative liabilities of $328,000, unamortized debt discount of $196,000 and
interest expense of $700,000 as set forth in Note 6 to the company's financial
statements, Notes Payable, Long-Term Debt, Capital Leases and certain
obligations for operating leases requiring future minimal commitments under
non-cancelable leases set forth in Note 8 - Commitments .




21




OFF-BALANCE
SHEET ARRANGEMENTS




As of
September 30, 2009, 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




Property
and Equipment




Property
and equipment are stated at cost less accumulated depreciation. Major renewals
and improvements are capitalized; minor replacements, maintenance and repairs
are charged to current operations. Depreciation is computed by applying the
straight-line method over the estimated useful lives which are generally three
to seven years.




Impairment
losses are recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. No impairment losses
have been recorded since inception.





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.





Derivative
Instruments




In
connection with the sale of debt or equity instruments, the Company 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
Company's 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, the Company estimates
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, the
Company estimates the future volatility of its common stock price based on not
only the history of its stock price but also the experience of other entities
considered comparable to the Company.




22





Recent
Accounting Pronouncements




In
July 2009, the FASB established the FASB Accounting Standards CodificationTM
(“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in accordance with generally accepted accounting principles
(“GAAP”) in the United States. This guidance was included in the Codification
under FASB Accounting Standard Codification (“ASC”) Topic 105, Generally
Accepted Accounting Principles. All prior accounting
standard documents were superseded by the Codification and any accounting
literature not included in the Codification is no longer authoritative. Rules
and interpretive releases of the SEC issued under the authority of federal
securities laws will continue to be sources of authoritative GAAP for SEC
registrants. The Codification became effective for the Company beginning with
the third quarter of 2009. Therefore, beginning with the third quarter of 2009,
all references made by the Company in its consolidated condensed financial
statements use the new Codification numbering system. The Codification does not
change or alter existing GAAP and, therefore, did not have a material impact on
the Company’s consolidated condensed financial statements.




In April
2008, the FASB issued a pronouncement on what is now codified as FASB ASC
Topic 350,Intangibles – Goodwill
and Other.  This pronouncement amends the factors to be considered in
determining the useful life of intangible assets accounted for pursuant to
previous topic guidance. Its intent is to improve the consistency between
the useful life of an intangible asset and the period of expected cash flows
used to measure its fair value. This pronouncement is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and interim
periods within those fiscal years, and its adoption had no effect on the
Company’s consolidated financial statements.





In March
2008, the FASB issued a pronouncement on what is now codified as FASB ASC Topic
815, Derivatives and Hedging. This pronouncement requires enhanced
disclosure about an entity’s derivative and hedging activities and thereby
improves the transparency of financial reporting. The objective of the
pronouncement is to provide adequate information about how derivative and
hedging activities affect an entity’s financial position, financial performance,
and cash flows. This pronouncement became effective in the first quarter of
2009, and its adoption from January 1, 2009 had no effect on the Company’s
consolidated financial statements.





On
January 1, 2009, the Company adopted Accounting Standards Codification
(“ASC”) Topic 810-10-65, “Noncontrolling Interests in Consolidated Financial
Statements — An Amendment to ARB No. 51”. The objective of this guidance
was to improve the relevance, comparability and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements by establishing accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. ASC 810-10-65 requires the reclassification of noncontrolling
interests, also referred to as minority interest, to the equity section of the
consolidated balance sheet presented upon adoption. Minority interest expense is
no longer separately reported as a reduction to net income on the consolidated
income statement, but is instead shown below net income under the heading “net
earnings (loss) attributable to noncontrolling interests.” Total provision
for income taxes remains unchanged; however, the Company’s effective tax rate as
calculated from the balances shown on the consolidated income statement has
changed as net earnings (loss) attributable to noncontrolling interests is
no longer included in the determination of income from continuing operations.
The Company has changed the presentation of its noncontrolling interests in
compliance with this requirement.




In
February 2008, the FASB issued ASC 820 — 10 (formerly “Financial Staff Position
SFAS No. 157-2”), which delayed the effective date of ASC 820 - 10 (formerly
“SFAS No. 157”) for all non-financial assets and non-financial liabilities
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until fiscal years
beginning after November 15, 2008. Nonfinancial assets and liabilities that
the Company measures at fair value on a non-recurring basis consist primarily of
property and equipment, goodwill, and intangible assets, which are subject to
fair value adjustments in certain circumstances (for example, when there is
evidence of impairment) The adoption of the provisions of ASC 820-10 did not
have a material impact on the Company’s consolidated financial position and
results of operations or cash flows.




Effective
June 30, 2009, the Company adopted guidance issued by the FASB and included in
ASC 855-10, “Subsequent Events,” which establishes general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before the financial statements are issued or are available to be issued. It
requires the disclosure of the date through which an entity has evaluated
subsequent events.  (See Note 1)




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK




As a
smaller reporting company, as defined in rule 12b-2 of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), we are not required to provide the
information mandated by this item.




ITEM
4. 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 changes in the Company's internal controls over financial reporting 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.




23




PART
II - OTHER INFORMATION




ITEM
1. LEGAL PROCEEDINGS




None.




ITEM
1A. RISK FACTORS




See Risk
Factors in item 1A of the Company form 10-K of Fiscal year ended December 31,
2008.




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.




Common
Stock Issued for Cash Consideration




No shares
were issued for cash consideration for the three months ended September 30,
2009.




Common
Stock Issued for Debt Conversions and Services Rendered




In
August, 2009, 318,476 shares of common stock at average price of $.31 were
issued for services rendered.




Common
Stock Issued Upon Conversion of Series A Preferred Stock




On July
7, 2009, an accredited investor acquired 8,871,266 shares of common stock
pursuant to Preferred A Conversions.




On
September 10, 2009, an accredited investor acquired 2,801,453 shares of common
stock pursuant to Preferred A Conversions.




On
September 29, 2009, an accredited investor acquired 27,371 shares of common
stock pursuant to Preferred A Conversions.







24




ITEM
3. DEFAULT IN SENIOR SECURITIES




None.




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




None.




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





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:
      November 23, 2009





























25