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, 2008




OR




o 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 o




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




APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY




PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:




Indicate
by check mark whether the registrant has filed all documents and reports
required to be files by Sections 12, 13, or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes o  No o   Not
Applicable x




APPLICABLE
ONLY TO CORPORATE ISSUERS:




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. 88,121,989 common shares
issued and outstanding as of November 11, 2008




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    o
            Accelerated
      filer                   
       oNon-accelerated
      filer      o
            Smaller reporting
      company   x












PART
I – FINANCIAL INFORMATION





ITEM
1.  CONSOLIDATED FINANCIAL STATEMENTS





ERF
WIRELESS, INC.


CONSOLIDATED
BALANCE SHEETS


SEPTEMBER
30, 2008, AND DECEMBER 31, 2007


($ in
thousands except share data)


September
      30,
              
              December
      31,2008
              
              2007(unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
              
              $
              195
              
              $
              2,211Accounts
      receivable, net
              
              
              532
              
              
              365Accounts
      receivable other
              
              
              136
              
              
              114Inventories
              
              
              220
              
              
              118Cost
      and profit in excess of billings
              
              
              176
              
              
              410Prepaid
      expenses and other current assets
              
              
              389
              
              
              523Total
      current assets
              
              
              1,648
              
              
              3,741Property
      and equipmentProperty
      and equipment
              
              
              5,383
              
              
              3,246Less
      accumulated depreciation
              
              
              (1,341
              )
              
              (564
              )Net
      property and equipment
              
              
              4,042
              
              
              2,682Goodwill
              
              
              436
              
              
              260Intangible
      assets, net
              
              
              1,207
              
              
              1,541Other
      assets
              
              
              232
              
              
              142Total
      assets
              
              $
              7,565
              
              $
              8,366LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Notes
      payable and current portion of long-term debt
              
              $
              481
              
              $
              513Current
      portion of long-term capital lease payable
              
              
              733
              
              
              403Accounts
      payable
              
              $
              818
              
              $
              1,089Deferred
      revenue
              
              
              14
              
              
              16Accrued
      expenses
              
              
              1,042
              
              
              929Derivative
      liabilities
              
              
              96
              
              
              403Deferred
      liability lease
              
              
              163
              
              
              164Total
      current liabilities
              
              
              3,347
              
              
              3,517Long-term
      debt, net of current portion
              
              
              4,884
              
              
              2,885Capital
      leases, net of current portion
              
              
              1,469
              
              
              1,009Deferred
      liability lease
              
              
              353
              
              
              476Deferred
      revenue
              
              
              5
              
              
              10Total
      long-term  liabilities
              
              
              6,711
              
              
              4,380Commitments
      and contingenciesShareholders’
      (deficit) equity:Preferred
      stock  -  $.001 par valueAuthorized  25,000,000
      sharesIssued
      and outstanding at September 30, 2008 andDecember
      31, 2007, 2,402,662 and 3,311,534, respectively
              
              
              2
              
              
              3Common
      stock  -  $.001 par valueAuthorized
      475,000,000 sharesIssued
      and outstanding at September 30, 2008, andDecember
      31, 2007, 83,646,187 and 61,541,358, respectively
              
              
              84
              
              
              62Additional
      paid in capital
              
              
              21,760
              
              
              19,098Accumulated
      deficit
              
              
              (24,339
              )
              
              (18,694
              )Total
      shareholders’ equity (deficit)
              
              
              (2,493
              )
              
              469Total
      liabilities and shareholders' equity (deficit)
              
              $
              7,565
              
              $
              8,366See
      accompanying notes to consolidated financial statements.


2





ERF
WIRELESS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007


(Unaudited)


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


For
      the Three Months
              
              
              For
      the Nine MonthsEnded
      September 30,
              
              
              Ended
      September 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Sales:Products
              
              $
              40
              
              
              $
              661
              
              
              $
              480
              
              
              $
              1,657Services
              
              
              1,101
              
              
              
              451
              
              
              
              3,341
              
              
              
              2,391Other
              
              
              -
              
              
              
              124
              
              
              
              -
              
              
              
              117Total
      sales
              
              
              1,141
              
              
              
              1,236
              
              
              
              3,821
              
              
              
              4,165Costs
      of goods sold:Products
      and integration services
              
              
              436
              
              
              
              291
              
              
              
              953
              
              
              
              1,736Rent,
      repairs and maintenance
              
              
              103
              
              
              
              46
              
              
              
              299
              
              
              
              138Salary
      and related cost
              
              
              18
              
              
              
              230
              
              
              
              74
              
              
              
              378Depreciation
              
              
              239
              
              
              
              56
              
              
              
              646
              
              
              
              143Other
      cost
              
              
              (62
              )
              
              
              271
              
              
              
              181
              
              
              
              302Total
      costs of goods sold
              
              
              734
              
              
              
              894
              
              
              
              2,153
              
              
              
              2,697Gross
      profit
              
              
              407
              
              
              
              342
              
              
              
              1,668
              
              
              
              1,468Operating
      expenses:Selling,
      general and administrative
              
              
              2,116
              
              
              
              1,594
              
              
              
              6,345
              
              
              
              4,465Depreciation
      and amortization
              
              
              208
              
              
              
              68
              
              
              
              674
              
              
              
              203Total
      operating expenses
              
              
              2,324
              
              
              
              1,662
              
              
              
              7,019
              
              
              
              4,668Loss
      from operations
              
              
              (1,917
              )
              
              
              (1,320
              )
              
              
              (5,351
              )
              
              
              (3,200
              )Other
      income/(expenses):Interest
      expense, net
              
              
              (262
              )
              
              
              (242
              )
              
              
              (616
              )
              
              
              (903
              )Gain
      (loss) on sale of assets
              
              
              25
              
              
              
              7
              
              
              
              25
              
              
              
              (3
              )Other
      income (expense)
              
              
              2
              
              
              
              -
              
              
              
              10
              
              
              
              -Derivative
      income
              
              
              8
              
              
              
              (213
              )
              
              
              287
              
              
              
              (330
              )Total
      other income (expense)
              
              
              (227
              )
              
              
              (448
              )
              
              
              (294
              )
              
              
              (1,236
              )Net
      loss
              
              $
              (2,144
              )
              
              $
              (1,768
              )
              
              $
              (5,645
              )
              
              $
              (4,436
              )Net
      loss per common share:Basic
              
              $
              (0.03
              )
              
              $
              (0.04
              )
              
              $
              (0.08
              )
              
              $
              (0.12
              )Diluted
              
              $
              (0.03
              )
              
              $
              (0.04
              )
              
              $
              (0.08
              )
              
              $
              (0.12
              )See
      accompanying notes to consolidated financial statements.




3


ERF
WIRELESS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007


(Unaudited)


($ in
thousands)


2008
              
              
              2007Cash
      flows from operating activitiesNet
      loss
              
              $
              (5,645
              )
              
              $
              (4,436
              )Adjustments
      to reconcile net loss to net cashused
      by operating activities:(Gain)
      loss on sale of assets
              
              
              (25
              )
              
              
              3Amortization
      of debt discount
              
              
              27
              
              
              
              498Depreciation
      and amortization
              
              
              1,320
              
              
              
              345Stock
      issued for services rendered
              
              
              1,790
              
              
              
              1,705Derivative
      (income) loss
              
              
              (287
              )
              
              
              330Stock
      based compensation and stock option expense
              
              
              29
              
              
              
              85Bad
      debt expense
              
              
              165
              
              
              
              15(Increase)
      in accounts receivable, net
              
              
              (330
              )
              
              
              -(Increase)
      in accounts receivable other
              
              
              (22
              )
              
              
              -(Increase)
      decrease in inventories
              
              
              (102
              )
              
              
              31Decrease
      (increase) in prepaid expenses
              
              
              134
              
              
              
              (234
              )Decrease
      in cost and profit in excess of billings
              
              
              234
              
              
              
              90(Decrease)
      in accounts payable
              
              
              (271
              )
              
              
              (44
              )Increase
      in accrued expenses
              
              
              110
              
              
              
              381(Decrease)
      in deferred liability lease
              
              
              (124
              )
              
              
              (139
              )(Decrease)
      in deferred revenue
              
              
              (7
              )
              
              
              (6
              )Total
      Adjustment
              
              
              2,641
              
              
              
              3,060Net
      cash used by operating activities
              
              
              (3,004
              )
              
              
              (1,376
              )Cash
      flows from investing activitiesProceeds
      from sale of assets
              
              
              27
              
              
              
              13Purchase
      of property and equipment
              
              
              (617
              )
              
              
              (466
              )Business
      acquisitions, net of cash acquired
              
              
              (171
              )
              
              
              -(Increase)
      in other assets
              
              
              (90
              )
              
              
              (22
              )Net
      cash used by investing activities
              
              
              (851
              )
              
              
              (475
              )Cash
      flows from financing activitiesNet
      proceeds from line of credit
              
              
              2,134
              
              
              
              403Proceeds
      from financing agreements
              
              
              50
              
              
              
              693Payment
      of debt obligations
              
              
              (214
              )
              
              
              (434
              )Payment
      on capital lease obligations
              
              
              (401
              )
              
              
              (6
              )Proceeds
      from sale of common stock, net
              
              
              270
              
              
              
              1,740Net
      cash provided by financing activities
              
              
              1,839
              
              
              
              2,396Net
      (decrease) in cash
              
              
              (2,016
              )
              
              
              545Cash
      and cash equivalents at the beginning of the period
              
              
              2,211
              
              
              
              393Cash
      and cash equivalents at the end of the period
              
              $
              195
              
              
              $
              938Supplemental
      disclosure of cash flow information:Net
      cash paid during the year for:Interest
              
              $
              186
              
              
              $
              3Income
      taxes
              
              $
              -
              
              
              $
              -Supplemental
      non-cash investing and financing activities:Conversion
      of debt through issuance of common stock
              
              $
              167
              
              
              $
              934Issuance
      of shares for asset acquisition
              
              $
              400
              
              
              $
              -Property
      acquired under capital lease
              
              $
              1,191
              
              
              $
              192Note
      payable for acquisition
              
              $
              150
              
              
              $
              -See
      accompanying notes to consolidated financial statements.  4
  ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)




NOTE
1 - BASIS OF PRESENTATION




NATURE
OF THE COMPANY




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




BASIS
OF ACCOUNTING




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




PRINCIPLES
OF CONSOLIDATION




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




INVENTORIES




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




September
      30,
              
              
              December
      31,2008
              
              
              2007Raw
      material
              
              $
              95
              
              
              $
              49Finished
      goods
              
              
              125
              
              
              
              69$
              220
              
              
              $
              118




The
Company has pledged substantially all the inventory of Wireless Bundle Services
("WBS") of $97,000 and $39,000 as collateral against outstanding notes as of
September 30, 2008, and December 31, 2007, respectively.




INCOME
TAXES




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




BASIC
LOSS PER SHARE




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




5


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


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




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




RECENT
ACCOUNTING PRONOUNCEMENTS




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




NOTE 2 - GOODWILL




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




NOTE
3 - INTANGIBLE ASSETS




Intangible
assets consist of the following (in thousands):




Weighted
      Average Useful Life
                (in
      years)
              
              September
      30, 2008Gross
      Carrying Amount
              
              Accumulated
      Amortization
              
              Net
      Carrying Amount
 Customer
      relationships
              
              
              3.0
              
              
              $
              2,028
              
              
              $
              821
              
              
              $
              1,207Workforce
      in place
              
              
              3.0
              
              
              
              125
              
              
              
              125
              
              
              
              -Non-compete
      agreement
              
              
              3.0
              
              
              
              100
              
              
              
              100
              
              
              
              -Developed
      technology
              
              
              3.0
              
              
              
              20
              
              
              
              20
              
              
              
              -$
              2,273
              
              
              $
              1,066
              
              
              $
              1,207


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




On
January 11, 2008, ERFW completed the purchase of assets from Crosswind, Inc.,
and as part of the acquisition the Company acquired a customer list which was
valued at $206,000 and is being amortized over three years. Please see note 13
for additional details.




Total
amortization of intangibles was approximately $540,000 and $210,000 for the nine
months ended September 30, 2008 and 2007, respectively. The estimated
amortization expense for the next three years will be $148,000 for the remaining
period of 2008, $586,000 for 2009 and $473,000 in 2010.




6


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


NOTE
4 - COMMON STOCK, PREFERRED STOCK AND WARRANTS




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




COMMON
STOCK




As of
September 30, 2008, the Company had 83,646,187 shares of its $.001 par value
common stock issued and outstanding.




During
the nine months ended September 30, 2008, the Company issued a total of
4,511,066 shares of common stock in lieu of cash for professional services of
$702,000, settlement expense of $265,000, other services of $123,000, conversion
of notes payable of $167,000, salary and compensation of $700,000 and
acquisition of assets of $400,000. The Company valued the 4,511,066 shares at
the closing market price on the date of issuance of such shares.




PREFERRED
STOCK




The
Company has 25,000,000 shares of Series A Preferred Stock authorized of which
2,402,662 shares were issued and outstanding as of September 30, 2008. The
Series A Preferred Stock is convertible at holder's option at one preferred
share for 18.676347 shares Common Stock and has a 2:1 liquidation preference.
The holder of Series A Preferred Stock is required to give a 65-day notice of
conversion to the company. With respect to the Series A Preferred Stock
outstanding at September 30, 2008, the Company would be required to issue
44,872,953 shares of its Common Stock, subject to certain contractually imposed
conversion restrictions as described herein. During the 4th quarter 2005, all of
the Series A holders entered into a Series A Conversion Restriction Agreement
whereby all Series A holders, as a group, are prohibited from converting more
than 5% of the total outstanding (as of September 30, 2005) Series A holdings in
any one calendar quarter.




WARRANTS




The
Company had warrants outstanding to third parties purchase 4,165,271 common
shares as of September 30, 2008.




Warrants
for 389,999 at $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 of the Securities Act and issued such warrants to
purchase 389,999 shares of Common Stock at $3.57 per share, subject to
adjustment upon issuance of shares or warrants below market, expiring September
2010. See Note7 for valuation and marked-to-market activity.




Warrants
for 3,775,272 shares of common stock at $5.00 per share were issued by the
Company during 2006 thru 2008. Specifically, the Company sold $1,050,000 of
E-series bonds to accredited investors under the Securities Act. According to
the agreement, if the Bondholder converts within one year from investment; the
conversion includes a warrant to purchase one additional share of common stock
at a price of $5.00 for every share of common stock that has been received from
the conversion of the Bond principal, expiring at various dates from October
2011 thru September 2013. The Company has had thirty five units converted and
has attributed $259,000 to warrant expense using the Black Scholes option price
model in the quarter in which the unit was converted. As of September 30, 2008,
the Company has attributed $27,000 in warrant expense. See Note 7 for valuation
and marked-to-market activity.




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




Options/WarrantsIssued
      & OutstandingExercise
      Price
              
              Expiration
      Date
              
              September
      30,20083.57
              
              Sep-10
              
              
              389,9995.00
              
              Oct-11
      thru Sept-13
              
              
              3,775,2724,165,271
  7


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


NOTE
5 - 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, 2008Income
              
              
              Shares
              
              
              Per-Share(Numerator)
              
              
              (Denominator)
              
              
              AmountNet
      loss
              
              $
              (5,645
              )
              
              
              74,141
              
              
              $
              (0.08
              )Basic
      EPS:Loss
      available to common stockholders
              
              
              (5,645
              )
              
              
              74,141
              
              
              
              (0.08
              )Effect
      of dilutive securities
              
              
              -
              
              
              
              
              
              
              
              -Diluted
      EPS:Loss
      available to common stockholders
              
              $
              (5,645
              )
              
              
              74,141
              
              
              $
              (0.08
              )and
      assumed conversions
  For
      the three months ended September 30, 2008Income
                
                
                Shares
                
                
                Per-Share(Numerator)
                
                
                (Denominator)
                
                
                AmountNet
      loss
                
                $
                (2,144
                )
                
                80,755
                
                
                $
                (0.03
                )Basic
      EPS:Income
      available to common stockholders
                
                
                (2,144
                )
                
                
                80,755
                
                
                
                (0.03
                )Effect
      of dilutive securities
                
                
                -
                
                
                
                
                
                
                
                -Diluted
      EPS:Income
      available to common stockholders
                
                $
                (2,144
                )
                
                
                80,755
                
                
                $
                (0.03
                )and
      assumed conversions




For the
year to date ended September 30, 2008 dilutive securities existed. The effect of
the dilutive securities for the year to date ended September 30, 2008, would
have been 88,810,632 shares of common stock issued assuming all debt instruments
were converted, all Series A preferred stock converted and all options and
warrants were exercised.




NOTE
6 - MAJOR CUSTOMERS




The
Company had gross sales of approximately $3,821,000 and $4,165,000 for the nine
months ended September 30, 2008 and 2007, respectively. The Company had one
customer that represented approximately 14% of the gross sales in the nine
months ended September 30, 2008, and had one customer that represented 49% of
gross sales for the nine months ended September 30, 2007.




8


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


NOTE
7 – NOTES PAYABLE AND LONG-TERM DEBT




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




Terms
              
              Maturity
      Date
              
              Interest
      Rate
              
              
              Gross
      Balance
              
              
              Debt
      Discount
              
              
              Net
      BalanceBancleasing,
      Inc.
              $10,660
      / Month including interest
              
              October-14
              
              
              11.62%
              
              
              $
              572
              
              
              $
              -
              
              
              $
              572Agility
      Capital Lease
              $77,222
      / Month including interest
              
              Various
              
              
              18.82%
              
              
              
              1,627
              
              
              
              -
              
              
              
              1,627Balboa
      Lease
              $225
      / Month including interest
              
              June-10
              
              
              27.74%
              
              
              
              4
              
              
              
              -
              
              
              
              4Shane
      Griffths, Crosswind
              $13,911
      / Month including interest
              
              December-10
              
              
              7.50%
              
              
              
              127
              
              
              
              -
              
              
              
              127Liberty
      Finance
              $517
      / Month including interest
              
              September-09
              
              
              13.97%
              
              
              
              6
              
              
              
              -
              
              
              
              6Chase
      Bank
              $449
      / Month including interest
              
              November-09
              
              
              5.89%
              
              
              
              6
              
              
              
              -
              
              
              
              6Blanco
      National Bank
              $3,913
      / Month including interest
              
              August-10
              
              
              9.50%
              
              
              
              75
              
              
              
              -
              
              
              
              75Robert
      McClung, Momentum
              $23,476
      / Quarterly including interest
              
              October-10
              
              
              7.50%
              
              
              
              193
              
              
              
              -
              
              
              
              193George
      Kemper, TSTAR
              $38,254
      / Quarterly including interest
              
              April-10
              
              
              7.50%
              
              
              
              253
              
              
              
              -
              
              
              
              253Line
      of credit
              2
      years/ Quarterly interest (See below)
              
              December-09
              
              
              12.00%
              
              
              
              4,544
              
              
              
              -
              
              
              
              4,544E-bond
      investor notes
              3
      years/ Semiannual interest (See below)
              
              Various
              
              
              10.00%
              
              
              
              175
              
              
              
              15
              
              
              
              160Total
      debt
              
              
              
              
              
              
              
              
              $
              7,582
              
              
              $
              15
              
              
              
              7,567Less
      current maturities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,214Less
      debt discount current maturities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (15
              )Long-term
      debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              6,368




The gross
maturities of these debts are $435,000, $5,616,000, $943,000, $258,000, $94,000
and $236,000 for the years ended December 31, 2008, 2009, 2010, 2011 and 2012,
and thereafter, respectively.





INVESTOR
NOTES




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




Description
                      
                      Investor
      Notes
                      
                      
                      Warrant
      Liabilities
                      
                      
                      Compound
      Derivative Liability
                      
                      
                      TotalFair
      value issuance at inception
                      
                      $
                      508,018
                      
                      
                      $
                      470,702
                      
                      
                      $
                      521,281
                      
                      
                      $
                      1,500,00109-06-05
      to 09-30-05 change in fair value
                      
                      
                      18,373
                      
                      
                      
                      2,389,132
                      
                      
                      
                      1,012,547
                      
                      
                      
                      3,420,05210-01-05
      to 12-31-05 change in fair value
                      
                      
                      78,258
                      
                      
                      
                      (2,160,313
                      )
                      
                      
                      (1,090,630
                      )
                      
                      
                      (3,172,685
                      )01-01-06
      to 03-31-06 change in fair value
                      
                      
                      90,258
                      
                      
                      
                      (466,128
                      )
                      
                      
                      (276,615
                      )
                      
                      
                      (652,485
                      )04-01-06
      to 06-30-06 change in fair value
                      
                      
                      104,943
                      
                      
                      
                      (149,288
                      )
                      
                      
                      32,006
                      
                      
                      
                      (12,339
                      )07-01-06
      to 09-30-06 change in fair value
                      
                      
                      122,182
                      
                      
                      
                      73,005
                      
                      
                      
                      32,395
                      
                      
                      
                      227,58210-01-06
      to 12-31-06 change in fair value
                      
                      
                      140,846
                      
                      
                      
                      (118,744
                      )
                      
                      
                      (26,162
                      )
                      
                      
                      (4,060
                      )01-01-07
      to 03-31-07 change in fair value
                      
                      
                      158,659
                      
                      
                      
                      (20,503
                      )
                      
                      
                      (2,478
                      )
                      
                      
                      135,67804-01-07
      to 06-30-07 change in fair value
                      
                      
                      184,473
                      
                      
                      
                      113,377
                      
                      
                      
                      (4,843
                      )
                      
                      
                      293,00707-01-07
      to 09-30-07 change in fair value
                      
                      
                      93,990
                      
                      
                      
                      116,109
                      
                      
                      
                      (197,501
                      )
                      
                      
                      12,59810-01-07
      to 12-31-07 change in fair value
                      
                      
                      -
                      
                      
                      
                      52,413
                      
                      
                      
                      -
                      
                      
                      
                      52,41301-01-08
      to 03-31-08 change in fair value
                      
                      
                      -
                      
                      
                      
                      (113,802
                      )
                      
                      
                      -
                      
                      
                      
                      (113,802
                      )04-01-08
      to 06-30-08 change in fair value
                      
                      
                      -
                      
                      
                      
                      (128,524
                      )
                      
                      
                      -
                      
                      
                      
                      (128,524
                      )07-01-08
      to 09-30-08 change in fair value
                      
                      
                      -
                      
                      
                      
                      (11,663
                      )
                      
                      
                      -
                      
                      
                      
                      (11,663
                      )Conversions
      from inception to date
                      
                      
                      (1,500,000
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,500,000
                      )Fair
      value at September 30, 2008
                      
                      $
                      -
                      
                      
                      $
                      45,773
                      
                      
                      $
                      -
                      
                      
                      $
                      45,773
 From
inception to date through September 30, 2008, the Company recorded a net
derivative income of $749,000 and for the nine months ended September 30, 2008,
a net derivative income of $254,000.




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


Warrants
 Assumptions
              
              3/31/2007
              6/30/2007
              9/30/2007
              12/31/2007
              3/31/2008
              6/30/2008
              9/30/2008Dividend
      yield
              
              0.00%
              0.00%
              0.00%
              0.00%
              0.00%
              0.00%
              0.00%Risk-free
      rate for term
              
              4.51%
              4.89%
              4.03%
              3.07%
              1.62%
              2.91%
              2.00%Volatility
              
              140.00%
              200.00%
              177.00%
              180.00%
              180.00%
              170.00%
              155.00%Maturity
      date
              
              3.44
      years
              3.39
      years
              2.93
      years
              2.68
      years
              2.43
      years
              2.18
      years
              1.93
      years
 
 9
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 A
Black-Scholes methodology was used to value the warrants.
  LINE
OF CREDIT
  During
2007, the Company amended its two-year unsecured revolving credit facility with
certain private investors that provides a $3 million dollar line of credit. The
terms of the secured revolving credit facility allow ERF Wireless to draw upon
the facility as financing requirements dictate and provide for quarterly
interest payments at a 12% rate. The loan has been extended from February 28,
2009, to March 31, 2011, and may be prepaid without penalty or repaid at
maturity. At September 30, 2008, the balance of the credit line was $4,543,515.
The lender has agreed to fund up to a maximum of $6.5 million through 2011 under
the same terms and conditions.
  E-SERIES
BOND INVESTOR NOTE
  The
E-Series Bonds were determined to include various embedded derivative
liabilities. The derivative liabilities are the conversion feature and the
redemption option (compound embedded derivative liability). At the date of
issuance the E-Series Bond, compound embedded derivative liabilities were
measured at fair value using either quoted market prices of financial
instruments with similar characteristics or other valuation techniques. These
derivative liabilities will be marked-to-market each quarter with the change in
fair value recorded in the income statement. The Company uses the effective
interest method to record interest expense and related debt accretion which was
$26,535 for the nine months ended September 30, 2008, and the estimated debt
accretion for 2008 is $14,547.
  The
following table summarizes the convertible debt activity for the period May 31,
2006, to September 30, 2008:
 
  Description
              
              
              E-Series
      Bonds
              
              
              
              Compound
                Derivative
                Liability
              
              
              
              TotalFair
      value issuance at inception
              
              $
              916,174
              
              
              $
              133,826
              
              
              $
              1,050,00005-31-06
      to 06-30-06 change in fair value
              
              
              763
              
              
              
              (11,750
              )
              
              
              (10,987
              )07-01-06
      to 09-30-06 change in fair value
              
              
              5,847
              
              
              
              (3,971
              )
              
              
              1,87610-01-06
      to 12-31-06 change in fair value
              
              
              6,648
              
              
              
              (13,213
              )
              
              
              (6,565
              )01-01-07
      to 03-31-07 change in fair value
              
              
              9,065
              
              
              
              5,956
              
              
              
              15,02104-01-07
      to 06-30-07 change in fair value
              
              
              49,060
              
              
              
              (10,668
              )
              
              
              38,39207-01-07
      to 09-30-07 change in fair value
              
              
              2,965
              
              
              
              4,536
              
              
              
              7,50110-01-07
      to 12-31-07 change in fair value
              
              
              25,580
              
              
              
              (1,274
              )
              
              
              24,30601-01-08
      to 03-31-08 change in fair value
              
              
              9,146
              
              
              
              (39,397
              )
              
              
              (30,251
              )04-01-08
      to 06-30-08 change in fair value
              
              
              6,110
              
              
              
              (20,468
              )
              
              
              (14,358
              )07-01-08
      to 09-30-08 change in fair value
              
              
              4,096
              
              
              
              6,706
              
              
              
              10,802Conversions
      from inception to date
              
              
              (875,000
              )
              
              
              -
              
              
              
              (875,000
              )Fair
      value at September 30, 2008
              
              $
              160,454
              
              
              $
              50,283
              
              
              $
              210,737
  From
inception to date through September 30, 2008, the Company recorded a net
derivative income of $90,725 and for the nine months ended September 30, 2008, a
net derivative income of $60,341.
  SHAYNE
GRIFFTHS, CROSSWIND, INC.
  On
January 11, 2008, the Company issued a note to Crosswind, Inc., totaling
$150,000 bearing interest at 7.5% and are secured by the equipment acquired,
payable in twelve quarterly payments of $13,911 plus interest.
  CAPITAL
LEASES
  Agility Lease Fund, LLCIncluded in property and equipment at September 30, 2008, is $1,442,508
capitalized equipment, net of amortization. The equipment and one of the
Company's bank accounts are the primary collateral securing the financing with a
guarantee of repayment by ERF Wireless, Inc.
  Banc Leasing Inc.,Included in
property and equipment at September 30, 2008, is $610,900 capitalized equipment,
net of amortization. The equipment is the primary collateral securing the
financing.
  10
  ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
    Year
      Ending  December 31,2008
              
              $
              2542009
              
              
              1,0302010
              
              
              8402011
              
              
              3132012
              
              
              128Thereafter
              
              
              267Total
      minimum lease payments
              
              
              2,832Less
      amount representing interest
              
              
              (630
              )Present
      value of net minimum lease payments
              
              
              2,202Current
      maturities of capital lease obligations
              
              
              (733
              )Long-term
      portion of capital lease obligations
              
              $
              1,469
  NOTE
8 – UNCOMPLETED CONTRACTS
  Costs,
estimated earnings and billings on uncompleted contracts for the nine months
ended September 30, 2008 are summarized as follows (in thousands):
  September
      30,2008Costs
      incurred on uncompleted contracts
              
              $
              2,547Estimated
      profit
              
              
              707Gross
      revenue
              
              
              3,254Less:
      billings to date
              
              
              3,078Costs
      and profit in excess of billings
              
              $
              176
  Such
amounts are included in the accompanying balance sheets at September 30, 2008
are summarized as follows (in thousands):
  September
      30,2008Cost
      and estimated earnings in excess of billings on uncompleted
      contracts
              
              $
              176Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
              
              
              -$
              176
  NOTE
9 - COMMITMENTS AND CONTINGENCIES
  LEASES
AND LICENSE AGREEMENTS
  For the
nine months ended September 30, 2008 and 2007, rental expenses of approximately
$464,000 and $287,000, 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,
2008, were as follows:
 
 Period
      Ending December 31,
              
              Amount
      ($000)2008
              
              $
              1532009
              
              
              5892010
              
              
              5642011
              
              
              3902012
              
              
              52Thereafter
              
              
              43Total
              
              $
              1,791
  11
  ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  NOTE
10 - INDUSTRY SEGMENTS
  This
summary reflects the Company's current segments, as described
below.
  WIRELESS
BUNDLED SERVICES DIVISION (WBS)
  WBS
provides wireless broadband products and services to commercial and individual
customers throughout the wireless industry. The company is in the early stages
of building and acquiring a seamless wireless broadband network throughout North
America to serve private entities, cities, municipalities and the general
public. All sales from external customers are located within the United
States.
  WIRELESS
MESSAGING SERVICES DIVISION (WMS)
  WMS
principally provides wireless broadband system design and implementation,
manufactures paging equipment, repair and maintain paging infrastructure
equipment and supplies high-power infrastructure equipment to the wireless
messaging industry and owns and operates a wide-area messaging service. All
sales from external customers are located within the United States as well as
certain international locations.
  NETWORK
OPERATING SERVICES DIVISION (NOS)
  NOS
provide the overall day-to-day 24/7 monitoring of all wireless broadband
networks that the Company constructs, acquires, maintains and administers. The
transactions in the NOS segment for the nine months ended September 30, 2008 and
2007 were not material.
  ENTERPRISE
NETWORK SERVICES (ENS)
  ENS
provides product and service to operate an enterprise-class encrypted wireless
banking network business. ENS provides the CryptoVue System consisting of
software, site-based hardware devices and servers to perform network encryption;
contracts for the construction, operation, monitoring and maintenance of fixed
wireless networks for banking customers; trade names, equipment and software,
including the software architecture and design.
 For the
nine months ended September 30, 2008 (in thousands)
  WMS
                    
                    
                    WBS
                    
                    
                    ENS
                    
                    
                    TotalRevenue
                    
                    $
                    633
                    
                    
                    $
                    2,945
                    
                    
                    $
                    243
                    
                    
                    $
                    3,821Segment
      (loss) income
                    
                    
                    88
                    
                    
                    
                    (1,446
                    )
                    
                    
                    (1,219
                    )
                    
                    
                    (2,577
                    )Segment
      assets
                    
                    
                    401
                    
                    
                    
                    5,175
                    
                    
                    
                    1,578
                    
                    
                    
                    7,154Capital
      expenditures
                    
                    
                    14
                    
                    
                    
                    1,244
                    
                    
                    
                    777
                    
                    
                    
                    2,035Depreciation
      and amortization
                    
                    
                    11
                    
                    
                    
                    1,150
                    
                    
                    
                    109
                    
                    
                    
                    1,270
  Nine
      Months EndedReconciliation
      of Segment Loss from Operations to Net Loss
                  
                  September
      30, 2008Total
      segment loss from operations
                  
                  $
                  (2,577
                  )Total
      corporate overhead
                  
                  
                  (3,068
                  )Net
      loss
                  
                  $
                  (5,645
                  )
  Reconciliation
      of Segment Assets to Total Assets
                  
                  September
      30, 2008Total
      segment assets
                  
                  $
                  7,154Total
      corporate assets
                  
                  
                  411Consolidated  assets
                  
                  $
                  7,565
 
 12
  ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  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, 2008, one customer accounts for $552,000 of Wireless
Messaging Services Division revenues. At September 30, 2007, one customer
accounts for $311,000 of Enterprise Network Services Division revenues and one
customer accounts for $2,025,000 of Wireless Messaging Services Division
revenues.
  NOTE
11 - SUPPLEMENTAL NON-CASH DISCLOSURES:
  During
2008, the Company issued stock in lieu of cash as payment for the following (in
thousands):
 
 September
      30, 2008
                
                Supplemental
      Non-Cash DisclosureProfessional
      fees
                
                $
                702Settlements
                
                
                265Salary
      and compensation
                
                
                700Other
      services rendered
                
                
                123Total
      for services, interest, liabilities and compensation
                
                $
                1,790Notes
      payable
                
                $
                167Acquisition
                
                $
                400
  SUPPLEMENTAL
SCHEDULE OF ASSETS ACQUIRED RECONCILING CASH PAID:
 
 On
January 11, 2008, ERF Wireless, Inc (ERFW) completed the purchase of assets from
Crosswind Enterprises Inc. The schedule below reflects the fair value of assets
acquired, liabilities assumed, common stock issued and note payable
issued.
 
 Fair
      value of assets acquired
                
                
                724Liabilities
      assumed
                
                
                (3
                )Common
      stock issued for acquisition
                
                
                (400
                )Note
      payable issued for acquisition
                
                
                (150
                )Cash
      paid for acquisition
                
                $
                171
  NOTE
12 - EMPLOYEE STOCK OPTIONS
  In 2004,
the Board of Directors adopted a Non-Qualified Stock Option Plan under which
5,000,000 shares of the Company's common stock were reserved for issuance. In
March 2007, the Board of Directors adopted a Non-Qualified Stock Option Plan
under which an additional 10,000,000 shares were reserved for issuance. In April
2008, the Board of directors adopted a Non-Qualified Stock Option Plan whereby
an additional 15,000,000 shares were reserved for issuance. There were 95,742
Series A preferred stock convertible to 1,788,111 common stock shares granted to
certain Officers and employees under employment agreements. As of September 30,
2008, 270,135 common stock shares remain to be converted from Series A preferred
stock. Also the Company has granted to certain officers and employees 500,000
stock options which are currently exercisable. As of September 30, 2008, under
all Non-Qualified Stock Option Plans, 16,218,171 shares were issued and
exercised by certain employees and consultants for services
rendered.
  Option
activity was as follows for the nine months ended September 30, 2008:
  13
  ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  2008Weighted-Average
      Exercise PriceSharesOutstanding
      at beginning of year
                3,302,000
                
                $
                2.98Granted
                125,000
                
                
                0.43Assumed
      through acquisitions
                -
                
                
                -Exercised
                -
                
                
                -Forfeited/cancelled
                (2,927,000)
                
                
                3.28Outstanding
      throughout the period
                500,000
                
                $
                0.57Exercisable
      at September 30, 2008
                500,000
                
                $
                0.57
  The
weighted average fair value of the individual options granted during the nine
months ended September 30, 2008, is estimated at $.43 on the date of grant.
Information about options outstanding was as follows at September 30, 2008:
 
 Remaining
                
                
                Average
                
                
                
                
                
                AverageClass
                
                
                Number
                
                
                Average
      Contractual
                
                
                Exercise
                
                
                Number
                
                
                ExerciseExercise
      Price
                
                
                Outstanding
                
                
                Life
      in Years
                
                
                Price
                
                
                Exercisable
                
                
                Price$
                0.10
                
                
                
                225,000
                
                
                
                0.83
                
                
                $
                0.10
                
                
                
                225,000
                
                
                $
                0.10$
                1.38
                
                
                
                150,000
                
                
                
                0.83
                
                
                $
                1.38
                
                
                
                150,000
                
                
                $
                1.38$
                0.43
                
                
                
                125,000
                
                
                
                2.33
                
                
                $
                0.43
                
                
                
                125,000
                
                
                
                0.43500,000
                
                
                
                1.13
                
                
                $
                0.57
                
                
                
                500,000
                
                
                $
                0.57
  NOTE 13 – BUSINESS COMBINATIONS
 
 CROSSWIND
ENTERPRISES, INC., ACQUISITION
  PURCHASE PRICE
  On
January 11, 2008, ERF Wireless, Inc (ERFW) completed the purchase of assets from
Crosswind Enterprises Inc. under the Asset Purchase Agreement dated January 11,
2008. Under the Asset Purchase Agreement, ERFW acquired the wireless internet
service provider ("WISP"), which includes all of the current customers,
equipment and network infrastructure equipment. The acquisition will also
increase the Company's footprint in west Texas and into eastern New Mexico and
may lead to additional synergy with expansion of the WiNet and US-BankNet
System. At the time of the transaction, there were no material relationships
between the seller and ERFW or any of its affiliates, or any director or officer
of ERFW, or any associate of any such officer or director. ERFW paid $650,000 in
cash, notes and securities and assumed $2,880 in current liabilities and assumed
$71,498 in note payables.
  The
purchase price allocation is as follows (in thousands):
  Accounts
      receivable
                
                
                2Property
      and equipment
                
                
                340Goodwill
                
                
                176Identifiable
      intangible assets
                
                
                206Accounts
      payable and accrued expenses
                
                
                (3
                )Note
      payable
                
                
                (71
                )Total
      adjusted purchase price
                
                $
                650
  NOTE
14 - SUBSEQUENT EVENTS
  During
the 4th quarter 2008, through November 14, 2008 the Company issued shares in the
amount of 1,109,337 for services and liabilities and issued shares in the amount
of 3,366,465 for conversion of preferred stock to common stock.
  14
  ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
  This
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with the other sections of
this quarterly report on Form 10-Q, including the financial
statements.
  OUR
MARKETS AND BUSINESS STRATEGY
  The
Company has four operating divisions to provide solutions and services to
different segments of the wireless industry. The Company's Enterprise Networks
Services Division serves enterprise customers, private entities, cities,
unincorporated municipalities and the general public. The Company's Wireless
Bundled Services Division provides wireless broadband products and services,
including Internet, voice, data and security services, and is in the early
stages of building or acquiring a seamless wireless broadband network throughout
much of North America to serve private entities, cities, municipalities and the
general public. The Company's Wireless Messaging Services Division provides
wireless broadband system design and implementation, manufactures and supplies
high-power infrastructure equipment to the wireless messaging industry and owns
and operates a wide-area messaging service (one- and two-way paging retail). In
addition, WMS provides a turn-key implementation of a triple play voice, video,
and data to residential developments internationally as well as in the U.S. The
Company's Network Operation Services Division provides the overall day-to-day
24/7 monitoring of all wireless broadband networks that the Company constructs,
acquires, maintains and administers. Hereinafter, all references to the Company
include the operations and financial condition of the Company and its operating
divisions. Subsequent to the quarter ended June 30, 2008, the company announced
the formation of a new Oil and Gas Services Division to address growing customer
demand in the oil and gas industry for the company’s wireless products and
services.  Utilizing the resources of its rapidly expanding wireless
broadband networks in Texas, New Mexico and Louisiana, the company is now
actively supplying specialized products and services to oil and gas customers
through this new division.
  The
Company continues to focus its initial marketing efforts at certain Louisiana,
Mississippi, Alabama, New Mexico, Georgia, Texas and Florida banks due to the
likelihood of hurricanes and wide-scale disasters in those states. The Company's
business strategy is to design, construct, secure, maintain and monitor
enterprise-class encrypted microwave broadband networks for the regional banking
industry.
  The
Company's fault-tolerant network solutions for individual banks ("BranchNetTM
systems") is currently providing 20 to 30 Mbps of encrypted microwave data
communications bandwidth to six banks in three states. BranchNet provides high
speed communications among a financial institution's branches spread across
hundreds of miles.  The BranchNet systems address the banking industry
demands for secure, fault-tolerant broadband networks, while significantly
reducing the cost of the required fault-tolerant bandwidth versus traditional
wireline communications options provided by the incumbent telephone
carriers.
  In
addition, the Company is currently building its own nationwide fiber, satellite
and encrypted wireless network for the banking industry called US BankNet. The
Company leases fiber for long-haul data transmissions, builds encrypted wireless
infrastructure for the "last mile", and incorporates satellite failover for
redundancy.
  The
Company's strategic plan is to develop US BankNet in a series of steps. First,
it sells an individual financial institution ("FI") a private encrypted wireless
network ("BranchNet") to replace the FI's wireline data communications wide area
network (WAN) to its branches. Six such networks have already been completed for
FIs in Texas, Louisiana and Missouri. The Company is interconnecting individual
FI networks into Company-owned statewide networks to provide them with
high-speed access to banking service providers, disaster recovery centers,
correspondent banks, the Internet and the Federal Reserve. All of the Company's
Louisiana-based FI customers and the Louisiana State Police are participating in
the Company's first statewide network, Louisiana BankNet. As statewide networks
are completed, the Company plans to aggregate them into regional networks (i.e.
"Southern BankNet") and finally aggregate the regional networks into its
nationwide network, US BankNet.
  In the
U.S. there are 2,426 community banks and 431 credit unions that meet the size
criteria of the Company's wireless broadband T1 replacement model. This market
segment of banks and credit unions have between 5 and 19 branches with the
primary target group averaging 12 branches. This represents a large potential
market. There are an additional 492 large banks with 20 or more branches with an
average of 135 branches representing an additional large market potential. To
penetrate this market, the Company is negotiating with a Fortune 50 company to
sell and support the Company's products in this segment of the market. The
Company is also in negotiations with selected large core banking service
providers to market and sell the Company's products to their respective customer
bases.
 
 The
Company also plans to expand its offering to provide wireless broadband product
and service solutions to other large vertical markets where high bandwidth and
secure communications are needed (such as the digital oil field, hospitals,
schools, law enforcement, etc.), especially in areas where it can leverage the
excess capacity in network infrastructure already constructed and paid for by
its bank customers.
  15
  The
Company has recently acquired twelve wireless broadband networks (“WISPs”) in
key underserved regions to both provide local maintenance service for its
BranchNet bank customers as well as to produce long term recurring revenue. The
Company anticipates that it will expand its WISP footprint by both organic
growth and acquisition in areas where its banking network subsidiary has sold
BranchNet networks so that the Company can capitalize on the wireless network
infrastructure it constructs for its bank customers. For example, the Company
continues to negotiate multi-bank agreements to use the bank's network backbone
on a revenue sharing basis to sell wireless broadband services to schools,
hospitals, businesses, municipal entities and residential customers in the
region covered by that bank's BranchNet network with little or no additional
infrastructure cost to the Company.
  RECENT
EVENTS
  During
the quarter ended September 30, 2008, the Company has continued to execute its
expansion plans of construction and operation of the nationwide wireless BankNet
network, acquisition of strategic WISP networks with customers, expansion of the
sales staff and continued construction of various bank wireless networks. A
summary of the major milestones during and subsequent to the quarter ended
September 30, 2008 is as follows:
  ·
              The
      Company announced the formation of a new Oil and Gas Services Division to
      address growing customer demand in the oil and gas industry for the
      company’s wireless products and services.  Utilizing the
      resources of its rapidly expanding wireless broadband networks in Texas,
      New Mexico and Louisiana, the Company is now actively supplying
      specialized products and services to oil and gas customers through this
      new division.
  ·
              The
      Company obtained a nationwide license for operation in the 3.65 GHz band
      and is partnering with entities that will make additional spectrum
      available in the 2.5 GHz band.  The Company is in the final
      processes of evaluating various brands of WiMAX equipment and will begin
      limited deployment of this new technology in selected WISP and oil and gas
      markets across Texas, New Mexico and
Louisiana.
  ·
              The
      Company has begun an aggressive acquisition initiative in Texas, New
      Mexico, Oklahoma, Louisiana and Colorado; with the objective of adding and
      additional 100,000 square miles of wireless coverage in areas that will
      best support the growth of its Oil and Gas Division and regional banking
      networks.
  RESULTS
OF OPERATIONS
  THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008, COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2007
  The
following table sets forth summarized consolidated financial information for the
three and nine months ended September 30, 2008 and 2007:
 
 Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,($
      in thousands)
              
              2008
              
              
              2007
              
              
              $
      Change
              
              
              %
      Change
              
              
              2008
              
              
              2007
              
              
              $
      Change
              
              
              %
      ChangeTotal
      sales
              
              $
              1,141
              
              
              $
              1,236
              
              
              $
              (95
              )
              
              
              -8%
              
              
              $
              3,821
              
              
              $
              4,165
              
              
              $
              (344
              )
              
              
              -8%Cost
      of goods sold
              
              
              734
              
              
              
              894
              
              
              
              (160
              )
              
              
              -18%
              
              
              
              2,153
              
              
              
              2,697
              
              
              
              (544
              )
              
              
              -20%Gross
      profit
              
              
              407
              
              
              
              342
              
              
              
              65
              
              
              
              19%
              
              
              
              1,668
              
              
              
              1,468
              
              
              
              200
              
              
              
              14%Percent
      of total sales
              
              
              36%
              
              
              
              28%
              
              
              
              
              
              
              
              
              
              
              
              44%
              
              
              
              35%Operating
      expenses
              
              
              2,324
              
              
              
              1,662
              
              
              
              662
              
              
              
              40%
              
              
              
              7,019
              
              
              
              4,668
              
              
              
              2,351
              
              
              
              50%Loss
      from operations
              
              
              (1,917
              )
              
              
              (1,320
              )
              
              
              (597
              )
              
              
              45%
              
              
              
              (5,351
              )
              
              
              (3,200
              )
              
              
              (2,151
              )
              
              
              67%Other
      income/(expense)
              
              
              (227
              )
              
              
              (448
              )
              
              
              221
              
              
              
              -49%
              
              
              
              (294
              )
              
              
              (1,236
              )
              
              
              942
              
              
              
              -76%Net
      loss
              
              
              (2,144
              )
              
              
              (1,768
              )
              
              
              (376
              )
              
              
              21%
              
              
              
              (5,645
              )
              
              
              (4,436
              )
              
              
              (1,209
              )
              
              
              27%
  For the
three months ended September 30, 2008, the Company's business operations
reflected an increase in sales for Wireless Bundled Services with an offset of
decreased sales for both Wireless Messaging Services and Enterprise Network
Services. For the three months ended September 30, 2008, the Company's
consolidated operations generated net sales of $1,141,000 compared to prior year
net sales of $1,236,000. The $95,000 decrease in net sales is primarily
attributable to $447,000 decrease in Wireless Messaging Services attributable to
prior year sales with the El Dorado Golf and Beach Club of San Jose del Cabo,
Mexico project, with no similar sales comparison in the same quarter 2008, a
$255,000 decrease in banking network installation and services and offset with
an increase of $607,000 in recurring wireless WISP services with the increased
growth attributed to recent WISP acquisitions. Product sales decrease $621,000
and offset with an increase in service and other sales of $526,000. The decrease
is primarily due to prior year sales in the Wireless Messaging Services
associated with El Dorado Golf and Beach Club of San Jose del Cabo, Mexico
project and decrease sales in Enterprise Network Services in product and
services to banks. For the three months ended September 30, 2008, the Company
had a gross profit margin of 36%, compared to a gross profit margin of 28% for
the prior year. The increased in gross profit margin is primarily attributable
to several factors: (i) Increased WISP customer base in recurring revenue with
strong consistent margins on wireless broadband services and (ii) consistent
margins in our Wireless Messaging Services change orders in completing the El
Dorado Golf and Beach Club of San Jose del Cabo, Mexico project.
  16
  For the
nine months ended September 30, 2008, the Company's consolidated operations
generated net sales of $3,821,000 compared to prior-year net sales of $4,165,000
for the nine months ended September 30, 2007. The $344,000 decrease in net sales
is primarily attributable to $1,717,000 decrease in Wireless Messaging Services
prior year sales associated with the El Dorado Golf and Beach Club of San Jose
del Cabo, Mexico, a $541,000 decrease in banking network installation and
services resulting in reduced network construction revenues in 2008 and offset
with an increase of $1,914,000 in recurring wireless WISP services with the
increased growth attributed to recent WISP acquisitions. For the nine months
ended September 30, 2008, the Company had a gross profit margin of 44%, compared
to a gross profit margin of 35% for the prior-year nine-month period ended
September 30, 2007. The increased in gross profit margin is primarily
attributable to several factors: (i) Increased WISP customer base growth through
acquisition in recurring revenue with strong consistent margins on wireless
broadband services and (ii) consistent margins in our Wireless Messaging
Services change orders in completing the El Dorado Golf and Beach Club of San
Jose del Cabo, Mexico project.
  The
Company incurred a net loss of $2,144,000 for the three months ended September
30, 2008. The Company's principal components of the net loss for the three
months ended September 30, 2008, included approximately $208,000 in depreciation
and amortization expenses, $262,000 of interest expense, and $367,000 of other
general and administrative expense, $1,193,000 in employment expenses and
$452,000 in professional services expense.
  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, 2008 and
2007:
 
 ($
      in thousands)
              
              Three
      Months Ended September 30,Business
      Segment
              
              
              2008
              
              %
      of Total
              
              
              2007
              
              %
      of Total
              
              
              $
      Change
              
              %
      ChangeWireless
      Messaging Services
              
              $
              65
              
              6%
              
              $
              512
              
              41%
              
              $
              (447
              )
              -87%Wireless
      Bundled Services
              
              
              961
              
              84%
              
              
              354
              
              29%
              
              
              607
              
              171%Enterprise
      Network Services
              
              
              115
              
              10%
              
              
              370
              
              30%
              
              
              (255
              )
              -69%Total
      Sales
              
              $
              1,141
              
              100%
              
              $
              1,236
              
              100%
              
              $
              (95
              )
              -8%($
      in thousands)
              
              Nine
      Months Ended September 30,Business
      Segment
              
              
              2008
              
              %
      of Total
              
              
              2007
              
              %
      of Total
              
              
              $
      Change
              
              %
      ChangeWireless
      Messaging Services
              
              $
              633
              
              17%
              
              $
              2,350
              
              56%
              
              $
              (1,717
              )
              -73%Wireless
      Bundled Services
              
              
              2,945
              
              77%
              
              
              1,031
              
              25%
              
              
              1,914
              
              186%Enterprise
      Network Services
              
              
              243
              
              6%
              
              
              784
              
              19%
              
              
              (541
              )
              -69%Total
      Sales
              
              $
              3,821
              
              100%
              
              $
              4,165
              
              100%
              
              $
              (344
              )
              -8%
  For the
three months ended September 30, 2008, net sales decreased to $1,141,000 from
$1,236,000 for the three months ended September 30, 2007. The overall decrease
of 8% was attributable to a decrease of $447,000 of Wireless Messaging Services,
a decrease in Enterprise Network Services of $255,000 and an increase in
Wireless Bundled Services of $607,000. The $447,000 decrease in Wireless
Messaging Services was primarily attributable to prior year sales with the El
Dorado Golf and Beach Club of San Jose del Cabo, Mexico project, with no similar
sales comparison in the same quarter 2008. The $255,000 decrease in banking
network installation and services was primarily attributable to Banks opting to
construct networks in subsequent quarter. The $607,000 increase was primarily
attributable to recurring wireless WISP services with recent WISP asset
acquisitions including approximately 5,000 customers.
  For the
nine months ended September 30, 2008, net sales decreased to $3,821,000 from
$4,165,000 for the nine months ended September 30, 2007. The overall decrease of
8% was primarily attributable to $1,717,000 decrease in Wireless Messaging
Services prior year sales associated with the El Dorado Golf and Beach Club of
San Jose del Cabo, Mexico. The $541,000 decrease is primarily attributable to
banking network installation and services resulting in reduced network
construction revenues in 2008. The $1,914,000 increase is primarily attributable
to recurring wireless WISP services with the increased sales growth attributed
to recent WISP acquisitions.
  17
  COST
OF GOODS SOLD
  The
following tables set forth summarized cost of goods sold information for the
three months ended September 30, 2008 and 2007:
 
 ($
      in thousands)
              
              Three
      Months Ended September 30,Business
      Segment
              
              
              2008
              
              %
      of Total
              
              
              2007
              
              %
      of Total
              
              
              $
      Change
              
              
              %
      ChangeWireless
      Messaging Services
              
              $
              85
              
              11%
              
              $
              434
              
              49%
              
              $
              (349
              )
              
              -80%Wireless
      Bundled Services
              
              
              513
              
              70%
              
              
              207
              
              23%
              
              
              306
              
              
              148%Enterprise
      Network Services
              
              
              136
              
              19%
              
              
              253
              
              28%
              
              
              (117
              )
              
              -46%Total
      cost of sales
              
              $
              734
              
              100%
              
              $
              894
              
              100%
              
              $
              (160
              )
              
              -18%
  Three
      Months Ended September 30,($
      in thousands)
              
              2008
              
              
              2007
              
              
              $
      Change
              
              
              %
      ChangeProducts
      and integration service
              
              $
              436
              
              
              $
              291
              
              
              $
              145
              
              
              
              50%Rent
      and maintenance
              
              
              103
              
              
              
              46
              
              
              
              57
              
              
              
              124%Salary
      and related cost
              
              
              18
              
              
              
              230
              
              
              
              (212
              )
              
              
              -92%Depreciation
              
              
              239
              
              
              
              56
              
              
              
              183
              
              
              
              327%Other
      costs
              
              
              (62
              )
              
              
              271
              
              
              
              (333
              )
              
              
              -123%Total
      cost of sales
              
              $
              734
              
              
              $
              894
              
              
              $
              (160
              )
              
              
              -18%
  The
following tables set forth summarized cost of goods sold information for the
nine months ended September 30, 2008 and 2007:
  ($
      in thousands)
              
              Nine
      Months Ended September 30,2008
              
              %
      of Total
              
              
              2007
              
              %
      of Total
              
              
              $
      Change
              
              
              %
      ChangeWireless
      Messaging Services
              
              $
              320
              
              15%
              
              $
              1,627
              
              60%
              
              $
              (1,307
              )
              
              -80%Wireless
      Bundled Services
              
              
              1,522
              
              71%
              
              
              471
              
              18%
              
              
              1,051
              
              
              223%Enterprise
      Network Services
              
              
              311
              
              14%
              
              
              599
              
              22%
              
              
              (288
              )
              
              -48%Total
      cost of sales
              
              $
              2,153
              
              100%
              
              $
              2,697
              
              100%
              
              $
              (544
              )
              
              -20%
  Nine
      Months Ended September 30,($
      in thousands)
              
              2008
              
              
              2007
              
              
              $
      Change
              
              
              %
      ChangeProducts
      and integration service
              
              $
              953
              
              
              $
              1,736
              
              
              $
              (783
              )
              
              
              -45%Rent
      and maintenance
              
              
              299
              
              
              
              138
              
              
              
              161
              
              
              
              117%Salary
      and related cost
              
              
              74
              
              
              
              378
              
              
              
              (304
              )
              
              
              -80%Depreciation
              
              
              646
              
              
              
              143
              
              
              
              503
              
              
              
              352%Other
      costs
              
              
              181
              
              
              
              302
              
              
              
              (121
              )
              
              
              -40%Total
      cost of sales
              
              $
              2,153
              
              
              $
              2,697
              
              
              $
              (544
              )
              
              
              -20%
  For the
three months ended September 30, 2008, cost of goods sold decreased by $160,000,
or 18%, to $734,000 from $894,000 as compared to the three months ended
September 30, 2007. The decrease of $160,000 in cost of goods sold is primarily
attributable to other costs of $333,000 of travel associated with prior year
costs with the El Dorado Golf and Beach Club project in Mexico and broadband
utility cost due to growth of our WISP customer base; a $212,000 decrease in
salary and related costs is due to prior year El Dorado Golf and Beach Club
project in Mexico and wireless banking installations; offset with an increase of
$145,000 of product and service costs primarily attributable to additional
change orders due to the El Dorado Golf and Beach Club project in Mexico and due
to increase maintenance and repair cost associated with Hurricane Gustav with
our wireless banking networks; a $183,000 increase is attributable to
depreciation expense associated with recent acquisitions and growth of our
wireless network area to increase our WISP customer base and $57,000 increase is
attributable to rent and maintenance cost associated with acquisitions and
growth of  our wireless network area to increase our WISP customer
base.
  For the
nine months ended September 30, 2008, cost of goods sold decreased by $544,000,
or 20%, to $2,153,000 from $2,697,000 as compared to the nine months ended
September 30, 2007. The decrease of $544,000 in cost of goods sold is primarily
attributable to product and service cost of $783,000 associated with prior year
cost with El Dorado Golf and Beach Club project in Mexico and wireless banking
installations; a $304,000 decrease in salary and related cost is due to prior
year El Dorado Golf and Beach Club project in Mexico and wireless banking
installations; a decrease of $121,000 of other cost is primarily attributable to
travel cost due to El Dorado Golf and Beach Club project in Mexico and broadband
utility cost due to growth of our WISP customer base; offset with an increase of
$503,000 is attributable to depreciation expense associated with recent
acquisitions and growth of our wireless network area to increase our WISP
customer base and $161,000 increase is attributable to rent and maintenance cost
associated with acquisitions and growth of  our wireless network area
to increase our WISP customer base.
  18
  OPERATIONS
EXPENSES
  The
following table sets forth summarized operating expense information for the
three and nine months ended September 30, 2008 and 2007:
 
 Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,($
      in thousands)
              
              2008
              
              
              2007
              
              
              $
      Change
              
              
              %
      Change
              
              
              2008
              
              
              2007
              
              
              $
      Change
              
              
              %
      ChangeEmployment
      expenses
              
              $
              1,193
              
              
              $
              646
              
              
              $
              547
              
              
              
              85%
              
              
              $
              3,433
              
              
              $
              2,246
              
              
              $
              1,187
              
              
              
              53%Professional
      services
              
              
              452
              
              
              
              588
              
              
              
              (136
              )
              
              
              -23%
              
              
              
              1,423
              
              
              
              1,334
              
              
              
              89
              
              
              
              7%Rent
      and maintenance
              
              
              98
              
              
              
              66
              
              
              
              32
              
              
              
              48%
              
              
              
              281
              
              
              
              200
              
              
              
              81
              
              
              
              41%Research
      and development
              
              
              6
              
              
              
              -
              
              
              
              6
              
              
              
              100%
              
              
              
              25
              
              
              
              -
              
              
              
              25
              
              
              
              100%Depreciation
      and amortization
              
              
              208
              
              
              
              68
              
              
              
              140
              
              
              
              206%
              
              
              
              674
              
              
              
              203
              
              
              
              471
              
              
              
              232%Other
      general and administrative
              
              
              367
              
              
              
              294
              
              
              
              73
              
              
              
              25%
              
              
              
              1,183
              
              
              
              685
              
              
              
              498
              
              
              
              73%Total
      operating expenses
              
              $
              2,324
              
              
              $
              1,662
              
              
              $
              662
              
              
              
              40%
              
              
              $
              7,019
              
              
              $
              4,668
              
              
              $
              2,351
              
              
              
              50%
  For the
three months ended September 30, 2008, operating expenses increased by 40% to
$2,324,000, as compared to $1,662,000 for the three months ended September 30,
2007. The increases that occurred, as evidenced by the immediately preceding
table, are discussed below:
  ·
              A
      $547,000 increase in employment expense. The increase is primarily
      attributable to growth of the company through recent
      acquisitions;
  ·
              A
      $136,000 decrease in professional services. The decrease is primarily
      related to legal expenses related to registration filings in the prior
      year;
  ·
              A
      $32,000 increase in rent and maintenance. The increase is primarily
      attributable to growth of the company through recent
      acquisitions;
  ·
              A
      $6,000 increase in research and development expense. The increase is
      primarily attributable to expense in improving efficiencies of VOIP data
      encryption;
  ·
              A
      $140,000 increase in depreciation and amortization; The increase is
      primarily attributable to growth of the company through recent
      acquisitions; and
  ·
              A
      $73,000 increase in other general and administrative
    expense.
  For the nine months ended September 30,
2008, operating expenses increase by 50% to $7,019,000, as compared to
$4,668,000 for the nine months ended September 30, 2007. The increases that
occurred, as evidenced by the immediately preceding table, are discussed
below:
  ·
              A
      $1,187,000 increase in employment expense. The increase is primarily
      attributable to growth of the company through recent
      acquisitions;
  ·
              A
      $89,000 increase in professional services. The increase is primarily
      related to accounting expenses related to recent acquisitions and
      audits;
  ·
              A
      $81,000 increase in rent and maintenance. The increase is primarily
      attributable to growth of the company through recent
      acquisitions;
  ·
              A
      $25,000 increase in research and development expense. The increase is
      primarily attributable to expense in improving efficiencies of VOIP data
      encryption;
  ·
              A
      $471,000 increase in depreciation and amortization; The increase is
      primarily attributable to growth of the company through recent
      acquisitions; and
  ·
              A
      $498,000 increase in other general and administrative
    expense.
  19
  OTHER
(INCOME) EXPENSE, NET
  For the
nine months ended September 30, 2008, the decrease in other (income) expense is
primarily attributable to derivative income of $287,000 and interest expense of
$616,000, net as compared to $330,000 derivative expense and $903,000, net,
respectively for the nine months ended September 30, 2007. The derivative income
represents the net unrealized (non-cash) charge during the nine months ended
September 30, 2008, in the fair value of our derivative instrument liabilities
related to warrants and embedded derivatives in our debt instruments that have
been bifurcated and accounted for separately.
  NET
LOSS
  For the
nine months ended September 30, 2008, our net loss was $5,645,000 compared to a
loss of $4,436,000 for the nine months ended September 30, 2007. The increase in
the loss for the nine months ended September 30, 2008, as compared to the nine
months ended September 30, 2007, is primarily attributable to increase in
employment, professional services, depreciation and amortization and general and
administrative.
  CASH
FLOWS
  The
Company's operating activities increased net cash used by operating activities
to $3,004,000 in the nine months ended September 30, 2008, compared to net cash
used of $1,376,000 in the nine months ended September 30, 2007. The increase in
net cash used by operating activities was primarily attributable to fund an
increase in the company's net operating loss $5,645,000, net of $3,306,000
non-cash charges combined with derivative income $287,000 to equal net non-cash
charge of $3,019,000, combined together with $378,000 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 $851,000 in the nine months
ended September 30, 2008, compared to use of net cash of $475,000 in the nine
months ended September 30, 2007. The increase in investing activities is
primarily growing WISP capabilities through asset acquisition and expansion of
our infrastructure in Texas, New Mexico and Louisiana.
  The
Company's financing activities provided net cash of $1,839,000 in the nine
months ended September 30, 2008, compared to $2,396,000 of cash provided in the
nine months ended September 30, 2007. The cash provided in the nine months ended
September 30, 2008, was primarily associated with the proceeds from equity
financings and the line of credit, net.
  LIQUIDITY
AND CAPITAL RESOURCES
  At
September 30, 2008, the Company's current assets totaled $1,648,000 (including
cash and cash equivalents of $195,000). Total current liabilities were
$3,347,000, resulting in negative working capital of $1,699,000. The Company has
funded operations to date through a combination of utilizing cash on hand,
issuing common stock to settle certain current liabilities, borrowings and
raising additional capital through the sale of its securities. The Company
operations for the nine months ended September 30, 2008, was primarily funded by
proceeds from the Company's line of credit totaling $2,134,000, sale of
restricted common stock, net to accredited investors of $270,000, and
convertible debt financing of $50,000.
  CURRENT
DEBT FACILITY
  At
September 30, 2008, the Company had approximately $1,957,000 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 nine months ended September 30, 2008, we issued to various accredited
investors an aggregate of 621,000 shares of restricted common stock for net
consideration of $270,000. We relied on Section 4(2) of the Act in effecting
this transaction.
  During
the nine months ended September 30, 2008, we issued 3,509,592 shares of common
stock to employees and business consultants, for aggregate consideration of
$1,528,024 of services rendered, pursuant to a registration statement on form
S-8.
  20
  DUTCHESS
FACILITY
  On June
14, 2007, we entered into an Investment Agreement with Dutchess whereby Dutchess
agreed to purchase up to $10,000,000 of our common stock over the course of
thirty-six (36) months.  The Company filed a Registration Statement
with the SEC covering an issuance of 10,000,000 of common stock under the equity
line agreement. The Company has received comments from the SEC and intends to
refile a pre-effective amendment to the registration with updated audited
financial statements during 2008.
  USE
OF WORKING CAPITAL
  We
believe our cash, anticipated cash flow from operations and available credit
facilities afford us adequate liquidity for the balance of fiscal 2008, although
we expect to raise additional capital during this period to fund our anticipated
growth for our banking and WISP network businesses if acceptable terms are
available. Furthermore, we anticipate that we will need additional capital in
the future to continue to expand our business operations, which expenditures may
include the following:
  ·
              Acquisitions
      of one or more companies, networks or other
  assets:
  ·
              Investment
      in towers, radios, customer premise equipment and other related equipment
      associated with wireless broadband expansion
  plans:
  ·
              Investment
      in back office systems and related infrastructure to support the Company's
      wireless broadband expansion plans:
  ·
              Investment
      in laboratory facilities including test and simulation
      equipment:
  ·
              Investment
      or licensing of certain intellectual property related to the Company's
      wireless broadband expansion plans:
  ·
              General
      working capital purposes.
  We have
historically financed our operations through private equity and debt financings.
We do not have any commitments for equity funding at this time, and additional
funding may not be available to us on favorable terms, if at all. As such there
is no assurance that we can raise additional capital from external sources, the
failure of which could cause us to sell assets or curtail
operations.
  CONTRACTUAL
OBLIGATIONS
  The
following table sets forth contractual obligations as of September 30,
2008:
 
 Payments
      Due by PeriodTotal
              
              
              Less
      than 1 Year
              
              
              1-3
      Years
              
              
              3-5
      Years
              
              
              More
      than 5 YearsContractual
      obligations:Long-term
      debt obligations
              
              $
              5,868
              
              
              $
              515
              
              
              $
              5,353
              
              
              $
              -
              
              
              $
              -Capital
      lease obligations
              
              
              2,832
              
              
              
              254
              
              
              
              2,183
              
              
              
              384
              
              
              
              11Operating
      lease obligations
              
              
              1,791
              
              
              
              153
              
              
              
              1,543
              
              
              
              64
              
              
              
              31Total
      contractual obligations
              
              $
              10,491
              
              
              $
              922
              
              
              $
              9,079
              
              
              $
              448
              
              
              $
              42
  The
Company's contractual obligations consist of long-term debt of $5,868,000,
derivative liabilities of $96,000 unamortized debt discount of $15,000 and
interest expense of $392,000 as set forth in Note 7 to the company's financial
statements, Notes Payable and Long-Term Debt, and certain obligations for
operating leases requiring future minimal commitments under non-cancelable
leases set forth in Note 9 - Commitments and Contingencies.
  OFF-BALANCE
SHEET ARRANGEMENTS
  As of
September 30, 2008, the Company did not have any significant off-balance-sheet
arrangements other than certain office and tower facility operating leases
requiring minimal commitments under non-cancelable leases disclosed in the table
above.
  21
  CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
  GENERAL
  We have
adopted various accounting policies to prepare our consolidated financial
statements in accordance with U.S. GAAP. Our most significant accounting
policies are described in Note 1 to our consolidated financial statements
included elsewhere in this report. The preparation of our consolidated financial
statements in conformity with U.S. GAAP requires us to make estimates and
assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. Our estimates and assumptions, including
those related to bad debts, inventories, intangible assets, sales returns and
discounts, and income taxes are updated as appropriate.
  Certain of our more critical accounting
policies require the application of significant judgment by management in
selecting the appropriate assumptions for calculating financial estimates. By
their nature, these judgments are subject to an inherent degree of uncertainty.
These judgments are based on our historical experience, terms of existing
contracts, and our observance of trends in the industry, information provided by
our customers, and information available from other outside sources, as
appropriate. Different, reasonable estimates could have been used in the current
period. Additionally, changes in accounting estimates are reasonably likely to
occur from period to period. Both of these factors could have a material impact
on the presentation of our financial condition, changes in financial condition
or results of operations.
  PRINCIPLES
OF CONSOLIDATION
  The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant inter-company accounts and transactions have been
eliminated in consolidation.
  USE
OF ESTIMATES
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
  DEFERRED
SYNDICATION COSTS
  Deferred
syndication costs consist of those expenditures incurred that are directly
attributable to fundraising and the collection thereto. Upon successful
collection of the funds, all expenses incurred will be reclassified to
additional paid in capital and treated as syndication costs; netted against the
funds raised.
  REVENUE
RECOGNITION
  The
Company's revenue is generated primarily from the sale of wireless
communications products and services, including providing reliable
enterprise-class wireless broadband services. The Company recognizes revenue
when persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable, and collectibility is
probable.
  The
Company records revenues from its fixed-price, long-term contracts using the
percentage-of-completion method. Revenues are recorded based on construction
costs incurred to date as a percentage of estimated total cost at completion.
The percentage-of-completion, determined by using total costs incurred to date
as a percentage of estimated total costs at completion, reflects the actual
physical completion of the project. This method of revenue recognition is used
because management considers total cost to be the best available measure of
progress on the contracts.
  The
Company recognizes product sales generally at the time the product is shipped.
Concurrent with the recognition of revenue, the Company provides for the
estimated cost of product warranties and reduces revenue for estimated product
returns. Sales incentives are generally classified as a reduction of revenue and
are recognized at the later of when revenue is recognized or when the incentive
is offered. Shipping and handling costs are included in cost of goods
sold.
  Service
revenue is principally derived from wireless broadband services, including
internet, voice, and data and monitoring service. Subscriber fees are recorded
as revenues in the period during which the service is provided.
  22
  WARRANTY
  The
Company's suppliers generally warrant the products distributed by the Company
and allow returns of defective products, including those that have been returned
to the Company by its customers. The Company does not independently warrant the
products that it distributes, but it does provide warranty services on behalf of
the supplier.
  FIXED
ASSETS
  Furniture
and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. The costs
associated with normal maintenance, repair, and refurbishment of equipment are
charged to expense as incurred. The capitalized cost of equipment and vehicles
under capital leases is amortized over the lesser of the lease term or the
asset's estimated useful life, and is included in depreciation and amortization
expense in the consolidated statements of operations.
  When
assets are retired or otherwise disposed of, the costs and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
recognized as income for the period. The cost of maintenance and repairs is
charged to income as incurred; significant renewals and betterments are
capitalized. Deductions are made for retirements resulting from renewals or
betterments.
  GOODWILL
 
 Goodwill
represents the excess of the cost of companies acquired over the fair value of
their net assets at the dates of acquisition. Under current accounting
pronouncement, the company is required to annually assess the carrying value of
goodwill associated with each of its distinct business units that comprise its
business segments of the company to determine if impairment in value has
occurred.
  LONG-LIVED
ASSETS
  We review
our long-lived assets, to include intangible assets subject to amortization, for
recoverability whenever events or changes in circumstances indicate that the
carrying amount of such long-lived asset or group of long-lived assets
(collectively referred to as "the asset") may not be recoverable. Such
circumstances include, but are not limited to:
  ·
              a
      significant decrease in the market price of the
  asset;
  ·
              a
      significant change in the extent or manner in which the asset is being
      used;
  ·
              a
      significant change in the business climate that could affect the value of
      the asset;
  ·
              a
      current period loss combined with projection of continuing loss associated
      with use of the asset;
  ·
              a
      current expectation that, more likely than not, the asset will be sold or
      otherwise disposed of before the end of its previously estimated useful
      life;
  We
continually evaluate whether such events and circumstances have occurred. When
such events or circumstances exist, the recoverability of the asset's carrying
value shall be determined by estimating the undiscounted future cash flows (cash
inflows less associated cash outflows) that are directly associated with and
that are expected to arise as a direct result of the use and eventual
disposition of the asset. To date, no such impairment has occurred. To the
extent such events or circumstances occur that could affect the recoverability
of our long-lived assets, we may incur charges for impairment in the
future.
  CONCENTRATIONS
OF CREDIT RISK
  Trade
accounts receivable are concentrated with companies or entities in the regional
banking and Internet services industry. Accordingly, the credit risk associated
with the trade accounts receivable will fluctuate with the overall condition of
the regional banking and Internet services industries. The primary component of
accounts receivable relates to the Company's sales of banking wireless broadband
networks and Internet service revenues. As a result, such estimates are based on
the Company's historical collection experience and accounts receivable does
reflect a general or specific provision for an allowance for doubtful accounts.
During all periods presented, credit losses, to the extent identifiable, were
within management's overall expectations.
  23
  DERIVATIVE
INSTRUMENTS
  In
connection with the sale of debt or equity instruments, we may sell options or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain embedded derivative
instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument
liability.
  The
identification of, and accounting for, derivative instruments is complex. Our
derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated embedded derivative features that are accounted
for as derivative instrument liabilities, we estimate fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques. The valuation techniques require assumptions related
to the remaining term of the instruments and risk-free rates of return, our
current common stock price and expected dividend yield, and the expected
volatility of our common stock price over the life of the option. Because of the
limited trading history for our common stock, we have estimated the future
volatility of our common stock price based on not only the history of our stock
price but also the experience of other entities considered comparable to us. The
identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.
  RECENT
ACCOUNTING PRONOUNCEMENTS
  In December 2007, the FASB issued
SFAS No. 141R,Business
Combinations.
SFAS 141R establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. SFAS No. 141R also provides guidance for recognizing and measuring
the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statement to evaluate
the nature and financial effects of the business combination. SFAS 141R is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. We expect SFAS No. 141R will have an impact on
our consolidated financial statements when effective, but the nature and
magnitude of the specific effects will depend upon the nature, terms and size of
the acquisitions we consummate after the effective date. We are still assessing
the impact of this standard on our future consolidated financial
statements.
  INFLATION
  The
Company's results of operations have not been affected by inflation and
management does not expect inflation to have a significant effect on its
operations in the future.
  ITEM 3. CONTROLS AND PROCEDURES
  We
maintain controls and procedures designed to ensure that information required to
be disclosed in the reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and procedures
performed as of the end of the period covered by this report, our chief
executive officer and principal financial officer concluded that our disclosure
controls and procedures were adequate.
  There
were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
  24
  PART
II - OTHER INFORMATION
  ITEM
1. LEGAL PROCEEDINGS
  None.
  ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  The
following transactions were completed pursuant to either Section 4(2) of the
Securities Act or Regulation D of the Securities Act. With respect to issuances
made pursuant to Section 4(2) of the Securities Act, the transactions did not
involve any public offering and were sold to a limited group of persons. Each
recipient either received adequate information about ERF Wireless or had access,
through employment or other relationships, to such information, and ERF Wireless
determined that each recipient had such knowledge and experience in financial
and business matters that they were able to evaluate the merits and risks of an
investment in the Company.
  With
respect to issuances made pursuant to Regulation D of the Securities Act, ERF
Wireless determined that each purchaser was an "accredited investor" as defined
in Rule 501(a) under the Securities Act, or if such investor was not an
accredited investor, that such investor received the information required by
Regulation D.
  Except as
otherwise noted, all sales of the Company's securities were made by officers of
the Company who received no commission or other remuneration for the
solicitation of any person in connection with the respective sales of securities
described above. The recipients of securities represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions.
  On
January 7, 2008, an accredited investor acquired 50,000 shares of common stock
at $1.06 per share.
  On
February 6, 2008, accredited investors acquired 52,615 shares of common stock at
$0.65 per share.
  On March
14, 2008, accredited investors acquired 518,987 shares of common stock at $0.40
per share.
  On March
31, 2008, accredited investors acquired 196,850 shares of common stock at $0.38
per share pursuant to a conversion of E-series bonds.
  On March
31, 2008, accredited investors acquired 191,571 shares of common stock at $0.13
per share pursuant to a conversion of E-series bonds.
  On March
31, 2008, accredited investors acquired 40,783 shares of common stock at $0.61
per share pursuant to a conversion of E-series bonds.
  On August
19, 2008, accredited investors acquired 80,828 shares of common stock at $0.31
per share pursuant to a conversion of E-series bonds.
  On
January 10, 2008, an accredited investor acquired 2,457,716 shares of common
stock pursuant to Preferred A Conversions.
  On March
14, 2008, an accredited investor acquired 28,803 shares of common stock pursuant
to Preferred A Conversions.
  On March
25, 2008, an accredited investor acquired 6,217,131 shares of common stock
pursuant to Preferred A Conversions.
  On April
10, 2008, an accredited investor acquired 308,160 shares of common stock
pursuant to Preferred A Conversions.
  On April
21, 2008, an accredited investor acquired 28,542 shares of common stock pursuant
to Preferred A Conversions.
  25
  On April
30, 2008, an accredited investor acquired 3,302,168 shares of common stock
pursuant to Preferred A Conversions.
  On July
29, 2008, an accredited investor acquired 1,548,042 shares of common stock
pursuant to Preferred A Conversions.
  On August
04, 2008, an accredited investor acquired 280,146 shares of common stock
pursuant to Preferred A Conversions.
  On August
25, 2008, an accredited investor acquired 933,818 shares of common stock
pursuant to Preferred A Conversions.
  On
September 08, 2008, an accredited investor acquired 1,867,635 shares of common
stock pursuant to Preferred A Conversions.
  ITEM
3. DEFAULT IN SENIOR SECURITIES
  None.
  ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  None.
  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
  26
  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
      Cubley
                Chief Executive
      OfficerDate:  November 14,
2008
  27