UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

**FORM 10-K**

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2008

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ___________

 

Commission file number 333-136487

 

**KEYON COMMUNICATIONS HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 

| Delaware                                                      |   | 74-3130469                            |
|---------------------------------------------------------------|--------|---------------------------------------|
| State or Other Jurisdiction of

Incorporation or Organization |   | (I.R.S. Employer

Identification No.) |

 

11742 Stonegate Circle

Omaha, Nebraska 68164

(Address of Principal Executive Offices)

 

(402) 998-4000

Telephone Number, Including Area Code)

 

Securities Registered Pursuant to Section 12(b) of the Exchange Act: None

 

Securities registered under Section 12(g) of the Exchange Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issued, as defined in Rule 405 of the Securities Act.

| YESo   NOx |
|----------------------|

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

|  YESo   NOx |
|----------------------------|

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YESx   NOo

 

Indicate by check mark that disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

| Large accelerated filero    | Accelerated filero         |
|---------------------------------------|----------------------------|
| Non-accelerated filero                | Smaller reporting companyx |

 

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

 

KeyOn Communications Holdings, Inc.’s revenues for fiscal year ended December 31, 2008 was$7,793,740

 

As of April 13, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $900,335 computed by reference to the closing price of the common stock on April 13, 2009.

 

As of April 13, the Company has outstanding 8,828,837 shares of its $0,001 par value common stock.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

None.

 

----

 

**KEYON COMMUNICATIONS HOLDINGS, INC.**

 

**Table of Contents**

 

|                                                                                                    |   | Page   |
|---------------------------------------------------------------------------------------------------------|--------|--------|
| PART I                                                                                                  |   | 1      |
| Item 1. Description of Business                                                                         |   | 8      |
| Item 1A. Risk Factors                                                                                   |   | 17     |
| Item 1B. Unresolved Staff Comments                                                                      |   | 17     |
| Item 2. Description of Property                                                                         |   | 17     |
| Item 3. Legal Proceedings                                                                               |   | 17     |
| Item 4. Submission of Matters to a Vote of Security Holders                                             |   | 18     |
|                                                                                                    |   |   |
| PART II                                                                                                 |   | 19     |
| Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer                 |   |   |
| Purchases of Equity Securities                                                                          |   | 19     |
| Item 6. Selected Financial Data                                                                         |   | 20     |
| Item 7. Management’s Discussion and Analysis or Plan of Operation                                 |   | 20     |
| Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                     |   | 24     |
| Item 8. Financial Statements and Supplementary Data                                                     |   | 24     |
| Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure            |   | 24     |
| Item 9A(T). Controls and Procedures                                                                     |   | 24     |
| Item 9B. Other Information                                                                              |   | 25     |
|                                                                                                    |   |   |
| PART III                                                                                                |   | 25     |
| Item 10. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance;            |   |   |
| Compliance with Section 16(a) of the Exchange Act                                                       |   | 25     |
| Item 11. Executive Compensation                                                                         |   | 28     |
| Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |   | 29     |
| Item 13. Certain Relationships and Related Transactions, and Director Independence.                     |   | 31     |
| Item 14. Principal Accountant Fees and Services                                                         |   | 31     |
|                                                                                                    |   |   |
| PART IV                                                                                                 |   | 32     |
| Item 15. Exhibits, Financial Statements Schedules                                                       |   | 32     |
| SIGNATURES                                                                                              |   | 34     |

 

 

 

----

 

**PART I**

 

**Item 1. Description of Business.**

 

**Overview**

 

KeyOn Communications Holdings, Inc. (“KeyOn” or the “Company”) is one of the largest rural wireless broadband providers in the United States. 1 As of December 31, 2008, the Company had over 15,500 subscribers and operates networks covering over 50,000 square miles in 11 states across the Midwest and Western United States. The Company has grown through        the consolidation of similar companies throughout its target markets as well as continued organic growth. KeyOn primarily focuses on providing fixed wireless broadband to rural and other areas of the country that it believes are currently underserved by traditional phone and cable companies. The Company’s current network footprint covers an addressable market of approximately 2.5 million people, as well as small to mid-sized businesses.

 

Since launching its wireless broadband service in 2003, the Company has successfully increased its subscriber count and, based on both subscribers and revenue, KeyOn believes that it is the third largest wireless broadband company in the United States. To date, the Company has completed and successfully integrated four acquisitions and is in active discussions with other candidates        located in adjacent markets to the Company’s existing network footprint. KeyOn’s acquisition strategy allows the Company to rapidly grow its subscriber base while expanding its earnings through operating expense reductions and other synergies achieved in integration.

 

KeyOn offers residential and business subscribers a simple, reliable and affordable broadband service that compares favorably to traditional broadband technologies such as cable modem, Digital Subscriber Line (“DSL”) or satellite. The Company leverages wireless broadband technology which it believes allows its service to cover a geographic market for a fraction of the cost        of other competing broadband technologies. In addition to its broadband services, KeyOn also sells voice over Internet Protocol (“VoIP”) and video services through its national retailer agreement with DISH Network Corporation.

 

KeyOn is able to deliver broadband services at competitive prices to communities that are ignored or underserved by traditional phone and cable companies. Generally, KeyOn’s markets are rural locations with populations of generally less than 50,000 that often lack the communications infrastructure to supply broadband access. There are over 6,000 rural and underserved markets with        populations of between 3,000 and 100,000, amounting to over 56 million Americans with either little or no access to broadband services. 2 In rural markets, broadband penetration is only 38% compared to 57% and 60% of households in urban and suburban markets, respectively. 3 KeyOn believes that the lower broadband penetration rate in rural areas compared to urban and suburban areas is driven primarily by the technical limitations and high cost of providing broadband        over traditional terrestrial networks in less densely populated areas as evidenced by the broadband portions of the American Recovery & Reinvestment Act of 2009. As a result, the Company believes there is a significant addressable market which is not currently being targeted by other providers of broadband services.

 

KeyOn believes that it has a scalable operating platform used in the overall management and in all customer functions of the Company’s networks. By centralizing operations in its Network Operations Center (“NOC”), utilizing a sophisticated Operations Support Software (“OSS”), and by decentralizing management around market clusters, the Company believes it        is able to achieve operating costs that are significantly lower than most of its competitors. Further, by expanding into adjacent and new markets or introducing new services, the Company is able to leverage its existing network investments to improve economic returns. KeyOn believes it can significantly improve its growth opportunities while continuing to grow revenue through:

 

_____________________

 

 

 

 

___________________

1Broadband Wireless Exchange Magazine Website (www.bbwexchange.com/wireless_isp/)

 

2United States Department of Agriculture, Economic Research Service and Wireless Communications Association International Conference, June 12-15, 2007

 

3 Pew Internet & American Life Project, Home Broadband Adoption 2008

 

- 1 -

----

|   | **•** | strategic acquisitions of wireless broadband companies that complement its market footprint; |
|--------|------------|----------------------------------------------------------------------------------------------|

 

|   | **•** | contiguous market deployments combined with organic growth within KeyOn’s existing footprint; |
|--------|------------|-----------------------------------------------------------------------------------------------------|

 

|   | **•** | offering its subscribers bundled and additional services, such as satellite video and VoIP, to further increase average revenue per user; and |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | the strategic introduction of next generation networks, including Worldwide Interoperability for Microwave Access ("WiMAX"), that also provide advanced services such as nomadic or mobile data and video. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Subscriber Growth Through Acquisitions**

 

KeyOn believes it can take advantage of growing subscriber and operations scale by continuing to acquire wireless broadband subscriber bases together with their network assets, thus creating a profitable and valuable communications company. The wireless broadband industry is highly fragmented, comprised of thousands of potential acquisition targets in and around the Company’s        market areas. These targets represent an opportunity to grow revenues and expand the Company’s operating margins.

 

To date the Company has completed four acquisitions. KeyOn believes it has access to proprietary deal flow and has developed an efficient process of negotiating and structuring purchases, managing due diligence and integrating these operations. Upon the completion of acquisitions, the Company believes that it can derive higher margins than previous ownership through the elimination of        duplicative overhead costs. KeyOn is able to realize these synergies in the integration of acquisition targets through:

 

|   | **•** | Centralizing operations and customer support into KeyOn’s NOC in Omaha which enables remote monitoring and diagnostics; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Generating scale economies in purchasing termination/access loops and capital equipment; |
|--------|------------|------------------------------------------------------------------------------------------|

 

|   | **•** | Rationalizing expenses in areas of management, network and customer support and general and administrative; and |
|--------|------------|-----------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Leveraging KeyOn’s proven marketing initiatives, such as its network of resellers and targeted direct marketing, to quickly increase the rate of subscriber and revenue growth. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Current Markets Served and Organic Growth**

 

KeyOn operates primarily in markets with populations of generally less than 50,000. The Company currently offers its broadband services to residential and business subscribers in a market footprint covering over 50,000 square miles in the following 11 Western and Midwestern states: Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Nebraska, Nevada, Ohio, South Dakota and Texas. The        Company estimates its existing footprint covers approximately 2.5 million people, as well as small to mid-sized businesses in these areas.

 

KeyOn believes marketing efforts at the local level create a competitive advantage by creating awareness of its brand while strengthening the connection to its communities. The Company’s multi-pronged sales and marketing approach leverages its local ties and presence and focuses on establishing strong distribution channels in each market. Direct marketing efforts include print        and door hangers in addition to working with businesses and community groups at the local level to promote brand and service awareness. Additionally, the Company works with distribution partners, such as satellite television providers, to offer bundled services within its markets.

 

_________________

 

 

- 2 -

----

Since the beginning of 2006, the Company has experienced a compound annualized subscriber growth rate of 59.1%,with approximately 25% of that growth coming from organic marketing activities and 75% from acquisitions. Additionally, the Company has achieved a low average monthly churn of approximately 2% during the same period, which the Company believes is a combined result of its        subscribers’ satisfaction with its service and the lack of other competing services in the Company’s markets.

 

**Rural Market Opportunity**

 

Within the United States, rural areas have an overall lower Internet penetration rate, and substantially less access to broadband, than the more densely populated urban and suburban areas. Although broadband adoption has experienced healthy growth in the past year, broadband penetration rates in rural markets trail the rest of the country. While urban and suburban markets have reached        broadband penetration rates of 57% and 60%, respectively, rural market penetration totals only 38%. Importantly, rural market penetration grew at a compound annual growth rate since 2005 of 23% while urban and suburban growth rates slowed to 9% and 22%, respectively.9  Consequently, the growth of rural broadband penetration is consistent with greater availability of broadband in rural markets, a trend that the Company believes        is supported by many small, wireless broadband companies trying to serve the needs of their communities.

 

One of the primary reasons for the lagging penetration rate in rural areas is the lack of infrastructure or access to broadband, rather than lack of demand for a broadband connection.10  Notably, overall Internet use in rural markets, regardless of the mode of connectivity, lagged the rest of the country by a much smaller        gap, 11 percentage points or a 60% to 71% margin.11  KeyOn believes that this substantially lower penetration rate of broadband Internet, or commonly referred to as the "Digital Divide", demonstrates that most rural households with Internet access still utilize analog dial-up connections for Internet access. Availability is the key to closing this gap as just over one-third (38%) of rural adults have access to a broadband        connection either at home or at work, versus more than 55% for urban and suburban residents.12  As a result, the Company believes there is a significant market opportunity that we seek to address which is not currently being met by traditional phone and cable providers.

 

The Company believes that the lower broadband penetration rate in rural versus urban and suburban areas is driven primarily by the technical limitations and high cost of providing broadband over terrestrial-based networks in less densely populated areas. DSL service suffers from distance limitations in less populated areas, and DSL equipment and cable plant upgrades both involve        significant upfront capital to deploy their service that is rarely justified in less densely populated rural markets. As a result, there may still be areas that will not be served by cable or DSL at any time in the near future.13  These limitations have generally discouraged broadband deployments and have caused incumbent phone and cable companies to maintain high broadband Internet service prices in the small and rural        markets where they do offer these services. Where broadband has been deployed, rural areas have experienced rapid growth in home broadband uptake, and in the past three years the gap between rural and non-rural in-home broadband adoption, though still substantial, has narrowed.

*A New Catalyst*

 

The American Recovery and Reinvestment Act of 2009 (ARRA) has allocated $7.2 billion for the deployment of broadband infrastructure. Under ARRA, the National Telecommunications Information Administration (NTIA) is responsible for awarding $4.7 billion in grants to provide broadband access in rural and underserved areas through the Broadband Technologies Opportunity Program (BTOP).        Additionally, the Rural Utilities Service (RUS) is charged with providing $2.5 billion in grants, loans and loan guarantees, so long as 75% of the area to be served is a rural area without sufficient access to broadband. The Company views the passage of ARRA and the broadband funding components as a watershed event for broadband in the United States and in particular, rural America and the Company itself.

 

These federal telecommunications stimulus programs are directed towards service providers who will not only deliver next-generation broadband services to under-served communities but also deploy “shovel-ready” projects that can be commenced within 120 days from the passage of ARRA. The Company believes that its existing base of operations, business strategy and ability to        deploy networks quickly make it an ideal candidate for participation in the funding. As a result, the Company intends to apply for stimulus funding and is currently preparing various components of its application including its network build models and data analysis.

 

**Service Offerings**

 

*Broadband*

 

KeyOn provides broadband to homes and businesses for a flat monthly rate under service agreements for either annual or two-year contracts. These services are generally billed monthly, quarterly or semi-annually in advance.

 

*DISH Network*

 

KeyOn began offering video services as a reseller of DISH Network Corporation in November 2007. By selling and installing DISH Network video packages directly (as opposed to through its indirect dealer network) to its subscribers, KeyOn receives marketing dollars, installation and activation fees and a nominal monthly recurring revenue fee, provided the end-user remains a DISH customer        for over one year. KeyOn does not collect any revenue directly from its end-users under the terms of this agreement.

 

_________________

 

9 Pew Internet & American Life Project, Home Broadband Adoption 2008

 

10 United States Government Accountability Office, Telecommunications, May 2006 and Pew Internet & American Life Project, Home Broadband Adoption 2006

 

11 Pew Internet & American Life Project, Home Broadband Adoption 2007

 

12 Pew Internet & American Life Project, Home Broadband Adoption 2007

 

13 Frost & Sullivan, Satellite and its Place Amongst Competing Broadband Technologies 2005

 

- 3 -

----

*WiMAX Deployments*

 

KeyOn’s wireless broadband service today is provided to subscribers over primarily unlicensed spectrum in the 2.4 GHz band. The Company is in the process of introducing WiMAX networks, initially in the 3.65 GHz spectrum band. WiMAX is an international network technology standard that provides efficient use of spectrum, interoperability of manufacturers' equipment, high-bandwidth        throughput and self-installation by end users. The global WiMAX market opportunity for service revenue is expected to increase from $322 million in 2006 to approximately $26 billion by 2012, a compound annualized growth rate of approximately 108%.14  Global WiMAX subscribers totaled 950,000 as of March 31, 2007 and are projected to surpass 54 million in 2012.15 

 

In November of 2007, the Company was awarded a non-exclusive license to operate in the 3.65GHz spectrum band. The Company initially launched a WiMAX pilot in one of the Company’s markets in southern Nevada to confirm the viability of fixed and nomadic broadband wireless services using WiMAX technology in the 3.65 GHz band. Having successfully completed the pilot, the Company        intends to commercially market the services to its customers. KeyOn also successfully tested VoIP services on the 3.65 GHz WiMAX platform to provide an integrated voice and data solution to its customers.

 

By using WiMAX-based equipment as an adjunct to its existing fixed-wireless networks, the Company expects to create a superior service offering, including nomadic and portable data and video services. The advantages of deploying WiMAX technology based on a global standard, include higher data speeds, greater spectral efficiency, advanced nomadic services with self-installation        features, global economies of scale and forward compatibility with the mobile WiMAX (802.16 (e) standard). In addition, with the certification of network standards and profiles to standards, network equipment costs should continue to decrease. The resulting interoperability of hardware will not only accelerate downward pricing, but will also afford service providers greater vendor selection and potential roaming revenues.

 

Additional spectrum allocation for unlicensed applications has recently been made available. In 2007, the FCC released 50 MHz of spectrum in the 3.65 GHz band to facilitate “rapid expansion of broadband services in America’s rural heartland.” The FCC requires the approved licensees to register their base stations in a common database and to deploy FCC certified        equipment that incorporates specific protocols.

 _________________

 

14 Maravedis Telecom Market Research and Analysis, June 20, 2007. Annual revenue determined by multiplying the reported WiMAX average revenue per user (ARPU) by the projected number of subscribers. This monthly revenue figure was then multiplied by 12

 

15Senza Fili Consulting, June 19, 2007

 

16 Pew Internet & American Life Project, Home Broadband Adoption 2007

 

**Competition**

 

In the United States, the broadband access market has evolved as a duopoly between cable and telephone companies. KeyOn believes that rural markets have much less competition than urban markets, given the relatively high cost to deploy traditional networks in less densely populated areas. However, KeyOn is not the only provider of broadband services in its markets. KeyOn faces        competition from cable operators that offer broadband over cable networks, incumbent local exchange carriers, or ILECs, that offer DSL, satellite operators, wireless broadband service providers and mobile cellular operators. KeyOn competes with these companies on the basis of availability, price, speed and portability of the services. Specifically, the Company’s competitors include the following:

 

- 4 -

----

*Incumbent Local Exchange Carrier and Cable Companies*

 

KeyOn faces competition from ILECs in the small markets in the Midwest and West. In particular, the Company generally faces competition from companies such as Qwest Communications International Inc., AT&T Inc. and smaller regional or local phone companies. If the market has a significant population density (35,000 - 50,000+), the larger ILECs have typically deployed DSL in the one        central office (CO) in the market. DSL deployments by smaller regional and local phone companies vary; however, the Company believes that all providers of DSL are restricted by DSL's physical distance limitations.

 

Cable operators typically deploy a hybrid fiber-COAX in order to offer broadband through a cable modem service. In markets with a population of 35,000-50,000 or more, cable modem service is often available to most households, with somewhat less availability to businesses. In these markets, KeyOn competes against large cable providers such as Cox Communications, Inc. and smaller,        regional cable providers, such as Cable One, Inc. and Bresnan Communications, LLC.

 

*Wireless Broadband Service Providers*

 

KeyOn also faces competition from other wireless broadband providers that use unlicensed or licensed spectrum. For example, there may be a locally owned "mom and pop" wireless broadband operator present in the market offering local services. The Company believes that most of these operators lack the operating scale and thus are burdened with significant costs from or inefficient        operations.

 

Wireless broadband competition may also come from local governments, universities, and municipalities that provide "WiFi" networks over unlicensed spectrum. These services are occasionally characterized as public-private partnerships and may be partially subsidized. In some cases, they are offered to subscribers at no cost at all. Recently, Cablevision began offering Wi-Fi to its        existing cable-modem broadband customers throughout parts of its cable network footprint.

 

In addition, the “new” Clearwire Corporation also offers wireless high speed Internet access utilizing pre-WiMAX-based technology in 46 markets in the United States and WiMAX technology in two major metropolitan markets- Baltimore, Maryland and Portland, Oregon. In terms of both domestic deployments and subscribers, Clearwire Corporation is the largest company providing        advanced data services. Clearwire Corporation is focused on larger population centers, underscoring the significant market opportunity available to the Company in serving underserved rural markets.

 

*Satellite*

 

Satellite providers such as WildBlue Communications, Inc. and Hughes Network Systems, LLC also offer broadband data services in rural and underserved markets. Although satellite has the capability to serve a large geographic area, the service levels can be impaired by the distance the signal travels to and from the satellite. Communication delays, or latency, can significantly inhibit        satellite providers' ability to offer advanced services, such as voice over Internet Protocol (VoIP) and online gaming. According to research conducted by Pike & Fischer in February 2008, satellite broadband is projected to serve only 1.3 million households by 2012, up from 600,000 subscribers currently being served by satellite broadband. Satellite remains a broadband access service of last resort, due to its inherent latency and high price for equipment and service. KeyOn believes        its services can be provided to its target customers more efficiently and at more competitive prices than satellite broadband services and as a result, it does not compete effectively with fixed wireless broadband.

 

*Cellular and PCS Services*

 

Many of the major mobile wireless carriers offer higher data rate access plans, but these plans are either restricted to larger urban and suburban markets or the actual data transfer rate can be significantly less than KeyOn’s fixed broadband services. However, wireless carriers continue to expand their network coverage, allowing advanced data services to be offered to a broader        subscriber base. Also, wireless carriers have continued to leverage data services by offering personal computer data card devices and providing customers with wireless access to the Internet. KeyOn believes that these nationwide players will continue to focus on larger metropolitan markets, and will continue to be limited in bandwidth relative to the fixed wireless providers.

 

*Other*

 

Other emerging technologies may also seek to enter the broadband services market. For example, power and distribution companies have attempted to provide broadband services over their existing power lines, though without much commercial success. It is possible that over time with the further development of technology, broadband over power lines may prove to be a means of providing        competitive broadband services. The 700 MHz auction may also provide existing service providers, such as Verizon and AT&T, and potentially new market entrants, such as Cox Communications or CenturyTel, Inc., an opportunity to offer additional wireless mobile data services. However, the 700 MHz spectrum will not be cleared before June 2009, the eventual certification of the long-term evolution (“LTE”) technology standard which most operators plan to use in the 700 MHz        band, and the existing economic crisis may not result in meaningful geographic deployments for several years.

 

- 5 -

----

**Corporate History**

 

The Company was organized in the State of Delaware on September 9, 2004 under the name Grant Enterprises, Inc., and became a public shell company, as defined by the Securities and Exchange Commission. On August 9, 2007, a wholly-owned subsidiary of the Company merged with and into a private company, KeyOn Communications Inc., with KeyOn Communications Inc. being the surviving company.        Upon closing of the merger, the Company discontinued its former business and succeeded to the business of KeyOn Communications Inc. as its sole line of business. At the same time, the Company also changed its name from Grant Enterprises, Inc. to KeyOn Communications Holdings, Inc. At this time we are no longer a shell company.

 

**Regulatory Matters**

 

Wireless broadband services are subject to regulation by the Federal Communications Commission. At the federal level, the Federal Communications Commission has jurisdiction over wireless transmissions over the electromagnetic spectrum, all interstate and foreign telecommunications services, and many aspects of intrastate telecommunications. State regulatory commissions have        jurisdiction over many aspects of intrastate telecommunications. Municipalities may regulate limited aspects of KeyOn’s business by, for example, imposing zoning requirements and requiring installation permits.

 

*Telecommunications Regulation*

 

KeyOn’s wireless broadband systems can be used to provide Internet access service, interconnected VoIP service and virtual private networks, or VPNs. The Federal Communications Commission has classified Internet access service as an interstate information services that is subject to regulation under Title I of the Communications Act of 1934, as amended, or the Communications Act.        Accordingly, most regulations that apply to telephone companies and other common carriers under Title II of the Communications Act do not apply to KeyOn’s wireless broadband Internet access service. For example, KeyOn is not currently required to contribute a percentage of gross revenues from its Internet access services to universal service funds used to support local telephone service and advanced telecommunications services for schools, libraries and rural health care        facilities, or "USF Fees."

 

The Federal Communications Commission has not yet classified interconnected VoIP service as an information service regulated under Title I of the Communications Act, or as a telecommunications service regulated under Title II of the Communications Act. However, the Federal Communications Commission has classified interconnected VoIP service as interstate telecommunications for purposes        of USF fees. As a result, KeyOn must pay USF Fees on the gross revenues KeyOn derives from providing interconnected VoIP service to end users. KeyOn is not required to pay USF fees on the gross revenues it derives from providing interstate telecommunications to other carriers, such as interconnected VoIP service providers, where KeyOn acts as a carrier's carrier, provided that KeyOn verifies that the other carrier is registered to pay and is paying USF fees on its service to end users.        The proposed USF fee rate for the second quarter of 2009 is 11.3% of gross revenues derived from the provision of interstate telecommunications to end users. Beginning in late 2007, similar fees used to support interstate telecommunications relay service providers also apply to interconnected VoIP providers as well. At the present time, VoIP is not a material contributor to KeyOn’s revenues.

 

KeyOn is not required to file tariffs with the Federal Communications Commission, setting forth the rates, terms, and conditions of its Internet access service. The Federal Communications Commission, however, is currently considering whether to impose various consumer protection obligations, similar to Title II obligations, on wireless broadband Internet access providers. These        requirements may include obligations related to truth-in-billing, slamming, service discontinuance, customer proprietary network information and federal universal service funds mechanisms. Internet access providers are currently subject to generally applicable state consumer protection laws enforced by state Attorneys General and general Federal Trade Commission consumer protection rules.

 

The Federal Communications Commission has not yet classified interconnected VoIP services as information services or telecommunications services under the Communications Act. In November 2004, the Federal Communications Commission determined that, regardless of their regulatory classification, certain interconnected VoIP services qualify as interstate telecommunications subject to the        jurisdiction of the Federal Communications Commission. The Federal Communications Commission preempted state regulations that address such issues as entry certification, tariffing, and enhanced 911 requirements.

 

The Federal Communications Commission is conducting a comprehensive proceeding to address all types of Internet protocol-enabled services, including interconnected VoIP service, and to consider what regulations, if any, should be applied to such services, as use of broadband services becomes more widespread. In June 2005, the Federal Communications Commission adopted the first set of        regulations in this comprehensive Internet protocol-enabled proceeding, imposing enhanced 911-related requirements on interconnected VoIP service providers as a condition of offering such service to consumers. The Federal Communications Commission defined "interconnected VoIP service" as voice service that:

 

|   | **•** | enables real-time, two-way voice communications; |
|--------|------------|--------------------------------------------------|

 

|   | **•** | requires a broadband connection from the user's location; |
|--------|------------|-----------------------------------------------------------|

 

|   | **•** | requires Internet protocol-compatible customer premises equipment; and |
|--------|------------|------------------------------------------------------------------------|

 

|   | **•** | permits users generally to receive calls that originate on and terminate to the public switched telephone network. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------|

 

 

- 6 -

----

Effective November 28, 2005, all interconnected VoIP providers are required to transmit, through the wireline, all 911 calls, as well as a call-back number and the caller's registered location for each call, to the appropriate public safety answering point that is capable of receiving and processing that information. In addition, all interconnected VoIP providers must have a process to        obtain a subscriber's registered location prior to activating service, and must allow their subscribers to update their registered location immediately if the subscriber moves the service to a different location. Interconnected VoIP providers are also required to prominently and in plain English advise subscribers of the manner in which dialing 911 using VoIP service is different from dialing 911 service using traditional telephone service, and to provide warning labels with VoIP        equipment.

 

On August 5, 2005, the Federal Communications Commission adopted an Order finding that both facilities-based broadband Internet access providers and interconnected VoIP providers are subject to the Communications Assistance for Law Enforcement Act, or CALEA, which requires service providers covered by that statute to build certain law enforcement surveillance assistance capabilities        into their communications networks. The Federal Communications Commission required facilities-based broadband Internet access providers and interconnected VoIP providers to comply with CALEA requirements by May 14, 2007.

 

On May 3, 2006, the Federal Communications Commission adopted an additional Order addressing CALEA compliance obligations of these providers. In that order, the Federal Communications Commission:

 

|   | **•** | affirmed the May 14, 2007 compliance deadline; |
|--------|------------|------------------------------------------------|

 

|   | **•** | indicated compliance standards are to be developed by the industry within the telecommunications standards-setting bodies working together with law enforcement; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | permitted the use of certain third parties to satisfy CALEA compliance obligations; |
|--------|------------|-------------------------------------------------------------------------------------|

 

|   | **•** | restricted the availability of compliance extensions; |
|--------|------------|-------------------------------------------------------|

 

|   | **•** | concluded that facilities-based broadband Internet access providers and interconnected VoIP providers are responsible for any CALEA development and implementation costs; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | declared that the Federal Communications Commission may pursue enforcement action, in addition to remedies available through the courts, against any non-compliant provider; and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | adopted interim progress report filing requirements. |
|--------|------------|------------------------------------------------------|

 

On June 27, 2006, the Federal Communications Commission released an Order addressing USF fee obligations of interconnected VoIP service providers. The Federal Communications Commission amended the USF rules to require providers of interconnected VoIP service to contribute to the USF under the existing contribution methodology. Interconnected VoIP providers must report and contribute to        the USF on all their interstate and international end-user telecommunications revenues, using one of three options:

 

|   | **•** | they may use the interim safe harbor established in the June, 2006 Order, under which 64.9% of their traffic is presumed to be interstate or international; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | they may report based on their actual interstate telecommunications revenues; or |
|--------|------------|----------------------------------------------------------------------------------|

 

|   | **•** | they may rely on traffic studies subject to certain conditions. |
|--------|------------|-----------------------------------------------------------------|

 

All interconnected VoIP providers must file a Federal Communications Commission Form 499-A with the Federal Communications Commission for registration purposes even if they qualify for the *de minimis* exemption for contribution purposes. Interconnected VoIP service also may be subject to state and local taxation.

 

In a decision released April 2, 2007, the Federal Communications Commission determined that interconnected VoIP providers should be subject to its rules implementing Section 222(c) of the Communications Act, which governs telecommunications carriers' use of customer proprietary network information, or CPNI. CPNI is customer-specific information derived from the provision of        telecommunications service, including call detail and caller location information. Federal Communications Commission rules permit carriers and interconnected VoIP providers to use CPNI to market the services they already provide to customers, and for limited service-related and fraud prevention purposes, without prior customer approval. All other uses or third party disclosure of CPNI generally require prior customer approval, as follows: service providers, either themselves or through        agents, may use CPNI to market other communications-related services through "opt-out" consent such that the service provider may use CPNI unless the customer affirmatively instructs the service provider otherwise; all other use or third party disclosure of CPNI, including any use of location information, requires "opt-in" approval whereby a service provider may not use or disclose CPNI without the customer's express affirmative permission. The Federal Communications Commission rules        also require that carriers and interconnected VoIP providers implement personnel, network and related safeguards to protect CPNI from unauthorized third party disclosure.

 

- 7 -

----

 

In a decision released on April 21, 2004, the Federal Communications Commission determined that interconnected VoIP calls that connect to the public switched telephone network, or PSTN, at both ends of the call are subject to the same access charges as a circuit switched call. Interconnected VoIP calls that connect to the PSTN at one end of the call are subject to either a terminating        or originating access charge, depending upon which end of the call connects to the PSTN.

 

Broadband Internet-related and Internet protocol-services regulatory policies are continuing to develop, and it is possible that KeyOn’s broadband Internet access and VoIP services could be subject to additional regulations in the future. The extent of the regulations that will ultimately be applicable to these services and the impact of such regulations on the ability of        providers to compete are currently unknown.

 

*Spectrum Regulation*

 

The Federal Communications Commission routinely reviews its spectrum policies and may change its position on spectrum allocations from time to time. On June 7, 2007, the Federal Communications Commission issued a Memorandum Opinion and Order regarding rules for the 3650-3700 MHz spectrum band. Currently, this band is allocated for use to an unlimited number of operators pursuant to a        link registration process. Similarly, the Federal Communications Commission has modified regulation in the 2.5 GHz BRS/EBS spectrum band and, from time to time, can modify or change spectrum allocations pursuant to rulemaking proceedings. KeyOn believes that the Federal Communications Commission is committed to allocating spectrum to support wireless broadband deployment throughout the United States and will continue to modify its regulations to foster such deployment, which will help        the Company implement its existing and future business plans.

 

*Internet Taxation*

 

The Internet Tax Non-Discrimination Act, which was passed by Congress in November 2004 and signed into law in December 2004, renewed and extended until November 2007, a moratorium on taxes on Internet access and multiple, discriminatory taxes on electronic commerce. This moratorium had previously expired in November 2003, and as with the preceding Internet Tax Freedom Act,        “grandfathered” states that taxed Internet access prior to October 1998 to allow them to continue to do so. Certain states have enacted various taxes on Internet access or electronic commerce, and selected states’ taxes are being contested on a variety of bases. However, state tax laws may not be successfully contested and future state and federal laws imposing taxes or other regulations on Internet access and electronic commerce may arise, any of which could increase        the cost of providing Internet services, which could, in turn , materially adversely affect KeyOn’s business.

 

**Employees**

 

As of April 15, 2009, the Company had 46 full-time employees. Of these employees, approximately, 9 serve in customer service and support positions, 23 serve as network engineers and field technicians, 7 serve in accounting and administrative positions, 4 serve in sales and marketing positions and 3 are members of the executive team. None of KeyOn’s employees are subject to a        collective bargaining agreement. The Company considers its relationship with its employees to be good.

 

**Item 1A. Risk Factors**

 

**Certain Risks and Uncertainties**

 

Certain statements in this Annual Report on Form 10-KSB, including certain statements contained in “Description of Business” and “Management’s Discussion and Analysis,” constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as        amended. The words or phrases “can be,” “may,” “could,” “would,” “expects,” “believes,” “seeks,” “estimates,” “projects” and similar words and phrases are intended to identify such forward-looking statements. Such forward-looking statements are subject to various known and unknown risks and uncertainties, including those described on the following pages, and the Company cautions        you that any forward-looking information provided by or on behalf of the Company is not a guarantee of future performance. The Company’s actual results could differ materially from those anticipated by such forward-looking statements due to a number of factors, some of which are beyond the Company’s control. All such forward-looking statements are current only as of the date on which such statements were made. The Company does not undertake any obligation to publicly update        any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.

 

- 8 -

----

 

**Risks Relating to the Company**

 

***The Company’s business will require additional capital for operations and debt service.***

 

KeyOn’s independent auditors have expressed substantial doubt about the Company’s ability to continue as a going concern, which may hinder the Company’s ability to obtain future financing.

 

In their report dated April 15, 2009, KeyOn’s independent auditors stated that the Company’s financial statements for the year ended December 31, 2008 were prepared assuming that it would continue as a going concern, and that they have substantial doubt about the Company’s ability to continue as a going concern. KeyOn’s auditors’ doubts are based on the        Company’s incurring net losses and deficits in cash flows from continuing operations and the fact that the Company continues to experience net operating losses. The Company’s ability to continue as a going concern is subject to its ability to generate sufficient cash flow and/or obtain necessary funding from outside sources, including by the sale of its securities, or obtaining loans from financial institutions, where possible. The Company’s continued net operating        losses and its auditors’ doubts increase the difficulty of meeting such goals, and its efforts to continue as a going concern may not prove successful.

 

The continued viability of the Company’s business will require additional funding for working capital, marketing, the introduction of new network technologies, incremental debt service, the potential upgrade of its networks, the expansion of its network coverage area, customer premise equipment and future acquisitions. In addition, KeyOn may raise additional capital through the        issuance of debt that may require the Company to use a portion of its cash flows from operations and other available cash to make payments of principal and interest on debt, thereby reducing funds that could be available for other business purposes. KeyOn may be unable to secure such funding when needed in adequate amounts or on acceptable terms, if at all. To execute its business strategy, KeyOn may issue additional equity securities in public or private offerings, potentially at a        price lower than the market price at the time of such issuance. Similarly, by securing debt financing, the Company may be forced to incur significant interest expense. If KeyOn cannot secure sufficient funding it may be forced to forego strategic opportunities or delay, scale back or eliminate network deployments, operations, acquisitions and other growth opportunities. In the event the Company can not secure third-party financing, it may pursue other alternatives to raise capital such        as asset sales. While asset sales may result in additional funds for operations, the divesting of assets will result in a smaller company in terms of revenues and cash flows from operations.

 

***KeyOn might not have sufficient capital or generate enough cash flow to service interest obligations or repay its indebtedness.***

 

As of February 8, 2008, the Company had an outstanding promissory note payable of $4,500,000, which was subsequently extended to mature on February 8, 2009 at the Company’s option. The Company has negotiated a 120 day extension of this promissory note until June 4, 2009. The note bears interest at a variable rate equal to 2.5 percentage points above the lender’s prime rate,        with a current interest rate of 7.25%. If KeyOn is unable to secure additional financing at acceptable terms or generate sufficient cash flow from operations, the Company might not have adequate capital for interest payments or for principal repayment. In addition, while it is outstanding, the promissory note contains prohibitions on the Company’s ability to secure additional debt or grant future security interests with respect to the Company’s assets. These limitations may        limit KeyOn’s ability to obtain additional financing, withstand downturns in its business and take advantage of business and strategic opportunities.

 

******The Company is seeking to obtain third-party financing in a very challenging economic environment***.***

 

In order to continue its operations and pursue various growth initiatives either through acquisition or under the broadband portions of ARRA, the Company is seeking third-party financing.  In general, seeking financing in the capital markets is more difficult now than in any time in the Company’s history.  Moreover, to the extent the Company is successful, the terms may        be dilutive to the Company’s existing stockholders.

 

***The Company may be unable to successfully execute on either its acquisition strategy or organic growth strategy, both of which it depends upon to drive the growth of its subscriber base.***

 

In order to successfully execute on both its acquisition strategy and organic growth strategy, KeyOn will need to continue to build its infrastructure and operational capabilities. The Company’s ability to do any of these successfully could be affected by any one or more of the following factors:

 

| **•** | the Company’s ability to raise additional capital to fund its operations and growth.                                                                                                                                          |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                |
| **•** | the Company’s ability to successfully negotiate with potential acquisition targets, including the targets' willingness to accept consideration such as cash, debt, the Company’s common stock or a combination thereof; |

 

| **•** | the Company’s ability to acquire companies or their assets at purchase prices that are consistent with KeyOn’s targeted returns; |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | the Company’s ability to successfully integrate companies it acquires, which could result in increased costs, additional churn or damage to an existing or acquired brand; |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | the ability of the Company’s equipment, equipment suppliers or third-party service providers to perform as it expects; |
|------------|------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | the Company’s ability to further penetrate its existing markets and contribute to the organic growth of its subscriber base; |
|------------|------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | the Company’s ability to differentiate its services from those offered by its competitors in the markets it serves; |
|------------|---------------------------------------------------------------------------------------------------------------------------|

 

| **•** | the Company’s ability to obtain both network and customer premise equipment, which it currently receives from third parties; |
|------------|------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | the Company’s ability to attract and retain qualified personnel; |
|------------|------------------------------------------------------------------------|

 

| **•** | equipment failure or interruption of service, which could adversely affect the Company’s reputation and its relations with customers; and |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | the Company’s ability to accurately predict and respond to the rapid technological changes in its industry and the evolving demands of the markets it serves. |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

  

The Company’s failure to adequately address any one or more of the above factors could have a significant adverse impact on the Company’s ability to implement its business plan with respect to its acquisition strategy and organic growth plans, as well as its ability to pursue other opportunities that arise.

 

- 9 -

----

***Any acquisitions the Company makes could result in integration difficulties that could lead to substantial costs, delays or other operational or financial difficulties.***

 

KeyOn seeks to expand by acquiring businesses, including those in its current or new geographic markets. The Company cannot accurately predict the timing, size and success of its acquisition efforts and the associated capital commitments that might be required. The Company expects to face competition for acquisitions, which may limit the number of acquisition opportunities available        and may lead to higher acquisition prices. KeyOn may not be able to identify, acquire or profitably manage additional businesses or successfully integrate acquired businesses, if any, without substantial costs, delays or other operational or financial difficulties. In addition, such acquisitions involve a number of other risks, including:

 

| **•** | failure of the acquired businesses to achieve expected results; |
|------------|-----------------------------------------------------------------|

 

| **•** | diversion of management's attention and resources to acquisitions; |
|------------|--------------------------------------------------------------------|

 

| **•** | inability to timely and cost-effectively integrate acquired operations; |
|------------|-------------------------------------------------------------------------|

 

| **•** | failure to retain key customers or personnel of the acquired businesses; |
|------------|--------------------------------------------------------------------------|

 

| **•** | disappointing quality or functionality of acquired equipment, networks and personnel; and |
|------------|-------------------------------------------------------------------------------------------|

 

| **•** | risks associated with unanticipated events, liabilities or contingencies. |
|------------|---------------------------------------------------------------------------|

 

Subscriber dissatisfaction with, or performance problems of, a single acquired business could negatively affect KeyOn’s reputation. The inability to acquire businesses on reasonable terms or successfully integrate and manage acquired companies, or the occurrence of performance problems at acquired companies, could result in dilution, unfavorable accounting treatment or one-time        charges and difficulties in successfully managing the business.

 

***The Company has a history of operating losses and expects to continue suffering losses for the foreseeable future.***

 

The Company has incurred losses since it was launched in 2002. Moreover, in each of 2008 and 2007, KeyOn recorded net losses of $8,050,358 and $7,610,753. The Company cannot anticipate when, if ever, its operations will become net cash-flow positive. The Company may incur future net losses as it integrates acquisitions, introduces new network equipment, increases its marketing for        organic subscriber growth and pursues other aspects of its business strategy.

 

 ***The Company may experience difficulties in maintaining its existing network, as well as in constructing, upgrading and introducing new technologies, such as WiMAX, into networks, which could adversely affect customer satisfaction, increase subscriber churn and reduce the Company’s revenues.***

 

KeyOn’s success depends on providing affordable and reliable broadband access, as well as related services. If the number of subscribers using its network and the complexity of its services increase, the Company will require more infrastructure, network and customer service resources to maintain the quality of its services. Consequently, the Company may be required to make        substantial investments to construct and improve its facilities and equipment and to upgrade its technology and network infrastructure. This is particularly true in connection with the WiMAX networks the Company intends to pursue. If KeyOn does not implement these developments and network upgrades successfully, or if it experiences inefficiencies, operational failures, or unforeseen costs during implementation, the quality of the Company’s services could decline.

 

The Company may experience quality deficiencies, cost overruns and delays in implementing its network improvements and expansion, in maintenance and upgrade projects, including slower than anticipated technology migrations. In addition, KeyOn typically is required to obtain rights from land, building or tower owners to install its antennae and other equipment to provide service to its        subscribers. The Company may not be able to obtain, on terms acceptable to itself, or at all, the rights necessary to construct its network and expand its services.

 

KeyOn also faces challenges in managing and operating its networks. These challenges include operating, maintaining and upgrading network and customer premises equipment to accommodate increased traffic or technological advances, and managing the sales, advertising, customer support, billing and collection functions of its business, while providing reliable network service at expected        speeds and quality. The Company’s failure in any of these areas could adversely affect customer satisfaction, increase subscriber churn, increase its costs and decrease its revenues.

 

***The Company utilizes unlicensed spectrum, which is subject to intense competition, low barriers of entry and potential interference from multiple competing users.***

 

- 10 -

----

The Company presently utilizes primarily unlicensed spectrum in connection with its broadband service offerings. While unlicensed spectrum is regulated by the Federal Communications Commission, it is available to multiple simultaneous users and may be subject to interference, which may reduce the quality of the service provided to subscribers. The availability of unlicensed spectrum is        limited and others do not need to obtain permits or licenses to utilize the same unlicensed spectrum used by KeyOn currently or may in the future utilize, threatening its ability to reliably deliver services. The Company also holds a nationwide license in the “lightly-licensed” 3.65GHz band. This band affords greater protection than some of the unlicensed bands which the Company utilizes, but is still available to multiple simultaneous users.

 

***Unlicensed spectrum becomes impractical to use in certain markets and the Company is required to obtain and maintain rights to use licensed spectrum in those markets which could negatively impact its ability to execute its business strategy. To the extent KeyOn secures licensed spectrum, it faces increased operational costs and greater regulatory scrutiny.***

 

In certain markets, the Company intends to provide mobile or nomadic service by using technologies such as WiMAX and licensed spectrum. If unlicensed spectrum bands are insufficient to use for the deployment of such services, the Company may need to secure and maintain sufficient rights to use licensed spectrum by obtaining licenses or long-term leases in those markets. Obtaining        licensed spectrum can be a long and difficult process that can be costly and require a disproportionate amount of management resources, and may require the Company to incur significant indebtedness or secure additional capital. KeyOn may not be successful in its efforts to secure spectrum acquisition financing or be able to acquire, lease or maintain, either from third parties or through a licensed spectrum auction, the spectrum necessary to execute its strategy.

 

Licensed spectrum, whether owned or leased, poses additional risks, including:

 

| **•** | adverse changes to regulations governing spectrum rights; |
|------------|-----------------------------------------------------------|

 

| **•** | the risk that spectrum acquired or leased will not be commercially usable or free of damaging interference from licensed or unlicensed operators in the Company’s or adjacent bands; |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | failure of the Federal Communications Commission or other regulators to renew spectrum licenses as they expire; |
|------------|-----------------------------------------------------------------------------------------------------------------|

 

| **•** | inability to satisfy build-out or service deployment requirements upon which spectrum licenses or leases are, or may be, conditioned; |
|------------|---------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | increases in spectrum acquisition costs; |
|------------|------------------------------------------|

 

| **•** | uncertainty in obtaining the equipment required to use the licensed spectrum; |
|------------|-------------------------------------------------------------------------------|

 

| **•** | increases in capital expenses associated with new equipment required to utilize the licensed spectrum; |
|------------|--------------------------------------------------------------------------------------------------------|

 

| **•** | contractual disputes with, or the bankruptcy or other reorganization of the license holders, which could adversely affect control over the spectrum subject to such licenses. |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

***Depending upon the geographic market, some of the Company’s competitors are better established and have engineering, sales and marketing resources that are significantly greater than the Company has, which may make it difficult to attract and retain subscribers.***

 

As a general matter, the market for broadband and related services is highly competitive, and KeyOn may compete with other companies in its markets. Some of these competitors are well established with larger and better-developed networks and support systems, longer-standing relationships with customers, greater name recognition and greater financial, technical and marketing resources        than the Company has. As a result, KeyOn’s competitors may reduce the prices of their services significantly or may offer broadband connectivity packaged with other services. The Company may not be able to reduce its prices or otherwise combine its services with other services, which may make it more difficult to attract and retain subscribers.

 

The Company’s competitors include:

 

| **•** | cable operators offering broadband Internet connectivity services and voice communications; |
|------------|---------------------------------------------------------------------------------------------|

 

| **•** | incumbent and competitive local exchange carriers providing DSL services; |
|------------|---------------------------------------------------------------------------|

 

| **•** | wireless Internet service providers using licensed or unlicensed spectrum; |
|------------|----------------------------------------------------------------------------|

 

| **•** | third generation, or 3G, cellular, personal communications service, or PCS, and other wireless providers offering wireless broadband services and capabilities, including developments in existing cellular and PCS technology that may increase network speeds or have other advantages over the Company’s services; |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

- 11 -

----

| **•** | Internet service providers offering dial-up Internet connectivity; |
|------------|--------------------------------------------------------------------|

 

| **•** | providers of VoIP telephone services; |
|------------|---------------------------------------|

 

| **•** | satellite providers offering or developing broadband connectivity; and |
|------------|------------------------------------------------------------------------|

 

| **•** | electric utilities and other providers offering or planning to offer broadband Internet connectivity over power lines.

  |
|------------|--------------------------------------------------------------------------------------------------------------------------------|

Additionally, as a result of the broadband funding initiatives of the 2009 American Recovery and Reinvestment Act, other existing and prospective competitors may have greater financial wherewithal and adopt technologies or business plans similar to KeyOn’s, or seek other means to develop services competitive with the Company, particularly if the Company’s services prove to        be attractive in its target markets. This competition may make it difficult for the Company to attract and retain subscribers.

 

***The Company relies on third party sales representatives to assist in selling its services, and the failure of these representatives to perform as expected could reduce the Company’s future sales.***

 

KeyOn sells its services to some of its customers through third party sales representatives. However, the Company’s relationships with some of these third party sales representatives are relatively new and it is unable to predict the extent to which its third party sales representatives will be successful in marketing and selling the Company’s services. Moreover, many of        KeyOn’s third party sales representatives also market and sell competing products. The Company’s third party sales representatives may terminate their relationships with the Company at any time, or with short notice and may give greater attention to the products sold by KeyOn’s competitors. KeyOn’s future performance will also depend, in part, on its ability to attract additional third party sales representatives that will be able to market the Company’s        services effectively, especially in markets in which KeyOn has not previously distributed services. If the Company cannot retain its current third party sales representatives and recruit additional or replacement third party sales representatives, its revenues and operating results could be harmed.

 

***The Company relies on a limited number of third party suppliers that produce its network and customer premise equipment, and occasionally install or service its network sites. The Company is also currently using one or more third-party providers to supply the Company with certain aspects of its video and VoIP services. If these companies fail to perform or experience delays,        shortages or increased demand for their services, KeyOn may face a shortage of components, increased costs, and may be required to suspend its network deployment and its product and service introduction.***

 

In addition to the personnel the Company has on staff, KeyOn also depends on a limited number of third party suppliers to produce and deliver services required for its networks. The Company does not maintain any long-term supply contracts with its equipment manufacturers and distributors. In addition, KeyOn relies on providers of Internet bandwidth in order to transport data traffic on        its networks onto the public Internet. If a manufacturer or other provider does not satisfy KeyOn’s requirements, or if KeyOn loses a manufacturer or any other significant provider, it may have insufficient network equipment for delivery to subscribers and for installation or maintenance of its infrastructure, and the Company may be forced to suspend the deployment of its network and enrollment of new subscribers, thus impairing future growth. KeyOn also currently contracts with        third-party providers for certain video and Vo IP services and relies on those services to be compliant with all relevant regulatory requirements. To the extent these third-party providers are unable to meet either KeyOn’s or the regulatory requirements, KeyOn may be forced to suspend the deployment of these services, thus impairing future revenue growth.

 

***The Company’s inability to use shares of its common stock or to obtain capital to finance future acquisitions could impair the growth and expansion of its business.***

 

The extent to which KeyOn will be able or willing to use shares of its common stock to consummate acquisitions will depend on:

 

| **•** | the market value of the Company’s securities, which will vary; |
|------------|----------------------------------------------------------------------|

 

| **•** | liquidity, which is presently limited; and |
|------------|--------------------------------------------|

 

| **•** | the willingness of potential sellers to accept shares of the Company’s common stock as full or partial payment for their business. |
|------------|------------------------------------------------------------------------------------------------------------------------------------------|

 

Using shares of KeyOn’s common stock for this purpose may also result in significant dilution to the Company’s then existing stockholders. To the extent that the Company is unable to use its common stock to make future acquisitions, KeyOn’s ability to grow through acquisitions may be limited to the extent that the Company is able to raise capital through debt or        additional equity financings. The Company may not be able to obtain the necessary capital to finance any acquisitions. If KeyOn is unable to obtain additional capital on acceptable terms, or at all, KeyOn may be required to reduce the scope of acquisition-driven expansion plans or redirect resources previously committed to other purposes.

 

- 12 -

----

***The Company depends on the continued availability of leases for the deployment of its communications equipment.***

 

KeyOn has either constructed or acquired networks in each of the markets it serves. Networks are typically built by installing antennae on rooftops, cellular towers and other elevated structures pursuant to lease agreements that allow the Company to collocate its equipment. In the markets where the Company builds networks itself, it typically seeks five-year initial terms for its        leases with multiple three to five year renewal options. Such renewal options are generally exercisable at KeyOn’s discretion before the expiration of each term. If the leases the Company enters into or assume by way of acquisition are terminated or if the owners of these structures are unwilling to continue to enter into leases with KeyOn in the future, KeyOn would be forced to seek alternative arrangements with other providers. If KeyOn is unable to continue to obtain or renew        such leases on satisfactory terms, its business would be harmed.

 

***The Company’s business depends on its service brands, and if it does not maintain and enhance its brands, the Company’s ability to attract and retain subscribers may be impaired and its business and operating results may be harmed.***

 

KeyOn believes that its brands are a critical part of its business. Maintaining and enhancing the Company’s brands may require substantial investments with no assurance that these investments will be successful. The Company currently markets under the “KeyOn,” “SpeedNet” and “SIRIS” brands, and if it incurs significant expenses in promoting and        maintaining these brands, KeyOn’s business, prospects, operating results and financial condition may be harmed. KeyOn anticipates that maintaining and enhancing its brands may become increasingly competitive, difficult and expensive.

 

***Excessive customer churn may adversely affect the Company’s financial performance by slowing customer growth, increasing costs and reducing revenue.***

 

The successful implementation of KeyOn’s business plan depends upon controlling customer churn. Customer churn is a measure of customers who stop using KeyOn’s services. Customer churn could increase as a result of:

 

| **•** | personal economic conditions; |
|------------|-------------------------------|

 

| **•** | customers moving out of the Company’s geographic coverage area; |
|------------|-----------------------------------------------------------------------|

 

| **•** | interruptions to the delivery of services to customers over the Company’s network; |
|------------|------------------------------------------------------------------------------------------|

 

| **•** | billing errors and/or general reduction in the quality of the Company’s customer service; |
|------------|-------------------------------------------------------------------------------------------------|

 

| **•** | competitors offering additional, desired service offerings that the Company does not offer; and |
|------------|-------------------------------------------------------------------------------------------------|

 

| **•** | the availability of competing technology, such as cable modems, DSL, third-generation cellular, satellite, wireless Internet service and other emerging technologies, some of which may, from time to time, be less expensive or technologically superior to those offered by the Company. |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

An increase in customer churn can lead to slower customer growth, increased costs and a reduction in revenue.

 

***Interruption or failure of the Company’s networks, which in certain rural markets are often subject to severe weather such as storms or tornados, could impair the Company’s ability to provide its services, which could damage the Company’s reputation and harm operating results.***

 

KeyOn’s services depend on the continuing operation of its networks. The Company has experienced service interruptions in the past and may experience service interruptions or system failures in the future. Any unscheduled service interruption, as a result of severe weather or otherwise, adversely affects the Company’s ability to operate its business and could result in an        immediate loss of revenues. If KeyOn experiences frequent or persistent system or network failures, regardless of the reason, KeyOn’s reputation could be permanently harmed. The Company may need to make significant capital expenditures to increase the reliability of its systems, but these capital expenditures may not achieve the results the Company expects.

 

- 13 -

----

 ***The success of the Company’s business depends on the continuing contributions of its key personnel and the Company’s ability to attract, train and retain highly qualified personnel.*** 

 

KeyOn is highly dependent on the continued services of its chief executive officer and president, Jonathan Snyder and its chief operating officer, A. Robert Handell. Loss of the services of any of these individuals could adversely impact KeyOn’s operations. While KeyOn maintains a "key man" insurance policy for Jonathan Snyder, neither Jonathan Snyder nor A. Robert Handell is        currently bound by employment agreements. As a result, the Company cannot guarantee that either of these persons will stay with the Company for any definite period. 

 

In addition, to successfully introduce its services in new markets and grow its business in existing markets, KeyOn must be able to attract, train, motivate and retain highly skilled and experienced employees. In particular, qualified technical employees periodically are in great demand and may be unavailable in the time frame required to satisfy customer requirements. The Company may        not be able to attract and retain sufficient numbers of highly skilled technical employees in the future. The loss of skilled personnel or the KeyOn’s inability to hire or retain sufficient skilled personnel at competitive rates of compensation could impair KeyOn’s ability to successfully grow its business and retain its existing customer base. 

 

***The Company may not be able to effectively control and manage its growth, which would negatively impact its operations.*** 

 

The Company may face challenges in managing expanding service offerings and in integrating acquired businesses. Such eventualities will increase demands on KeyOn’s existing management, workforce and facilities. Failure to satisfy increased demands could interrupt or adversely affect the Company’s operations and cause administrative        inefficiencies. 

 

***If unauthorized persons gain access to the Company’s network, subscribers may perceive its network and services as not secure, which may adversely affect the Company’s ability to attract and retain subscribers and expose the Company to liability.*** 

 

Although KeyOn takes certain measures to guard against unauthorized access to its network, it may be unable to anticipate or implement adequate preventive measures against unauthorized access. Unauthorized parties may overcome the Company’s encryption and security systems and obtain access to data on its network, including on a device connected to its network. In addition,        because KeyOn operates and controls its network and its subscribers' Internet connectivity, unauthorized access of KeyOn’s network could result in damage to its network and to the computers or other devices used by KeyOn’s subscribers. An actual or perceived breach of network security, regardless of whether the breach is the Company’s fault, could harm public perception of the effectiveness of its security measures, adversely affect the ability to attract and retain        subscribers, expose the Company to significant liability and adversely affect the Company’s business prospects. 

 

**Risks Relating to the Company’s Industry** 

 

***The licensing of additional spectrum in the companies’ markets by the FCC could introduce additional competition.***

 

The FCC regulates the spectrum bands in which the companies and their competitors operate. The FCC can make additional spectrum available for use or change the way existing spectrum is used, which may result in additional competitors entering the companies’ markets and providing services that may directly compete with the companies’ offerings. The FCC offered several blocks        of spectrum in the 700 MHz frequency range as part of Auction 73, which concluded on March 18, 2008. Although deployments are not expected for a few years, this frequency range has been determined to be suitable for offering data, voice and video services, particularly in sparsely populated rural areas. As a result, the licensing and eventual build out of this spectrum may bring additional competition to the companies’ principal markets.

 

Additionally, on June 7, 2007, the FCC issued a Memorandum Opinion and Order regarding rules for the 3650-3700 MHz spectrum band. KeyOn has received the FCC’s approval to operate on 3.65 GHz band on a nationwide, non-exclusive basis. This newly regulated band may bring additional competition to the companies’ markets as more companies are awarded approval to        operate.

 

***The industry in which the Company operates is continually evolving. The Company’s services may become obsolete, and it may not be able to develop competitive services on a timely basis or at all.***

 

The broadband and wireless services industries are characterized by rapid technological change, competitive pricing, frequent new service introductions, evolving industry standards and regulatory requirements. The Company believes that its success depends on its ability to anticipate and adapt to these challenges and to offer competitive services on a timely basis. The Company faces a        number of difficulties and uncertainties associated with its reliance on technological development, such as:

 

|   | **•** | competition from service providers using more traditional and commercially proven means to deliver similar or alternative services to the Company’s targeted markets; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

- 14 -

----

|   | **•** | competition from better capitalized service providers using more efficient, less expensive technologies, including services not yet invented or developed to the Company’s targeted markets; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | the Company’s inability to develop a spectrum portfolio and offer advanced data services in a timely and cost efficient manner; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | responding successfully to advances in competing technologies in a timely and cost-effective manner; and |
|--------|------------|----------------------------------------------------------------------------------------------------------|

 

|   | **•** | uncertainty of timing with respect to a migration toward standards-based technology, requiring substantial capital expenditures. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------|

 

As the services offered by the Company and its competitors develop, residential and business customers may not accept the Company’s services as a commercially viable alternative to other means of delivering broadband or wireless broadband services. As a result, the Company’s services may become obsolete, and the Company may be unable to develop competitive services on a        timely basis, or at all.

 

***The Company is subject to extensive regulation that could limit or restrict its activities. If the Company fails to comply with these regulations, it may be subject to penalties, including fines and suspensions, and past due fees and interest, which may adversely affect the Company’s financial condition and results of operations.***

 

The Company’s business, including the acquisition, lease, maintenance, and use of spectrum licenses, is extensively regulated by federal, state and local governmental authorities. A number of federal, state and local privacy, security and consumer laws also apply to the Company’s business. These regulations and their application are subject to continual change as new        legislation, regulations or amendments to existing regulations are adopted from time to time by governmental or regulatory authorities, including as a result of judicial interpretations of such laws and regulations. Current regulations directly affect the breadth of services the Company is able to offer and may impact the rates, terms and conditions of the Company’s services. Regulation of companies that offer competing services, such as cable and DSL providers and        telecommunications carriers, also affects the Company’s business.

 

The Company believes that it is not required to register with the Universal Service Administrative Company, or the USAC, as a seller of telecommunications, nor is it required to collect universal service fund, or USF, fees from its customers or to pay USF fees directly. It is possible, however, that the Federal Communications Commission may assert that the Company is a seller of        telecommunications and that it is required to register and pay USF fees on some or all of the Company’s gross revenues. Although the Company would contest any such assertion, the Company could become obligated to pay USF fees, interest and penalties to USAC with respect to its gross revenues, past and/or future, from providing telecommunications and the Company may be unable to retroactively bill its customers for past USF fees.

 

In addition, the Federal Communications Commission or other regulatory authorities may in the future restrict the Company’s ability to manage subscribers' use of its network, thereby limiting the Company’s ability to prevent or address subscribers' excessive bandwidth demands. To maintain the quality of its network and user experience, the Company may manage the bandwidth        used by its subscribers' applications, in part by restricting the types of applications that may be used over the Company’s network. If the Federal Communications Commission or other regulatory authorities were to adopt regulations that constrain the Company’s ability to employ bandwidth management practices, excessive use of bandwidth-intensive applications would likely reduce the quality of its services for all subscribers. Such decline in the quality of the        Company’s services could harm its business.

 

The breach of a license or applicable law, even if inadvertent, can result in the revocation, suspension, cancellation or reduction in the term of a license or the imposition of fines. In addition, regulatory authorities may grant new licenses to third parties, resulting in greater competition in territories where the Company already has rights to licensed spectrum. In order to promote        competition, licenses may also require that third parties be granted access to the Company’s bandwidth, frequency capacity, facilities or services. The Company may not be able to obtain or retain any required license, and it may not be able to renew a license on favorable terms, or at all.

 

Wireless broadband services may become subject to greater state or federal regulation in the future. The scope of the regulations that may apply to similar companies and the impact of such regulations on the Company’s competitive position are presently unknown and could be detrimental to its business and prospects.

 

***In providing the Company’s services, the Company could infringe on the intellectual property rights of others, which may cause the Company to engage in costly litigation and, if the Company does not prevail, could also cause the Company to pay substantial damages and prohibit the Company from selling its services.***

 

Third parties may assert infringement or other intellectual property claims against KeyOn. The Company may have to pay substantial damages, including damages for past infringement if it is ultimately determined that the Company’s services infringe a third party's proprietary rights. Further, KeyOn may be prohibited from selling or providing some of its services before it obtains        additional licenses, which, if available at all, may require KeyOn to pay substantial royalties or licensing fees and divert much needed financial resources. Even if claims are without merit, defending a lawsuit takes significant time, may be expensive and may divert management's attention from other business concerns. Any public announcements related to litigation or interference proceedings initiated or threatened against KeyOn could cause the Company’s business to be harmed and        the Company's stock price to decline.

 

- 15 -

----

 

**Risks Relating to the Company’s Common Stock**

 

***The Company became public by means of a reverse merger, and as a result the Company is subject to the risks associated with the prior activities of the public company.***

 

Additional risks may exist because the Company became public through a reverse merger with a public shell company that did not have significant operations or assets prior to the time of the transaction. The public shell corporation was a development stage company from the time of its inception until the time of the merger on August 9, 2007. For approximately 3 years prior to the        merger, the public shell corporation had no significant business operations and generated nominal revenues. The Company may require the cooperation or assistance of persons or organizations, such as auditors, previously associated with the public shell company in connection with future matters that could be costly or difficult to secure. Although the Company performed a due diligence review of the public shell company, the Company may still be exposed to undisclosed liabilities        resulting from its prior operations and the Company could in cur losses, damages or other costs as a result.

 

***The Company has not paid dividends in the past and do not expect to pay dividends in the future. Any return on your investment may be limited to the value of the Company’s common stock.***

 

The Company has never paid cash dividends on its common stock and does not anticipate doing so in the foreseeable future. The payment of dividends on its common stock will depend on the Company’s earnings, financial condition and other business and economic factors as the board of directors may consider relevant. If the Company does not pay dividends, its common stock may be less        valuable because a return on your investment will only occur if the Company’s stock price appreciates.

 

***The Company’s common stock may be affected by limited trading volume and price fluctuations, each of which could adversely impact the value of its common stock.***

 

There has been very limited trading in the Company’s common stock and there can be no assurance that an active trading market in its common stock will either develop or be maintained. The Company’s common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of the common        stock without regard to the Company’s operating performance. In addition, the Company believes that factors such as quarterly fluctuations in its financial results and changes in the overall economy or the condition of the financial markets could cause the price of its common stock to fluctuate substantially. These fluctuations may also cause short sellers to enter the market from time to time in the belief that the Company will have poor results in the future. The Company cannot        predict the actions of market participants and, therefore, can offer no assurances that the market for its stock will be stable or appreciate over time.

 

******In an effort to conserve resources, the Company may choose to voluntarily delist from the over the counter bulletin board***.***

 

As a result of the challenging capital market environment, the Company may decide that the costs associated with being an over the counter bulletin board company do not exceed their benefits. Should the Company determine that in order to conserve resources it should delist from the over the counter bulletin board, it might inhibit the Company’s ability to raise capital or create        additional liquidity for the trading of the Company’s stock.

 

**Risks Relating to the Company’s Organization**

 

***The Company’s executive officers and directors own a substantial amount of the Company’s common stock and, therefore, exercise significant control over its corporate governance and affairs, which may result in their taking actions with which you do not agree.***

 

The Company’s executive officers and directors, and entities affiliated with them, control approximately 37% of the Company’s outstanding common stock, including exercisable stock options held by them. These stockholders, if they act together, may be able to exercise substantial influence over the outcome of all corporate actions requiring approval of the Company’s        stockholders, including the election of directors and approval of significant corporate transactions, which may result in corporate action with which you do not agree. This concentration of ownership may also have the effect of delaying or preventing a change in control, which might be in your best interest, but which might negatively affect the market price of the Company’s common stock.

 

***The Company is subject to financial reporting and other requirements for which the Company’s accounting, internal audit and other management systems and resources may not be adequately prepared.***

 

On August 9, 2007, the Company became subject to reporting and other obligations under the Securities Exchange Act of 1934, as amended, including the requirements of Section 404 of the Sarbanes-Oxley Act. Under Section 404, the Company will be required, starting in the fiscal year ending December 31, 2009, to conduct an annual management assessment of the effectiveness of its internal        controls over financial reporting and to obtain a report by its independent auditors addressing these assessments. The requirements of these rules and regulations will increase the Company’s legal and financial compliance costs, make some activities more difficult, time-consuming or costly and will place significant demands on management, administrative, operational, internal audit and accounting systems and resources. In connection with these requirements, the Company anticipates        that it will need to:

 

|   | **•** | upgrade its systems; |
|--------|------------|----------------------|

 

- 16 -

----

 

|   | **•** | implement additional financial and management controls, reporting systems and procedures; |
|--------|------------|-------------------------------------------------------------------------------------------|

 

|   | **•** | implement an internal audit function; and |
|--------|------------|-------------------------------------------|

 

|   | **•** | hire additional accounting, internal audit and finance staff. |
|--------|------------|---------------------------------------------------------------|

 

If the Company is unable to accomplish these objectives in a timely and effective fashion, the Company’s ability to comply with its financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to maintain effective internal controls could have a negative impact on the Company’s ability to manage its business and on its        stock price.

 

***If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about The Company’s business, its stock price and trading volume could decline.***

 

The trading market for the Company’s common stock will depend in part on the research and reports that securities or industry analysts publish about the Company or its business. The Company does not currently have research coverage by securities and industry analysts. If the Company obtains securities or industry analyst coverage and if one or more of the analysts who covers the        Company downgrades the Company’s stock or publishes inaccurate or unfavorable research about the Company’s business, its stock price would likely decline. If one or more of these analysts ceases coverage of the Company or fails to publish reports on the Company regularly, demand for its stock could decrease, which could cause the stock price and trading volume to decline.

 

**Item 1B. Unresolved Staff Comments**

 

Not Applicable.

 

**Item 2. Description of Property**

 

The Company leases approximately 10,000 square feet of office space in Omaha, Nebraska for $8,222 per month, plus applicable taxes, subject to adjustments in accordance with consumer price index fluctuations. The current lease term expires on April 1, 2012, at which time KeyOn has the option to extend the lease for an additional five-year period. This facility serves as the        Company’s corporate headquarters.

 

The Company leases approximately 3,200 square feet of office space for a field office in Las Vegas, Nevada for approximately $2,000 per month. The current lease term expires on April 30, 2010.

 

The Company leases approximately 2,000 square feet of office space for a field office in Idaho Falls, Idaho for $720 per month on a month-to-month basis.

 

The Company leases approximately 1,200 square feet of office space for a field office in Grand Junction, Colorado for $710 per month on a month-to-month basis.

 

The Company leases approximately 2,400 square feet of office space for a field office in Centerville, Iowa for approximately $800 per month. The current lease term expires on July 31, 2010.

 

The Company leases approximately 1,200 square feet of office space for a field office in Wolfforth, Texas for $525 per month on a month-to-month basis.

 

KeyOn believes that its current facilities are adequate for its immediate and near-term needs. Additional space may be required as the Company expands its activities. The Company does not currently foresee any significant difficulties in obtaining any required additional facilities. In the opinion of the management, each of its properties is adequately covered by insurance.

 

**Item 3. Legal Proceedings**

 

To the Company’s knowledge, except as described below, no legal proceedings, government actions, administrative actions, investigations or claims are currently pending against KeyOn or involve KeyOn that, in the opinion of the Company’s management, could reasonably be expected to have a material adverse effect on the Company’s business and financial        condition.

 

- 17 -

----

KeyOn is currently involved in litigation as a third-party defendant in a lawsuit initially filed by a former wholesale partner against KeyOn’s existing wholesale partner. On or about June 9, 2008, KeyOn made an Offer of Judgment in the amount of $100. Since this Offer was rejected, in the event the outcome of the litigation is more favorable to KeyOn, KeyOn is entitled to        recover attorneys’ fees. The parties are currently conducting discovery, but no requests have been served to date. KeyOn reasonably believes that the amount of exposure is nominal. KeyOn further believes that the claim is specious based on the fact that a non-contract claim was asserted despite an existing contractual relationship. Neither the Plaintiff nor the Defendant have commenced discovery in an effort to stall the prosecution of the claim while a settlement is        reached.

 

Effective February 19, 2009, we terminated that certain Agreement and Plan of Merger entered into with Internet America, Inc. (“Internet America”) (the “Merger Agreement”) as a result of certain material breaches to the Merger Agreement by Internet America. KeyOn believes that there are now termination fees due and owing to KeyOn as a result of these breaches.        In response, by letter dated February 19, 2009, Internet America has disputed our right to termination of the Merger Agreement, and has alleged certain breaches by KeyOn of the Merger Agreement and as a result of these alleged breaches by KeyOn, Internet America has demanded payment of termination fees from KeyOn. Despite the receipt of this demand, we believe that KeyOn will prevail in this matter should we decide to pursue it and intend to contest any claims that may be brought by        Internet America.

 

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

 

On or prior to November 21, 2008, stockholders holding 4,640,952 shares of the Company’s common stock, or 53.75%, approved, by written consent, to enter into an agreement and plan of merger with Internet America, Inc., (“Merger Agreement”) This Merger Agreement was ultimately terminated by the Company, effective February 19, 2009.

 

- 18 -

----

**PART II**

 

**Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.**

 

From August 23, 2007 through November 1, 2007, KeyOn’s common stock was quoted on the OTC Bulletin Board under the symbol KYCS.OB, and since November 2, 2007 KeyOn’s common stock has been quoted on the OTC Bulletin Board under the symbol KEYO.OB. Prior to August 23, 2007, there was no active market for KeyOn’s common stock. The following table sets forth the high and        low bid prices for the Company’s common stock for the periods indicated, as reported by the OTC Bulletin Board. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

 

| **Quarter Ended**  |   | **High** |   | **Low** |   |
|--------------------|--------|----------|--------|---------|--------|
| March 31, 2008     |   | $        | 5.00   |    | $      | 2.10 |   |
| June 30, 2008      |   | $        | 3.75   |    | $      | 1.10 |   |
| September 30, 2008 |   | $        | 1.40   |    | $      | 0.25 |   |
| December 31, 2008  |   | $        | .20    |    | $      | 0.05 |   |

 

The last reported sales price of KeyOn’s common stock on the OTC Bulletin Board on April 10, 2009, was .15 per share. As of April 10, 2009, there were approximately 110 holders of record of the Company’s common stock.

 

The Company has neither paid nor declared dividends on its common stock since its inception and does not plan to pay dividends on its common stock in the foreseeable future. The Company expects that any earnings which it may realize will be retained to finance its growth. There can be no assurance that the Company will ever pay dividends on its common stock. The Company’s        dividend policy with respect to the common stock is within the discretion of the Board of Directors and its policy with respect to dividends in the future will depend on numerous factors, including the Company’s earnings, financial requirements and general business conditions. Notwithstanding the foregoing, pursuant to that certain Business Loan Agreement and Promissory Note, dated February 4, 2008, between the Company and Sun West Bank, the Company is prohibited from paying        any cash dividends on the Company’s stock until the Company’s obligations under this Business Loan Agreement and Promissory Note have been satisfied in full.

 

**Equity Compensation Plan Information**

 

The following table provides information as of December 31, 2008 about compensation plans under which shares of the Company’s common stock may be issued to employees, consultants or members of the Company’s Board of Directors upon exercise of options, warrants or rights under all of the Company’s existing equity compensation plans. The Company’s existing equity        compensation plans consist of the Company’s 2007 Incentive Stock and Awards Plan in which all of the Company’s employees and directors are eligible to participate.

 

| **Plan Category**                                      |   | (a)

Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |      | (b)

Weighted-Average Exercise                        Price of Outstanding                        Options, Warrants and Rights |   | (c)

Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) |   |
|--------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------|-----------|--------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Equity compensation plans approved by stockholders     |   |                                                                                             | 1,865,281 |                                                                                                                           | $      | 1.32                                                                                                                                             |   |   | 384,719 |   |
| Equity compensation plans not approved by stockholders |   |                                                                                             | -         |                                                                                                                           |   | -                                                                                                                                                |   |   | - |   |
| All plans                                              |   |                                                                                             | 1,865,281 |                                                                                                                           | $      | 132                                                                                                                                              |   |   | 384,719 |   |

 

- 19 -

----

**Recent Sales of Unregistered Securities**

Set forth below is certain information concerning issuances of common stock that were not registered under the Securities Act that occurred in the fiscal year of 2008.

|   | **•** | On June 6, 2008 we issued 2,036 shares in exchange for $12,000 worth of services performed by a consultant for an effective price of $5.89 per share. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | On July 1, 2008 we issued 11,620 shares in exchange for $24,413 of services performed by a consultant for an effective price of $2.10 per share. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | On September 5, 2008 we issued 18,750 shares in satisfaction of $15,000 worth of services performed by a consultant for an effective price of $0.80 per share. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | On September 8, 2008, we issued 20,000 shares in exchange for $60,000 worth of services performed by a member of the executive management team for an effective price of $3.00 per share. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | On September 24, 2008 we issued 333,333 shares as consideration for a lender amending a material agreement. This amendment resulted in a financial benefit of $200,000 for an effective price of $0.60 per share. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | On December 4, 2008 we issued 136,505 shares in satisfaction of $30,000 worth of services performed by consultants for an effective price of $0.22 per share. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

The issuances referenced above were consummated pursuant to Section 4(2) and Regulation D of the Securities Act and the rules and regulations promulgated thereunder on the basis that such transactions did not involve a public offering and the offerees were sophisticated accredited investors with access to the kind of information that registration would provide. The recipients of these securities        represented their intention to acquire the securities for investment or in connection with services rendered 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. No sales commissions were paid to registered brokers in connection with any of these issuances.

 

**Item 6. Selected Financial Data** 

Not Applicable.

 

**Item 7. Management’s Discussion and Analysis or Plan of Operation**

 

**Overview**

We provide wireless broadband services primarily to rural and other underserved markets under the "KeyOn," "SpeedNet," and "SIRIS" brands. We offer our broadband services along with satellite video and VoIP services to both residential and business subscribers. As of December 31, 2008, the Company had over 15,500 subscribes and operates networks covering over 50,000 square miles in 11        states across the Midwest and Western United States. KeyOn primarily focuses on providing fixed wireless broadband to rural and other areas of the country that it believes are currently underserved by traditional phone and cable companies. In October 2007, we acquired substantially all of the assets of MicroLnk, LLC (“MicroLnk”), a provider of wireless broadband services to rural communities in Nebraska, headquartered in Lincoln, Nebraska. We currently operate the MicroLnk        assets under the “SpeedNet” brand. In January 2007, we acquired substantially all of the assets of SpeedNet Services, Inc. (“SpeedNet”), a leading provider of fixed wireless broadband services to non-metropolitan communities and rural areas in the central United States. Including the operations of SpeedNet our markets are located in the following 11 Western and Midwestern states: Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Nebraska, Nevada, Ohio, South        Dakota, and Texas. Our results for the year ended 2007 include eleven months of operations of SpeedNet and two full months of operations from MicroLnk.

Historically, the Company has grown through the acquisition of wireless broadband companies throughout its target markets and continued organic growth. However, as the capital market environment became increasingly difficult beginning in fiscal year 2008, the Company began to explore strategic alternatives in addition to seeking additional financing. This direction resulted in the Company        executing an agreement and plan of merger with a similarly situated provider of wireless broadband on November 14, 2008 (the “Merger Agreement”). The Company was optimistic that this merger would result in greater scale and operational efficiencies than the Company could generate as a stand-alone entity, especially against the backdrop of challenging financial markets. However, prior to its consummation, the Company terminated the Merger Agreement effective on February 19,        2009 for reasons disclosed in Form 8-K dated February 24, 2009. In light of the termination of the Merger Agreement, the Company did not receive the equity infusion contemplated by the Merger Agreement. Consequently, the failure to complete the merger necessitated the Company to seek other sources of capital to fund operations, including the issuance of additional subordinated secured promissory notes from exiting shareholders and other methods to reduce ongoing        monthly cash requirements such as renegotiating existing secured lease financing agreements and others further described below in Liquidity and Capital Reserves. The Company has succeeded in several of these initiatives while continuing to seek additional financing from existing shareholders and other third-parties. Although the Company is raising capital in a particularly challenging economic environment, the Company believes that in light of its stronger operating performance and the        opportunity for financing to deploy broadband in rural and underserved areas pursuant to specific portions of the 2009 American Recovery and Reinvestment Act, management believes it will be successful these efforts.

**Characteristics of Our Revenues and Operating Costs and Expenses**

We offer our services under annual, two-year or month-to-month service agreements. These services are generally billed monthly, quarterly, semiannually or annually in advance. Payments received in advance for subscriptions are deferred and recognized as the services are provided. Service initiation fees are recognized at the time of installation.

Operating costs and expenses consist of payroll and related expenses, network operating costs, marketing and advertising, professional fees, installation expense, cost of DISH inventory and stock and warrant-based compensation and general and administrative expenses. Payroll expenses consist of personnel costs, including salaries, benefits, employer taxes and bonuses across our functional        areas: executive, customer support, engineering, accounting and billing, marketing, and local market operational staff.

- 20 -

----

Network operating costs are comprised of costs directly associated with providing our services including tower rent, circuits to transport data to the Internet termination point and Internet termination bandwidth.

Marketing and advertising expenses primarily consist of direct marketing and advertising costs. Professional fees relate to legal, accounting and consulting and recruiting resources that we utilize periodically in the normal course of doing business. General and administrative expenses primarily consist of the support costs of our operations, such as costs related to office real estate        leases, company insurance, travel and entertainment, banking and credit card fees, taxes and vehicle leases.

**Results of Operations**

*Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007*

*Revenues*. During the year ended December 31, 2008, we recognized revenues of $7,793,740 compared to revenues of $7,185,433 during the year ended December 31, 2007, representing an increase of approximately 8%. This increase was primarily the result of our customer growth associated with our acquisitions of SpeedNet and MicroLnk.

*Operating Loss*. Operating expenses, which consist of payroll, bonuses and taxes, depreciation and amortization, other general and administrative costs, network operating costs, marketing and advertising, installation expense, professional fees and stock based compensation totaled $14,956,694 for the year ended December 31, 2008, as compared to $14,153,088 for        the year ended December 31, 2007, representing an increase of approximately 6%. Our acquisitions of SpeedNet and MicroLnk increased costs associated with running the resulting expanded operations. These increases were completely offset due to significant cost reductions in professional fees, general and administrative expenses and marketing. Non-cash expenses including stock-based and warrant compensation expense and stock granted for professional services totaled $3,337,826 for the        year ended December 31, 2008, as compared to $1,606,893 for the year ended December 31, 2007. Normalized operating expenses without these non-cash stock compensation expenses would have been $11,618,868 for the year ended December 31, 2008 as compared to $12,546,195 for the year ended December 31, 2007, representing a reduction of 7%. This adjusted change in operating expense is the result of the elimination of duplicative costs and efficiencies achieved through economies of scale        generated with our acquisitions of SpeedNet and MicroLnk. Our actual operating loss margin improved by 5 percentage points from a total operating loss $7,162,954 for the year ended December 31, 2008 as compared to a loss of $6,967,655 for the year ended December 31, 2007. By removing the non-cash stock compensation expenses of $3,337,826 for the year ended December 31, 2008 and $1,606,893 for the year ended December 31, 2007, our normalized operating loss margin improved by 26        percentage points from a total normalized operating loss $3,825,128 for the year ended December 31, 2008 as compared to a loss of $5,360,762 for the year ended December 31, 2007.

*Payroll, Bonuses and Taxes*. Payroll bonuses and taxes totaled $6,937,932 for the year ended December 31, 2008, as compared to $5,109,503 for the year ended December 31, 2007, representing an increase of approximately 36%. This increase was primarily due to an increase in non-cash compensation expense.Stock-based and warrant compensation of $ 3,337,826 was        expensed for the year ended December 31, 2008, as compared to $1,606,893 for the year ended December 31, 2007. Warrants were granted during the year ended December 31, 2008 and the year ended December 31, 2007 as compensation for the guaranty on our term notes. The expense recorded for these warrants granted was $2,042,499 for the year ended December 31, 2008 and $901,566 for the year ended December 31, 2007. Stock-based compensation for stock options issued under our option plan        totaled $1,295,327 for the year ended December 31, 2008 as compared to stock option expense in the year ended December 31, 2007 totaling $705,327.

*Depreciation and Amortization*. Depreciation and amortization expenses totaled $2,744,705 for the year ended December 31, 2008, as compared to $2,572,906 for the year ended December 31, 2007, representing an increase of approximately 7%. This increase was primarily due to the additional network footprint and customer premise equipment acquired in connection with        our acquisitions of SpeedNet and MicroLnk. The asset purchase acquisitions typically have a large amount of property, plant and equipment, resulting in higher depreciation charges.

*Other General and Administrative Expenses*. Other general and administrative expenses totaled $1,258,826 for the year ended December 31, 2008, as compared to $1,749,643 for the year ended December 31, 2007, representing a decrease of approximately 28%. The decrease is due to cost reduction initiatives across all areas. Travel expenses account for 22% of the        reduction, postage and shipping accounts for 14% of the reduction, and bank charges account for 10% of the reduction, The remaining 54% of the reductions are across all of our other general and administrative expenses including insurance, office supplies, office rent, reproduction costs and other miscellaneous expenses.

- 21 -

----

*Network Operating Costs*. Network operating costs, which consist of tower rent, local loop costs and Internet termination expense, totaled $2,751,534 for the year ended December 31, 2008, as compared to $2,523,601 for the year ended December 31, 2007, representing an increase of approximately 9%. The additional network footprint and increased customer bases        associated with our acquisitions of SpeedNet on January 31, 2007, and MicroLnk on October 22, 2007, account for this change

*Marketing and Advertising Expenses*. Marketing and advertising expenses totaled $320,812 for the year ended December 31, 2008, as compared to $558,922 for the year ended December 31, 2007, representing a decrease of approximately 43%. This decrease was attributed to our concentration on certain target markets as we continued to refine our        marketing strategy during the year ended December 31, 2008 as compared to the more broad-based marketing plan we employed during the year ended December 31, 2007. Our marketing costs were 4% of revenue for the year ended December 31, 2008 and 8% for the year ended December 31, 2007, representing a 4 percentage point decrease.

*Installation Expense*. Installation expense, which consists primarily of expenses associated with installation supplies, third party installation costs and transportation expenses related to the customer install, totaled $419,277 for the year ended December 31, 2008, as compared to $380,944 for the year ended December 31, 2007, representing an increase of        approximately 10%. Fuel costs increased in 2008 as compared to 2007 by 80% which accounts for approximately $120,000 in increased in installation costs. These costs were offset by the variable costs of third party installers and installation supplies. Installation volumes decreased by 21% year over year which accounts for approximately $80,000 in decreased in installation costs. SpeedNet utilizes third party contractors for installations and this expense is classified to installation        costs. In contrast, our other markets utilize employees and their wages are captured as payroll expenses.

*Professional Fees*. Professional fees, which consist of legal, accounting, and other related expenses, totaled $393,432 for the year ended December 31, 2008, as compared to $1,257,569 for the year ended December 31, 2007, representing a decrease of approximately 69%. Specifically, legal fees and other professional associated with the efforts related to our        reverse merger and subsequent equity financing account for the increase in professional fee costs for the year ended December 31, 2007

*Goodwill Asset Impairment*. Goodwill asset impairment of $97,635 was expensed for the year ended December 31, 2008, as compared to no cost for the year ended December 31, 2007. In the fourth quarter of fiscal 2008 we conducted an impairment test of our goodwill and intangible assets which resulted in a $97,635 impairment charge to our Pocatello goodwill. As of        December 31, 2008, we had $1,641,138 of goodwill and $2,220,548 of net intangible assets remaining on our balance sheet, which we currently believe to be realizable based on the estimated fair value of these assets.

 

*Cost of DISH Inventory*. Cost of DISH inventory of $32,541 was expensed for the year ended December 31, 2008, as compared to no cost for the year ended December 31, 2007. The expense for DISH inventory is recognized immediately after installation. We began installations as a DISH retailer in January 2008.

- 22 -

----

*Other Income and Expense*. We incurred other income and expense of $887,404 for the year ended December 31, 2008, as compared to $643,098 for the year ended December 31, 2007, representing an increase of 38%. We had $10,782 for gains on disposals of assets and negligible interest income during the year ended December 31, 2008 as compared to no gains on        disposals of assets and $60,611 interest income earned during the year ended December 31, 2007, accounting for 20% of the increase in this expense category. The interest and loan fees on the subordinated secured notes originating during the year ended December 31, 2008 accounted for 27% of the increase. Finally, the remaining 53% of the increase was due to the increased interest expense incurred in connection with lease financing in support of our continued organic growth of our        customer base and increased interest incurred on our term loan.

*Net Loss*. We had a net loss of $8,050,358 for the year ended December 31, 2008, as compared to a net loss of $7,610,753 for the year ended December 31, 2007, representing an increase in net loss of approximately 6%. The increased expenses during the year ended December 31, 2008 were almost completely offset by the increased revenues for the year ended December        31, 2008 from our acquisition of SpeedNet on January 31, 2007 and MicroLnk on October 2007 due to cost reduction initiatives implemented. Normalized net loss without the non-cash stock based compensation expense would have been $4,712,532 for the year ended December 31, 2008 as compared to $6,003,860 for the year ended December 31, 2007, representing an improvement of 22%. This adjusted change as a result of the elimination of duplicative costs and efficiencies achieved through        economies of scale generated with our acquisitions of SpeedNet and MicroLnk as well as focused cost reduction initiatives in professional fees and general and administrative costs. Our net loss margin improved by 3 percentage points from a net loss $8,050,358 for the year ended December 31, 2008 as compared to a net loss of $7,610,753 for the year ended December 31, 2007. By removing the non-cash stock compensation expense of $3,337,826, for the year ended December 31, 2008 and        $1,606,893 for the year ended December 31, 2007, our normalized net loss margin improved by 23 percentage points from a total normalized net loss $4,712,532 for the year ended December 31, 2008 as compared to a net loss of $6,003,860 for the year ended December 31, 2007.

**Liquidity and Capital Resources**

*General*

As of December 31, 2008 and 2007, we had cash of $28,032 and $316,999, respectively.

*Net Cash Used by Operating Activities*. Net cash used in operating activities totaled $1,825,314 for the year ended December 31, 2008, as compared to net cash used in operating activities of $1,121,196 for the year ended December 31, 2007. This change is primarily attributable to paying for operating expenses incurred throughout the year with a focused effort to keep accounts        payable at approximately the same level year over year.

*Net Cash Used in Investing Activities*. Net cash used in investing activities totaled $160,981 year ended December 31, 2008, as compared to $4,937,833 for the year ended December 31, 2007. The cash usage in 2007 is the result of the asset purchase of MicroLnk and SpeedNet coupled with $819,597 in expenditures paid with cash for customer premise equipment, tower        equipment and software purchases made for cash during 2007 versus $165,348 paid during 2008.

*Net Cash Provided By Financing Activities*. Net cash provided by financing activities totaled $1,697,328 for the year ended December 31, 2008, as compared to $6,371,338 for the year ended December 31, 2007. During 2008, we entered into a commercial loan agreement for $4,500,000 and used $3,000,000 of the proceeds to pay off the 2007 commercial loan. During 2008,        we issued $1,001,877 secured subordinated notes. These cash inflows were offset by payments totaling $1,029,287 to our capital lease obligations and our cash overdraft. During 2007, we entered into a commercial loan agreement for a term loan of $3,000,000. Proceeds from the sale of stock and the exercise of warrants during 2007 totaled $4,193,743.

- 23 -

----

*Working Capital*. As of December 31, 2008, we had negative working capital of $9,063,986. This number includes $4,500,000 of term debt, $1,001,877 for secured subordinated notes, $596,411 for capital leases, and $310,689 for deferred revenue.

 

Management has taken a variety of steps to strengthen the financial condition of the Company.  These initiatives have positively affected both the Company’s operating financial performance as well as its existing financing arrangements with secured lenders. Certain of these initiatives are described below:

 

*Operations*

 

During 2008, the Company sought to become more efficient operationally, the results of which allowed KeyOn to reduce headcount and other related expenses.  Management reduced its headcount from 65 full-time employees on March 31, 2008 to only 46 full-time employees as of April 15, 2009. In addition, we modified work schedules across the organization and continued to narrow marketing        efforts in the second half of fiscal year 2008, choosing to focus our efforts on our existing customer base to obtain new customer referrals. These initiatives resulted in fewer gross customer additions but significantly reduced expenses in this area. In light of fewer gross additions, customer installation expenses and capital expenditures for customers premise equipment are reduced as well as the need to procure additional lease financing debt. The Company also increased its charges        for new subscriber installations, resulting in a faster break-even point for new subscriber additions.

 

Management has been executing on a continuing effort to reduce operating expenses and increase overall operating efficiencies. To the extent the rent for a tower significantly exceeds the revenues generated by customers being served, we have terminated those lease agreements resulting in decreased tower expenses. Additionally, we have combined networks so that we can purchase fewer circuits        and save on internet termination costs.

 

As a result of these initiatives, in the fourth quarter of 2008, KeyOn reported its first quarter of positive operating cash flow. 

 

*Financial Restructuring*

 

In addition to the operational changes, management has undertaken a variety of measures to restructure the Company’s current and long-term liabilities.  In October 2008, we restructured a capital lease obligation with an existing lease financing company. By amending this material agreement, we were able to suspend certain monthly payment obligations through November 2008 and make        reduced payments over an extended 24-month maturity period. In March of 2009, we executed a second restructuring with another lease financing company. The effect of this restructuring also served to reduce the monthly payment obligations of the Company and extended the payments for an additional 24 months. Beginning in August and continuing through December 2008, the Company raised additional capital in the amount of $1,001,877 through the issuance of subordinated secured notes. The        note holders consisted of existing shareholders as well as members and affiliates of management. The Company’s $4.5 million senior secured Promissory Note held by Sun West Bank matured on February 8, 2009. However, on March 27, 2009, the Company and Sun West Bank amended the Promissory Note and extended its maturity until June 4, 2009. Finally, in March of 2009, the Company raised $300,000 of subordinated secured notes from existing shareholders, the terms of which are still being        negotiated between the holders and the Company’s independent members of the board of directors.

 

In order to continue our acquisition and organic growth strategies, as well as to sustain our current capital needs, management projects that we will require funds from sources outside of our normal operations. To the extent we are unable to obtain the required capital from existing shareholders of the Company, management will seek to raise additional capital from institutions or other        third-parties. Should the Company be unsuccessful in these efforts it may contemplate more severe measures such as asset sales or other strategic alternatives.

 

**Item 7A. Quantitative and Qualitative Disclosures About Market Risk**

 

Not applicable.

 

**Item 8. Financial Statements.**

 

See the Company’s financial statements beginning on page F-1.

 

**Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.**

 

Not applicable.

 

**Item 9A(T). Controls and Procedures.**

 

**Controls and Procedures**

 

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial        officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As noted below, the Company was unable to conclude that its disclosure controls and procedures are effective, as of the end of the period covered by this report (December 31, 2008), in ensuring that material information that the Company is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded,        processed, summarized and reported within t he time periods specified in the Securities and Exchange Commission’s rules and forms. The Company believes that it will have effective internal controls to meet this requirement prior to the filing of its annual report for the year ended December 31, 2009.

 

- 24 -

----

**Changes in Internal Control Over Financial Reporting**

 

There were no changes in the Company’s internal control over financial reporting during its most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

**Management’s Annual Report on Internal Control over Financial Reporting**

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, a company’s principal executive and principal financial        officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately        and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of its management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection        of unauthorized acquisition, use or disposition of its assets that could have a material effect on the financial statements.

 

The Company is committed to maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the        Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company is in the process of designing such internal controls and procedures over financial reporting.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide        only management’s report in this annual report.

 

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time. The Company’s system contains self-monitoring mechanisms, and actions are taken to        correct deficiencies as they are identified.

 

Management conducted an evaluation of the effectiveness of the system of internal control over finacial reporting based on the framework in Internal Control—Intergrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commissions (the “COSO Framework”). Based on this evaluation, management concluded that the Company’s system of        internal control over financial reporting was effective as of December 31, 2008, based on the COSO Framework.

 

**Item 9B. Other Information.**

 

Not applicable.

 

**PART III**

 

**Item 10. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act.**

 

The following table sets forth information regarding the members of the Company’s board of directors and the Company’s executive officers. All directors hold office for one-year terms until the election and qualification of their successors. Officers are elected annually by the board of directors and serve at the discretion of the board.

 

| Name               |   | Age |   | Position                                                                  |
|--------------------|--------|-----|--------|---------------------------------------------------------------------------|
| Jonathan Snyder    |   | 37  |   | Chief Executive Officer, President and Director                           |
| Jerome Snyder      |   | 68  |   | Chairman of the Board of Directors                                        |
| Annette Eggert     |   | 43  |   | Chief Financial Officer                                                   |
| A. Robert Handell  |   | 62  |   | Executive Vice President, Chief Operating Officer, Secretary and Director |
| Jason Lazar        |   | 35  |   | Vice President, Corporate Development and General Counsel                 |
| Rory Erchul        |   | 37  |   | Vice President, Marketing                                                 |
| R.C. Mark Baker    |   | 61  |   | Director                                                                  |
| Jeffrey Scott Rice |   | 41  |   | Director                                                                  |
| Jason K. Horowitz  |   | 38  |   | Director                                                                  |
| Curtis W. Anderson |   | 59  |   | Director                                                                  |

 

- 25 -

----

**Jonathan Snyder, President, Chief Executive Officer and Director.**Mr. Snyder has served as the Company’s president, chief executive officer and as a director since August 2007. Mr. Snyder has been the president, chief executive officer and a director of KeyOn Communications, Inc. since February 2002. From May 2001 through June 2005, Mr. Snyder served        as chairman of Transistor 8 LLC, a Santa Monica, California-based IT services firm. From 1996 through 1999, Mr. Snyder was a member of Pacific Capital Group, Inc. From 1994 through 1996, Mr. Snyder was an investment banker at Bear, Stearns & Co. Inc. While at Pacific Capital Group, Inc., Mr. Snyder was a founding shareholder of and former management executive at Global Crossing Limited. Mr. Snyder is a graduate of the Wharton School of Business at the University of Pennsylvania and        earned his MBA from the Anderson School at UCLA.

 

**Jerome Snyder, Chairman of the Board of Directors.**Mr. Snyder has served as the Company’s chairman since August 2007. Mr. Snyder has served as chairman of KeyOn Communications, Inc. since 2004. Mr. Snyder has been an attorney since 1964 and is a founder and principal of companies in Nevada and regionally, including the predecessor to the Palace        Station Hotel and Casino (now Station Casinos), Sun State Bank, Sun West Bank, Integrated Financial Associates, Medivisit, Border Billboard, Triple Crown of Polo, restaurants, and numerous professional, commercial and residential real estate developments.

 

**Annette Eggert, Chief Financial Officer.**Ms. Eggert has served as the Company’s chief financial officer since August 2007. Ms. Eggert has been the chief financial officer of KeyOn Communications, Inc. since June 2007. From March 2005 through June 2007, Ms. Eggert was the controller for the Interpublic Group Shared Services organization in Omaha,        Nebraska. From December 2002 through March 2005, Ms. Eggert was the controller of Connectivity Solutions Manufacturing, Inc., a wholly owned subsidiary of CommScope, Inc. and from October 1990 though December 2002, Ms. Eggert held various finance and accounting positions at Connectivity Solutions Manufacturing, Inc. Ms. Eggert is a licensed CPA and holds an MBA from the University of Nebraska.

 

**A. Robert Handell, Executive Vice President, Chief Operating Officer, Secretary and Director.**Mr. Handell has served as the Company’s executive vice president, chief operating officer, secretary and as a director since August 2007. Mr. Handell has served as a director of KeyOn Communications, Inc. since December 2004 and as chief operating officer        since January 2007. From July 2002 through December 2006, Mr. Handell served as president and as a director of CalNevAr Ventures, Inc., an entity formed to provide operational consulting services to KeyOn Communications, Inc. From May 2000 through July 2003, Mr. Handell served as chief executive officer and president of BroadLink Communications Inc., a high-speed wireless data network operator headquartered in Santa Rosa, California. From April 1997 through April 2000, Mr. Handell        served as president of Edison Source, an Edison International company. From January 1996 through June 1997, Mr. Handell served as president and chief executive officer of AccessLine Technologies Inc., a provider of personal number software and systems to telecommunications carriers. From July 1991 through December 1995, Mr. Handell served as executive vice president and chief operating officer of BellSouth MobileComm and from April 1987 through June 1991, Mr. Handell served as vice        president of sales, marketing and customer service at Bell Atlantic Mobile Systems.

 

**Jason Lazar, Vice President, Corporate Development and General Counsel.**Mr. Lazar has served as the Company’s vice president, corporate development and general counsel since August 2007. Mr. Lazar was the director of corporate development of KeyOn Communications, Inc. from March 2002 to June 2006 and has been the vice president, corporate development        and general counsel of KeyOn Communications, Inc. since June 2006. From May 2000 through March 2002, Mr. Lazar served as a director of ITU Ventures, a leading early-stage venture capital firm with more than $75,000,000 under management. Mr. Lazar holds a B.A. form Lehigh University and a J.D. from the Benjamin N. Cardozo School of Law at Yeshiva University.

 

**Rory Erchul, Vice President, Marketing.**Mr. Erchul has served as the Company’s vice president of marketing since August 2007. Mr. Erchul has been the vice president of marketing of KeyOn Communications, Inc. since July 2007. From December 2006 through June 2007, Mr. Erchul served as vice president of marketing and customer service for Allegiance        Communications, LLC, a rural cable company based in Shawnee, Oklahoma. From February 2004 to December 2006, Mr. Erchul served as regional manager for KeyOn Communications, Inc.'s Idaho operations. From April 2001 to February 2004, Mr. Erchul served as marketing director for Cable ONE, Inc. in Pocatello, Idaho. From January 1998 to April 2001, Mr. Erchul served as marketing director for Cable ONE, Inc. in Norfolk, Nebraska and from February 1994 to January 1998 as marketing assistant and        telemarketing manager for Cable ONE, Inc. in Fargo, North Dakota. Mr. Erchul holds a B.S. from Moorhead State University.

 

**R.C. Mark Baker, Director.**Mr. Baker has served as a director since August 2007. Mr. Baker has served as a director of KeyOn Communications, Inc. since April 2005. Since September 2003, Mr. Baker has served as chief executive officer of Touchstone Systems, Inc., a supplier of VoIP termination services to Tier 1 and Tier 2 customers around the world. Since        2003, Mr. Baker has also been a director of Cornerstone-On-Demand Inc., a California based provider of human capital management solutions. From November 1999 to January 2003, Mr. Baker served as a director of Ionex Telecommunications, Inc., a competitive local exchange carrier, and from July 1999 to July 2002, Mr. Baker served as its president and chief executive officer. From June 1998 to March 1999, Mr. Baker served as chief executive officer of USA Global Link GmbH. From December        1993 to June 1998, Mr. Baker held various senior positions with AT&T Inc., including executive vice president — international and vice president international traffic management, and from November 1989 to September 1992, Mr. Baker served as president and chief executive officer of British Telecom North America.

 

- 26 -

----

**Jeffrey Scott Rice, Director.**Mr. Rice has served as a director since August 2007. Mr. Rice has served as a director of KeyOn Communications, Inc. since April 2005. From January 1999 through October 2004, at which time it was sold, Mr. Rice was chairman and chief executive officer of OneWest, Inc., one of the largest privately held regional Internet service        providers in the Intermountain West. From December 1997 through January 1999, Mr. Rice served as a principal and founding partner of Diabetic Sense, Inc. (a Catalyst Rx Company), a diabetic management company based in Las Vegas, Nevada. From March 1995 though October 1997, Mr. Rice served as a director of sales for APB America, Inc., a national pharmacy benefits management company.

 

**Jason K. Horowitz, Director.**Mr. Horowitz has served as a director since October 2007. Since February 2005, Mr. Horowitz has served as senior vice president of business and legal affairs of CKX, Inc. (Nasdaq: CKXE), a diversified media company. From August 2000 to February 2005, Mr. Horowitz was the vice president of legal affairs of FXM, Inc., a private        investment firm. From October 1999 to July 2000, Mr. Horowitz was associate counsel for SFX Entertainment, Inc., the world's largest presenter and promoter of live entertainment. Mr. Horowitz received a B.A. from the University of Pennsylvania and a J.D. from Fordham University School of Law. Mr. Horowitz is a member of the advisory board of Steppingstone Day School, a not for profit school for handicapped babies and preschoolers.

 

**Curtis W. Anderson, Director.**Mr. Anderson has served as a director since October 2007. Since 1988, Mr. Anderson has served as chief executive officer of Fair, Anderson, & Langerman, a certified public accounting and business advisory firm. In addition, Mr. Anderson is a founder and director of Service 1st Bank of Nevada and is an experienced real        estate developer and business investor. Mr. Anderson is also active in numerous several civic associations and currently serves on the board of Opportunity Village, a not-for-profit that serves people with intellectual disabilities, and the Las Vegas Art Museum. Mr. Anderson is a licensed CPA and received a B.S. from the University of Notre Dame.

 

Except for Jerome Snyder and Jonathan Snyder, who are father and son, respectively, there are no family relationships among the Company’s directors or executive officers.

 

**Board Committees**

 

Since October 2007, the standing committees of the Company’s board of directors consist of an audit committee, a compensation committee and a nominating committee. Each member of the Company’s committees is "Independent" as such term is defined under and required by the federal securities laws and the rules of The Nasdaq Stock Market.

 

*Audit Committee*

 

The audit committee of the board of directors is currently comprised of Messrs. Anderson, Baker and Rice, each of whom is an independent director. Mr. Anderson is a qualified financial expert and serves as chairman of the audit committee. The audit committee's duties are to recommend to the Company’s board of directors the engagement of independent auditors to audit the        Company’s financial statements and to review the Company’s accounting and auditing principles. The audit committee reviews the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls. The audit committee will at all times be composed exclusively of directors who are, in the opinion of the        Company’s board of directors, free from any relationship that would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.

 

*Compensation Committee*

 

The compensation committee of the board of directors is currently comprised of Messrs. Rice and Horowitz. The compensation committee reviews and approves the Company’s salary and benefits policies, including compensation of executive officers. The compensation committee also administers the Company’s stock option plans and recommends and approves grants of stock options        under such plans.

 

*Nominating Committee*

 

We established a nominating committee of the board of directors, currently comprised of Messrs. Horowitz and Baker. The nominating committee considers and makes recommendations on matters related to the practices, policies and procedures of the board and takes a leadership role in shaping the Company’s corporate governance. As part of its duties, the committee assesses the size,        structure and composition of the board and board committees, coordinates evaluation of board performance and reviews board compensation. The committee also acts as a screening and nominating committee for candidates considered for election to the board. In this capacity it concerns itself with the composition of the board with respect to depth of experience, balance of professional interests, required expertise and other factors. The committee evaluates prospective nominees identified        on its own initiative or referred to it by other board members, management, stockholders or external sources and all self-nominated candidates. The committee uses the same criteria for evaluating candidates nominated by stockholders and self-nominated candidates as it does for those proposed by other board members, management and search companies.

 

- 27 -

----

**Code of Ethics**

 

We have adopted a written code of ethics and business conduct that applies to the Company’s directors, executive officers and all employees. The Company intends to disclose any amendments to, or waivers from, the Company’s code of ethics and business conduct that are required to be publicly disclosed pursuant to rules of the Securities and Exchange Commission by filing such        amendment or waiver with the Securities and Exchange Commission. This code of ethics and business conduct can be found in the corporate governance section of the Company’s website, www.keyon.com. The Company shall provide to any person without charge a copy of its code of ethics, upon written request to the following address: KeyOn Communications Holdings, Inc., 11742 Stonegate Circle, Omaha, Nebraska 68164, Attention: General Counsel.

 

**Item 11. Executive Compensation.**

 

**Summary Compensation Table**

 

The following table summarizes the annual and long-term compensation paid to Jonathan Snyder, the Company’s chief executive officer, A. Robert Handell, the Company’s executive vice president, chief operating officer and secretary and Annette Eggert, the Company’s Chief Financial Officer, whom the Company jointly refers to as the “named executive officers.”        Except for Messrs. Snyder and Handell, Ms. Eggert and two other executives, no other executive officer received annual remuneration in excess of $100,000 during 2008.

 

 

| **Name and Principal Position**                                     |   | **Year** |   | **Salary**

**($)** |   | **Bonus**

**($)** |   | **Option Awards(1)**

**($)** |    | **All Other Compensation**

**($)** |   | **Total**

**($)** |   |
|---------------------------------------------------------------------|--------|----------|--------|---------------------|--------|--------------------|--------|-------------------------------|---------|-------------------------------------|--------|--------------------|--------|
| Jonathan Snyder                                                     |   |     | 2008   |                |   | 120,923            |   |                          | — |                                |   | 110,527            |   |   | — |   |   | 645,097 |   |
| President and Chief Executive Officer (principal executive officer) |   |     | 2007   |                |   | 112,269            |   |                          | — |                                |   | 337,402            |   |   |  

— |   |   | 449.671 |   |
|                                                                |   |     |   |                |   |               |   |                          |    |                                |   |               |   |   |   |   |   |   |   |
| Annette Eggert                                                      |   |     | 2008   |                |   | 125,154            |   |                          | — |                                |   | 87,457             |   |   | — |   |   | 212,611 |   |
| Chief Financial Officer                                             |   |     | 2007   |                |   | 69,795             |   |                          | — |                                |   | 43,729             |   |   | — |   |   | 113,524 |   |
| A. Robert Handell                                                   |   |     | 2008   |                |   | 120,923            |   |                          | — |                                |   | 55,264             |   |   |  

— |   |   | 176,187 |   |
| Executive Vice President and Chief Operating Officer                |   |     | 2007   |                |   | 122,686            |   |                          | — |                                |   | 99,796             |   |   | — |   |   | 222,482 |   |
|                                                                |   |     |   |                |   |               |   |                          |    |                                |   |               |   |   |   |   |   |   |   |

 

________________________

 

| (1) | Based upon the aggregate grant date fair value calculated in accordance with the Financial Accounting Standards Board Statement of Financial Accounting Standard No. 123R, Share Based Payment. For information regarding the Company’s valuation of option awards, see “Critical Accounting Policies — Stock-Based Expense.” |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Outstanding Equity Awards at Fiscal Year-End**

 

The following table summarizes the outstanding equity awards to the Company’s named executive officers as of December 31, 2008:

 

|              |   | **Option Awards**                                                                 |   |
|-------------------|--------|-----------------------------------------------------------------------------------|--------|
| **Name**          |   | **Number of Securities Underlying Unexercised**

**Options Exercisable**

**(#)** |   | **Number of Securities Underlying Unexercised**

**Options Unexercisable**

**(#)** |   | **Option Exercise Price**

**($)** |   | **Option**

**Expiration**

**Date** |   |
| Jonathan Snyder   |   |                                                                              | 75,000 |   |   | — |   |   | 4.00 |   |   | 08/08/2017 |   |
|              |   |                                                                              |   |   |   |   |   |   |   |   |   |   |   |
| Annette Eggert    |   |                                                                              | 45,332 |   |   | 75,554 |   |   | 2.48 |   |   | 06/01/2017 |   |
|              |   |                                                                              |   |   |   |   |   |   |   |   |   |   |   |
| A. Robert Handell |   |                                                                              | 37,500 |   |   | — |   |   | 4.00 |   |   | 08/08/2017 |   |
|              |   |                                                                              |   |   |   |   |   |   |   |   |   |   |   |

 

- 28 -

----

**2007 Incentive Stock and Awards Plan**

 

On August 9, 2007, the Company’s board of directors and stockholders adopted the 2007 Incentive Stock and Awards Plan. The purpose of the 2007 Incentive Stock and Awards Plan is to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an        active interest of such persons in the Company’s development and financial success. Under the 2007 Incentive Stock and Awards Plan, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long term incentive awards. The 2007 Incentive Stock and Awards Plan is administered by the Company’s        board of directors.

 

**Director Compensation**

 

The following table summarizes the compensation awarded to the Company’s directors in 2008:

 

| **Name**           |   | **Fees Earned or Paid in Cash**

**($)** |    | **Option Awards**

**($)(1)** |   | **Total**

**($)** |   |
|--------------------|--------|------------------------------------------|---------|-------------------------------|--------|--------------------|--------|
| Jeffrey Scott Rice |   |                                     | — |                          |   | 133,957            |   |   | 133,957 |   |
|               |   |                                     |    |                          |   |               |   |   |   |   |
| R.C. Mark Baker    |   |                                     | — |                          |   | 133,457            |   |   | 133,457 |   |
|               |   |                                     |    |                          |   |               |   |   |   |   |
| Curt Anderson      |   |                                     | — |                          |   | 50,000             |   |   | 50,000 |   |
|               |   |                                     |    |                          |   |               |   |   |   |   |
| Jerome Snyder      |   |                                     | — |                          |   | 60,000             |   |   | 60,000 |   |
|               |   |                                     |    |                          |   |               |   |   |   |   |
| Jason Horowitz     |   |                                     | — |                          |   | 49,000             |   |   | 49,000 |   |

_____________________

 

| (1) | Based upon the aggregate grant date fair value calculated in accordance with the Financial Accounting Standards Board Statement of Financial Accounting Standard No. 123R, Share Based Payment. For information regarding the Company’s valuation of option awards, see “Critical Accounting Policies — Stock-Based Expense.” |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

Each director receives an annual retainer fee of $40,000, payable 80% in equity and 20% in cash.  However, each director can elect to take up to all of his cash fees in equity.  The equity issued may take any available form, including options or restricted stock at the discretion of each director.  The non-executive chairman receives an additional $20,000 annual        fee, payable 100% in equity. All additional compensation to be paid to the members of the committees is paid in equity.  The chairman of the audit committee receives a payment of $10,000 per year.  Each other member of the audit committee receives a payment of $4,000 per year. The chairman of the compensation committee receives a payment of $5,000 per year.  Each other member of the compensation committee receives a payment of $2,500 per year.  The chairman of        the nominating and corporate governance committee receives a payment of $4,000 per year.  Each other member of the nominating and corporate governance committee receives a payment of $2,000 per year.

 

**Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.**

 

The following table sets forth information with respect to the beneficial ownership of the Company’s common stock as of March 31, 2009 by:

 

|   | **•** | each person known by the Company to beneficially own more than 5% of the Company’s common stock; |
|--------|------------|--------------------------------------------------------------------------------------------------------|

 

|   | **•** | each of the Company’s directors; |
|--------|------------|----------------------------------------|

 

|   | **•** | each of the named executive officers; and |
|--------|------------|-------------------------------------------|

 

|   | **•** | all of the Company’s directors and executive officers as a group. |
|--------|------------|-------------------------------------------------------------------------|

 

- 29 -

----

The percentages of common stock beneficially owned are reported on the basis of regulations of the Securities and Exchange Commission governing the determination of beneficial ownership of securities. Under the rules of the Securities and Exchange Commission, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to        vote or to direct the voting of the security, or investment power, which includes the power to dispose of or to direct the disposition of the security. Except as indicated in the footnotes to this table, each beneficial owner named in the table below has sole voting and sole investment power with respect to all shares beneficially owned and each person's address is c/o KeyOn Communications Holdings, Inc., 11742 Stonegate Circle, Omaha, Nebraska 68164. As of December 31, 2008, the        Company had 8,771,350 shares outstanding.

 

| **Name of Beneficial Owner**                                 |   | **Number of                        Shares                        Beneficially                        Owned(1)** |      | **Percentage                        Beneficially                        Owned(1)** |   |
|--------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|-----------|------------------------------------------------------------------------------------|--------|
| Jonathan Snyder                                              |   |                                                                                                            | 1,420,336 | (2)                                                                                |   | 13.94 | % |
| Jerome Snyder                                                |   |                                                                                                            | 1,802,155 | (3)                                                                                |   | 17.04 | % |
| A. Robert Handell                                            |   |                                                                                                            | 386,563   | (4)                                                                                |   | 4.22 | % |
| Jason Lazar                                                  |   |                                                                                                            | 266,372   | (5)                                                                                |   | 2.95 | % |
| Sidharth Ganju                                               |   |                                                                                                            | 230,000   | (6)                                                                                |   | 2.56 | % |
| Annette Eggert                                               |   |                                                                                                            | 52,884    | (7)                                                                                |   | * |   |
| Rory Erchul                                                  |   |                                                                                                            | 23,924    | (8)                                                                                |   | * |   |
| R.C. Mark Baker                                              |   |                                                                                                            | 267,860   | (9)                                                                                |   | 2.96 | % |
| Jeffrey Scott Rice                                           |   |                                                                                                            | 270,113   | (10)                                                                               |   | 2.99 | % |
| Jason Horowitz                                               |   |                                                                                                            | 228,500   | (11)                                                                               |   | 2.54 | % |
| Curtis W. Anderson                                           |   |                                                                                                            | 232,313   | (12)                                                                               |   | 2.58 | % |
| All directors and executive officers as a group (12 persons) |   |                                                                                                            | 5,188,519 |                                                                               |   | 37.17 | % |

_____________________

 

| *   Less than 1%. |
|------------------------|

 

| (1)    | Shares of common stock beneficially owned and the respective percentages of beneficial ownership of common stock assumes the exercise of all options, warrants and other securities convertible into common stock beneficially owned by such person or entity currently exercisable or exercisable within 60 days of December 31, 2008. Shares issuable pursuant to                        the exercise of stock options and warrants exercisable within 60 days are deemed outstanding and held by the holder of such options or warrants for computing the percentage of outstanding common stock beneficially owned by such person, but are not deemed outstanding for computing the percentage of outstanding common stock beneficially owned by any other person. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (2)    | Includes 75,000 shares of common stock issuable upon the exercise of options; 346,875 shares of common stock issuable upon the exercise of guaranty warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

| (3) | Includes 270,537 shares of common stock issuable upon the exercise of options; 346,875 shares of common stock issuable upon the exercise of guaranty warrants; 5440 shares of common stock issuable upon the exercise of warrants; 79,483 shares of common stock that are held by Aarken Holdings, LLC, in which Jerome Snyder is the managing member |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| (4)    | Includes 37,500 shares of common stock issuable upon the exercise of options; 74,345 shares of common stock that are held jointly by A. Robert Handell and Dani Jo Handell, A. Robert Handell’s spouse.

  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5)    | Includes 37,500 shares of common stock issuable upon the exercise of options                                                                                                                                          |
|   |                                                                                                                                                                                                                  |
| (6)    | Includes 20,000 shares of common stock as restricted shares issuable in January 2009; 190,000 shares of common stock issuable upon the exercise of options. No longer an executive officer of the Company.            |
|   |                                                                                                                                                                                                                  |
| (7)    | Includes 52,884 shares of common stock issuable upon the exercise of options                                                                                                                                          |

 

| (8) | Includes 23,924 shares of common stock issuable upon the exercise of options |
|-----|------------------------------------------------------------------------------|

 

| (9) | Includes 267,860 shares of common stock issuable upon the exercise of options |
|-----|-------------------------------------------------------------------------------|

 

| (10) | Includes 270,113 shares of common stock issuable upon the exercise of options |
|------|-------------------------------------------------------------------------------|

 

| (11) | Includes 220,943 shares of common stock issuable upon the exercise of options; 998 shares of common stock issuable upon the exercise of warrants |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------|

 

| (12) | Includes 225,452 shares of common stock issuable upon the exercise of options; 6861 shares of common stock are held by Fair, Anderson & Langerman, with respect to which Mr. Anderson is the chief executive officer and a stockholder |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

- 30 -

----

**Item 13. Certain Relationships and Related Transactions, and Director Independence.**

 

On January 30, 2007, KeyOn issued a $3,000,000 promissory note to Sun West Bank, pursuant to which Sun West Bank advanced $3,000,000 to us. This note was satisfied in full on February 8, 2008 by refinancing. Repayment under this note was guaranteed by Jonathan Snyder, the Company’s president, chief executive officer and a director, and Barry Becker, a former director who resigned        in October 2007. Jerome Snyder, the Company’s chairman, and Steven Shearing agreed to indemnify Jonathan Snyder and Barry Becker for certain obligations under this guaranty. Jerome Snyder is a minority shareholder and director of Sun West Bank.

 

On February 8, 2008, the Company entered into a Business Loan Agreement and Promissory Note with Sun West Bank, pursuant to which it obtained a loan in the principal amount of up to $4,500,000.00. This loan is evidenced by a promissory note bearing interest at a variable rate equal to 2.5 percentage points above the prime rate of Sun West Bank, with a current interest rate equal to        seven and one quarter percent (7.25%) per annum. This loan matured according to its terms on February 4, 2009 and then was subsequently extended for one-hundred and twenty days until June 4, 2009. The Company’s obligations under this loan are guaranteed by each of Jerome Snyder, Jonathan Snyder, and Barry Becker. As consideration for providing these guarantees, the Company issued each of Jerome Snyder, Jonathan Snyder and Barry Becker a five year warrant to purchase 208,128 shares        of common stock at an exercise price of $4.00 per share, a five year warrant to purchase 69,375 shares of common stock at an exercise price of $6.00 per share and a five year warrant to purchase 69,375 shares of common stock at an exercise price of $8.00 per share.

 

As of December 31, 2008, the following Company officers and directors and their affiliates held the principal amount of subordinated secured notes as related parties: Jerome Snyder - $103,093; Jonathan Snyder - $335,052 and Jason Lazar - $128,866. In aggregate, the amount of accrued interest payable to these officers totaled $43,139 as of December 31, 2008.

 

**Director Independence**

 

R.C. Mark Baker, Jeffrey Scott Rice, Curtis W. Anderson and Jason K. Horowitz are independent directors, as provided in Nasdaq Marketplace Rule 4200(a)(15).

 

**Item 14. Principal Accountant Fees and Services.**

 

L.L. Bradford & Company, LLC has served as independent registered public accounting firm since August 2007 when KeyOn became a publicly held Company. L.L. Bradford & Company, LLC was also the Company’s independent registered public accounting firm for periods prior to August 2007 when it was privately held.

 

**(1) Audit Fees**

 

L.L. Bradford & Company, LLC billed the Company audit fees in the aggregate amount of $77,500 in the year ended December 31, 2008. These fees relate to the audit of the Company’s annual financial statements and the review of the Company’s interim quarterly financial statements.

 

**(2) Audit-Related Fees**

 

L.L. Bradford & Company, LLC, billed the Company audit-related fees in the aggregate amount of $3,000 in the year ended December 31, 2008. These fees relate primarily to the auditors review of the Company’s registration statements and related consents, audit of acquired companies or assets and audit related consulting.

 

**(3) Tax Fees**

 

L.L. Bradford & Company, LLC, billed the Company tax fees in the aggregate amount of $10,000 in the year ended December 31, 2008.

 

**(4) All Other Fees**

 

No fees of this sort were billed by L.L. Bradford & Company, LLC during 2008.

 

- 31 -

----

**PART IV**

 

**Item 15. Exhibits, Financial Statements Schedules**

 

| **Exhibit No.**    |   | **Description** |
|------------------------------|--------|-----------------|

 

| 2.1    |   | Agreement and Plan of Merger executed by and between KeyOn Communications Holdings, Inc., Internet America, Inc., and IA Acquisition, Inc. on November 14, 2008 (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on November 18,                        2008). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 3.1    |   | Composite Certificate of Incorporation of KeyOn Communications Holdings, Inc. (Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Registration Statement on Form SB-2/A of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on November 16, 2007).                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2    |   | Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on August 10, 2007).                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.1*  |   | KeyOn Communications Holdings, Inc. 2007 Stock and Awards Plan (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on August 10, 2007).                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.2*  |   | Form of Stock Option Award Agreement (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on August 10, 2007).                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.3*  |   | Form of Restricted Stock Agreement (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on August 10, 2007).                                                                                                                                                      |

 

| 10.4 |   | Commercial Security Agreement, dated February 8, 2008, by and between KeyOn Communications Holdings, Inc. and Sun West Bank (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on February 14, 2008). |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| 10.5   |   | Commercial Guaranty, dated February 8, 2008, executed by Jerome Snyder in favor of Sun West Bank (Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on February 14, 2008).   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                            |
| 10.6   |   | Commercial Guaranty, dated February 8, 2008, executed by Jonathan Snyder in favor of Sun West Bank (Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on February 14, 2008). |
|   |   |                                                                                                                                                                                                                                                                                            |
| 10.7   |   | Commercial Guaranty, dated February 8, 2008, executed by Barry Becker in favor of Sun West Bank (Incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on February 14, 2008).    |
|   |   |                                                                                                                                                                                                                                                                                            |
| 10.8   |   | Form of Warrant issued to Guarantors of Business Loan Agreement with Sun West Bank (Incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on February 14, 2008).                 |

 

| 10.9   |   | Form of Subordinated Secured Promissory Note executed by KeyOn Communications Holdings, Inc. on August 27, 2008 (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on September 3, 2008). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.10  |   | Form of Security and Loan Agreement executed by KeyOn Communications Holdings, Inc. on August 27, 2008 (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on September 3, 2008).          |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.11  |   | Form of Subsidiary Guaranty executed by KeyOn Communication Holdings, Inc. on August 27, 2008 (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on September 3, 2008).                   |

 

 

- 32-

----

 

|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12  |   | Amendment to Master Equipment Lease Agreement executed by and between KeyOn Communications Holdings, Inc. and Data Sales Co., Inc. on September 16, 2008 (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on September 23,                            2008). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.13  |   | Change in Terms Agreement executed by and between KeyOn Communications Holdings, Inc, and Sun West Bank on March 27, 2009 (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on April 2, 2009).                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 21.1   |   | Subsidiaries of Registrant (Incorporated by reference to Exhibit 21.1 to the Current Report on Form 8-K of KeyOn Communications Holdings, Inc. filed with the Securities and Exchange Commission on August 10, 2007).                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 31.1   |   | Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 31.2   |   | Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 32.1   |   | Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 32.2   |   | Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                            |

 

_____________________

 

| *   Management compensatory plan. |
|----------------------------------------|

 

- 33 -

----

**SIGNATURES**

 

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

|                      |                                                           |                      |
|---------------------------|----------------------------------------------------------------|---------------------------|
|                      | **KEYON COMMUNICATIONS HOLDINGS, INC.**                        |
|                      |                                                           |                      |
| Date: April 15, 2009 | By:                                                  | /s/ Jonathan Snyder  |
|                      |  

Jonathan Snyder

President and Chief Executive Officer |

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and the dates indicated.

 

| **Signature**                                                                                                                                    |   | **Title**                                                                               |   | **Date**       |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|----------------|
|                                                                                                                                             |   |                                                                                    |   |           |
| /s/ Jonathan Snyder            

Jonathan Snyder                                          |   | President, Chief Executive Officer and Director

(Principal Executive Officer)          |   | April 15, 2009 |
|                                                                                                                                             |   |                                                                                    |   |           |
|                                                                                                                                             |   |                                                                                    |   |           |
| /s/ Annette Eggert               

Annette Eggert                          |   | Chief Financial Officer (Principal Financial

Officer and Principal Accounting Officer) |   | April 15, 2009 |
|                                                                                                                                             |   |                                                                                    |   |           |
|                                                                                                                                             |   |                                                                                    |   |           |
| /s/ Jerome Snyder                                       Jerome Snyder |   | Chairman of the Board of Directors                                                      |   | April 15, 2009 |
|                                                                                                                                             |   |                                                                                    |   |           |
|                                                                                                                                             |   |                                                                                    |   |           |
| /s/ A. Robert Handell                                  A. Robert Handell                       |   | Director                                                                                |   | April 15, 2009 |
|                                                                                                                                             |   |                                                                                    |   |           |
|                                                                                                                                             |   |                                                                                    |   |           |
| /s/ R.C. Mark Baker                                   R.C. Mark Baker                          |   | Director                                                                                |   | April 15, 2009 |
|                                                                                                                                             |   |                                                                                    |   |           |
|                                                                                                                                             |   |                                                                                    |   |           |
| /s/ Jeffrey Scott Rice                                  Jeffrey Scott Rice                     |   | Director                                                                                |   | April 15, 2009 |
|                                                                                                                                             |   |                                                                                    |   |           |
|                                                                                                                                             |   |                                                                                    |   |           |

 

- 34 -

----

| /s/ Jason K. Horowitz                                Jason K. Horowitz |   | Director |   | April 15, 2009 |
|----------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------------|
|                                                                                                           |   |     |   |           |
|                                                                                                           |   |     |   |           |
| /s/ Curtis W. Anderson                               Curtis W. Anderson     |   | Director |   | April 15, 2009 |

 

- 35 -

----

**KEYON COMMUNICATIONS HOLDINGS, INC.**

**AND RELATED ENTITIES**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 

| Report of Independent Registered Accounting Firm                                                     |   |   | F-2 |   |
|------------------------------------------------------------------------------------------------------|--------|--------|-----|--------|
| Consolidated Balance Sheets as of December 31, 2008 and 2007                                         |   |   | F-3 |   |
| Consolidated Statements of Operations for the Years Ended December 31, 2008 and 2007                 |   |   | F-5 |   |
| Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2008 and 2007 |   |   | F-6 |   |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2008 and 2007                 |   |   | F-7 |   |
| Notes to Consolidated Financial Statements                                                           |   |   | F-8 |   |

 

F-1

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Stockholders

KeyOn Communications Holdings Inc. and Related Entities

Omaha, Nebraska

 

We have audited the accompanying consolidated balance sheets of KeyOn Communications Holdings Inc. and Related Entities as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is        to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).   Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over        financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An        audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KeyOn Communications Holdings Inc. and Related Entities as of December 31, 2008 and 2007, and the results of its activities and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations, negative cash flows from operations and current liabilities exceed current assets, all of which raise substantial doubt about the Company’s ability        to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/S/ L.L. Bradford & Company, LLC

L.L. Bradford & Company, LLC

April 15, 2009

Las Vegas, Nevada

 

F-2

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

REPORT ON CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2008

F-3

----

|                                                        |
|-------------------------------------------------------------|
| **KEYON COMMUNICATIONS HOLDINGS INC. AND RELATED ENTITIES** |
|                                                        |
| **CONSOLIDATED BALANCE SHEETS**                             |
|                                                             |

|                                                                          |   |                   |        |     |   |        |   |
|-------------------------------------------------------------------------------|--------|------------------------|-------------|----------|--------|-------------|--------|
|                                                                          |   | **As of December 31,** |        |
|                                                                          |   | **2008**               |        | **2007** |   |
| **ASSETS**                                                                    |   |                   |        |     |   |        |   |
|                                                                          |   |                   |        |     |   |        |   |
| CURRENT ASSETS:                                                               |   |                   |        |     |   |        |   |
| Cash                                                                          |   | $                      | 28,032      |     | $      | 316,999     |   |
| Accounts receivable, net of allowance for doubtful accounts                   |   |                   | 129,592     |     |   | 94,098      |   |
| Inventories                                                                   |   |                   | 172,434     |     |   | 300,610     |   |
| Prepaid expenses and other current assets                                     |   |                   | 74,198      |     |   | 75,259      |   |
|                                                                          |   |                        |             |     |        |             |   |
| Total current assets                                                          |   |                   | 404,256     |     |   | 786,966     |   |
|                                                                          |   |                        |             |     |        |             |   |
|                                                                          |   |                   |        |     |   |        |   |
| PROPERTY AND EQUIPMENT - Net                                                  |   |                   | 3,292,245   |     |   | 4,571,220   |   |
|                                                                          |   |                   |        |     |   |        |   |
| OTHER ASSETS                                                                  |   |                   |        |     |   |        |   |
| Goodwill                                                                      |   |                   | 1,641,138   |     |   | 1,738,773   |   |
| Subscriber base -net                                                          |   |                   | 562,743     |     |   | 964,787     |   |
| Trademarks                                                                    |   |                   | 16,667      |     |   | 16,667      |   |
| Refundable deposits                                                           |   |                   | 66,827      |     |   | 65,624      |   |
| Debt issuance costs - net                                                     |   |                   | 189,638     |     |   | 10,065      |   |
|                                                                          |   |                        |             |     |        |             |   |
| Total other assets                                                            |   |                   | 2,477,013   |     |   | 2,795,916   |   |
|                                                                          |   |                        |             |     |        |             |   |
|                                                                          |   |                   |        |     |   |        |   |
| TOTAL ASSETS                                                                  |   | $                      | 6,173,514   |     | $      | 8,154,102   |   |
|                                                                          |   |                        |             |     |        |             |   |
|                                                                          |   |                   |        |     |   |        |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                      |   |                   |        |     |   |        |   |
|                                                                          |   |                   |        |     |   |        |   |
| CURRENT LIABILITIES:                                                          |   |                   |        |     |   |        |   |
| Accounts payable and accrued expenses                                         |   | $                      | 2,522,884   |     | $      | 2,389,356   |   |
| Accounts payable and accrued expenses - related party                         |   |                   | 43,139      |     |   | —     |   |
| Cash overdraft                                                                |   |                   | 120,553     |     |   | 298,516     |   |
| Revolving line of credit                                                      |   |                   | 100,000     |     |   | 100,000     |   |
| Term loan payable - related party                                             |   |                   | 4,500,000   |     |   | 3,000,000   |   |
| Current portion of notes payable - related party                              |   |                   | 567,011     |     |   | —     |   |
| Current portion of notes payable                                              |   |                   | 648,610     |     |   | 149,685     |   |
| Current portion of deferred rent liability                                    |   |                   | 58,945      |     |   | 57,007      |   |
| Current portion of capital lease obligations                                  |   |                   | 596,411     |     |   | 742,562     |   |
| Deferred revenue                                                              |   |                   | 310,689     |     |   | 391,193     |   |
|                                                                          |   |                        |             |     |        |             |   |
| Total current liabilities                                                     |   |                   | 9,468,242   |     |   | 7,128,319   |   |
|                                                                          |   |                        |             |     |        |             |   |
|                                                                          |   |                   |        |     |   |        |   |
| LONG-TERM LIABILITIES:                                                        |   |                   |        |     |   |        |   |
| Deferred rent liability, less current maturities                              |   |                   | 141,463     |     |   | 200,320     |   |
| Notes payable, less current maturities                                        |   |                   | 36,867      |     |   | 68,525      |   |
| Capital lease obligations, less current maturities                            |   |                   | 854,390     |     |   | 667,639     |   |
|                                                                          |   |                        |             |     |        |             |   |
| Total long term liabilities                                                   |   |                   | 1,032,720   |     |   | 936,484     |   |
|                                                                          |   |                        |             |     |        |             |   |
|                                                                          |   |                   |        |     |   |        |   |
| COMMITMENTS AND CONTINGENCIES                                                 |   |                   |        |     |   |        |   |
|                                                                          |   |                   |        |     |   |        |   |
| STOCKHOLDERS’ EQUITY (DEFICIT):                                         |   |                   |        |     |   |        |   |
| Series A preferred stock, $0.001 par value; 5,000,000 shares authorized;      |   |                   |        |     |   |        |   |
| 0 shares issued and outstanding at December 31, 2007 and at December 31, 2008 |   |                   | —     |     |   | —     |   |
| Common stock, $0.001 par value; 95,000,000 shares authorized;                 |   |                   |        |     |   |        |   |
| 8,249,106 shares issued and outstanding at December 31, 2007;                 |   |                   | 8,771       |     |   | 8,249       |   |
| 8,771,350 shares issued and outstanding at December 31, 2008;                 |   |                   |        |     |   |        |   |
| Common stock payable for exercised options                                    |   |                   | 14,372      |     |   | —     |   |
| Additional paid-in capital                                                    |   |                   | 17,358,431  |     |   | 13,739,714  |   |
| Accumulated deficit                                                           |   |                   | (21,709,022 | )        |   | (13,658,664 | )      |
|                                                                          |   |                        |             |     |        |             |   |
| Total stockholders’ equity (deficit)                                    |   |                   | (4,327,448  | )        |   | 89,299      |   |
|                                                                          |   |                        |             |     |        |             |   |
|                                                                          |   |                   |        |     |   |        |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                    |   | $                      | 6,173,514   |     | $      | 8,154,102   |   |
|                                                                          |   |                        |             |     |        |             |   |

See notes to consolidated financial statements.

F-4

----

|                                                        |
|-------------------------------------------------------------|
| **KEYON COMMUNICATIONS HOLDINGS INC. AND RELATED ENTITIES** |
|                                                        |
| **CONSOLIDATED STATEMENTS OF OPERATIONS**                   |
|                                                             |

|                                                               |   |                                |       |     |   |       |   |
|--------------------------------------------------------------------|--------|-------------------------------------|------------|----------|--------|------------|--------|
|                                                               |   | **For the Year Ended December 31,** |       |
|                                                               |   | **2008**                            |       | **2007** |   |
| REVENUES:                                                          |   |                                |       |     |   |       |   |
| Service and installation revenue                                   |   | $                                   | 7,646,536  |     | $      | 7,060,343  |   |
| Support and other revenue                                          |   |                                | 147,204    |     |   | 125,090    |   |
|                                                               |   |                                     |            |     |        |            |   |
|                                                               |   |                                |       |     |   |       |   |
| Total revenues                                                     |   |                                | 7,793,740  |     |   | 7,185,433  |   |
|                                                               |   |                                     |            |     |        |            |   |
|                                                               |   |                                |       |     |   |       |   |
| OPERATING COSTS AND EXPENSES:                                      |   |                                |       |     |   |       |   |
| Payroll, bonuses and taxes                                         |   |                                | 6,937,932  |     |   | 5,109,503  |   |
| Depreciation and amortization                                      |   |                                | 2,744,705  |     |   | 2,572,906  |   |
| Network operating costs                                            |   |                                | 2,751,534  |     |   | 2,523,601  |   |
| Other general and administrative expense                           |   |                                | 1,258,826  |     |   | 1,749,643  |   |
| Installation expense                                               |   |                                | 419,277    |     |   | 380,944    |   |
| Professional fees                                                  |   |                                | 393,432    |     |   | 1,257,569  |   |
| Marketing and advertising                                          |   |                                | 320,812    |     |   | 558,922    |   |
| Goodwill asset impairment                                          |   |                                | 97,635     |     |   | —    |   |
| Cost of DISH inventory                                             |   |                                | 32,541     |     |   | —    |   |
|                                                               |   |                                     |            |     |        |            |   |
|                                                               |   |                                |       |     |   |       |   |
| Total operating costs and expenses                                 |   |                                | 14,956,694 |     |   | 14,153,088 |   |
|                                                               |   |                                     |            |     |        |            |   |
|                                                               |   |                                |       |     |   |       |   |
| LOSS FROM OPERATIONS                                               |   |                                | (7,162,954 | )        |   | (6,967,655 | )      |
|                                                               |   |                                |       |     |   |       |   |
| OTHER INCOME (EXPENSE):                                            |   |                                |       |     |   |       |   |
| Interest income                                                    |   |                                | 686        |     |   | 60,611     |   |
| Interest expense                                                   |   |                                | (898,872   | )        |   | (703,709   | )      |
| Gain on disposal of asset                                          |   |                                | 10,782     |     |   | —    |   |
|                                                               |   |                                     |            |     |        |            |   |
| Total other income (expense)                                       |   |                                | (887,404   | )        |   | (643,098   | )      |
|                                                               |   |                                     |            |     |        |            |   |
|                                                               |   |                                |       |     |   |       |   |
| PROVISION FOR INCOME TAXES                                         |   |                                | —    |     |   | —    |   |
|                                                               |   |                                     |            |     |        |            |   |
|                                                               |   |                                |       |     |   |       |   |
| NET LOSS                                                           |   | $                                   | (8,050,358 | )        | $      | (7,610,753 | )      |
|                                                               |   |                                     |            |     |        |            |   |
|                                                               |   |                                |       |     |   |       |   |
| Net loss per common share—basic and diluted                  |   | $                                   | (0.96      | )        | $      | (1.18      | )      |
|                                                               |   |                                     |            |     |        |            |   |
|                                                               |   |                                |       |     |   |       |   |
| Weighted average common shares outstanding—basic and diluted |   |                                | 8,392,016  |     |   | 6,452,646  |   |
|                                                               |   |                                     |            |     |        |            |   |

See notes to consolidated financial statements

F-5

----

|                                                               |
|--------------------------------------------------------------------|
| **KEYON COMMUNICATIONS HOLDINGS INC. AND RELATED ENTITIES**        |
|                                                               |
| **CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)** |
| **FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007**                 |
|                                                                    |

|                                                                          |   |             |   |                                               |    |                                        |   |                                       |   |                                                                                 |    |   |   |        |   |   |       |   |
|-------------------------------------------------------------------------------|--------|------------------|--------|----------------------------------------------------|---------|---------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------------------------------------------------|---------|--------|--------|-------------|--------|--------|------------|--------|
|                                                                          |   | **Common Stock** |   | **Additional Paid-                    In Capital** |    | **Common Stock                    Payable** |   | **Accumulated                    Deficit** |   | **Total                    Stockholders’                    Equity (Deficit)** |    |
|                                                                          |   |                  |   |                                               |    |                                        |   |
|                                                                          |   | **Shares**       |   | **Amount**                                         |    |                                        |   |                                       |   |
|                                                                          |   |                  |   |                                                    |    |                                             |   |                                            |   |                                                                                      |    |        |   |
| BALANCE, January 1, 2007 (see Note 1)                                         |   | 4,712,308        |   | $                                                  | 4,712   |                                        | $      | 6,446,036                                  |   | $                                                                                    | — |   | $      | (6,047,911  | )      | $      | 402,837    |   |
|                                                                          |   |             |   |                                               |    |                                        |   |                                       |   |                                                                                 |    |   |   |        |   |   |       |   |
| Common Stock Issued for Cash, January 5, 2007                                 |   | 422,617          |   |                                               | 423     |                                        |   | 1,607,627                                  |   |                                                                                 |    |   |   | —     |   |   | 1,608,050  |   |
| Common Stock Exchanged for Professional Services, March 31, 2007              |   | 6,861            |   |                                               | 7       |                                        |   | 26,098                                     |   |                                                                                 |    |   |   | —     |   |   | 26,105     |   |
| Common Stock Issued for Mandatorily Converted Notes Payable, January 31, 2007 |   | 306,566          |   |                                               | 307     |                                        |   | 1,166,253                                  |   |                                                                                 |    |   |   | —     |   |   | 1,166,560  |   |
| Warrants Granted on Mandatorily Converted Notes Payable                       |   | —          |   |                                               | — |                                        |   | 54,139                                     |   |                                                                                 |    |   |   | —     |   |   | 54,139     |   |
| Warrants Granted for Debt Issuance Costs, March 31, 2007                      |   | —          |   |                                               | — |                                        |   | 4,586                                      |   |                                                                                 |    |   |   | —     |   |   | 4,586      |   |
| Stock Based Compensation, March 31, 2007                                      |   | —          |   |                                               | — |                                        |   | 4,585                                      |   |                                                                                 |    |   |   | —     |   |   | 4,585      |   |
|                                                                          |   |             |   |                                               |    |                                        |   |                                       |   |                                                                                 |    |   |   |        |   |   |       |   |
| Warrants Granted for Debt Issuance Costs, June 30, 2007                       |   | —          |   |                                               | — |                                        |   | 34,584                                     |   |                                                                                 |    |   |   | —     |   |   | 34,584     |   |
| Stock Based Compensation, June 30, 2007                                       |   | —          |   |                                               | — |                                        |   | (3,994                                     | )      |                                                                                 |    |   |   | —     |   |   | (3,994     | )      |
| Exercise of $.05 Warrants, August 1, 2007                                     |   | 192,906          |   |                                               | 193     |                                        |   | 9,509                                      |   |                                                                                 |    |   |   | —     |   |   | 9,702      |   |
| Exercise of $.0007 Warrants, August 1, 2007                                   |   | 92,055           |   |                                               | 92      |                                        |   | (36                                        | )      |                                                                                 |    |   |   | —     |   |   | 56         |   |
| Grant of Guaranty Warrants, July, 2007                                        |   |             |   |                                               |    |                                        |   | 901,566                                    |   |                                                                                 |    |   |   | —     |   |   | 901,566    |   |
| Exercise of Guaranty Warrants, August, 2007                                   |   | 225,393          |   |                                               | 225     |                                        |   | (225                                       | )      |                                                                                 |    |   |   | —     |   |   | —    |   |
| Stock Option Exercised, July, 2007                                            |   | 816              |   |                                               | 1       |                                        |   | —                                    |   |                                                                                 |    |   |   | —     |   |   | 1          |   |
| Grant of $.0007 Stock Options, July, 2007                                     |   | —          |   |                                               | — |                                        |   | 181,073                                    |   |                                                                                 |    |   |   | —     |   |   | 181,073    |   |
| Conversion of $.0007 Employee Options to Restricted Stock, August, 2007       |   | 640,496          |   |                                               | 640     |                                        |   | (640                                       | )      |                                                                                 |    |   |   | —     |   |   | —    |   |
| Common Stock Issued for Professional Services, August 9, 2007                 |   | 50,000           |   |                                               | 50      |                                        |   | 199,950                                    |   |                                                                                 |    |   |   | —     |   |   | 200,000    |   |
| Common Stock Issued for Cash, August 9, 2007                                  |   | 551,750          |   |                                               | 552     |                                        |   | 2,087,948                                  |   |                                                                                 |    |   |   | —     |   |   | 2,088,500  |   |
| Grant Enterprise Merger Shares                                                |   | 900,001          |   |                                               | 900     |                                        |   | (900                                       | )      |                                                                                 |    |   |   | —     |   |   | —    |   |
| Stock Based Compensation, September 30, 2007                                  |   | —          |   |                                               | — |                                        |   | 256,644                                    |   |                                                                                 |    |   |   | —     |   |   | 256,644    |   |
| Warrant Granted for Debt Issuance Costs, September 30, 2007                   |   | —          |   |                                               | — |                                        |   | 10,606                                     |   |                                                                                 |    |   |   | —     |   |   | 10,606     |   |
| Series A Warrants Exercised, December, 2007                                   |   | 147,336          |   |                                               | 147     |                                        |   | 487,303                                    |   |                                                                                 |    |   |   | —     |   |   | 487,450    |   |
| Stock Based Compensation, December 31, 2007                                   |   |             |   |                                               |    |                                        |   | 204,127                                    |   |                                                                                 |    |   |   | —     |   |   | 204,127    |   |
|                                                                          |   |             |   |                                               |    |                                        |   |                                       |   |                                                                                 |    |   |   |        |   |   |       |   |
| Director Stock Based Compensation, December 31, 2007                          |   | —          |   |                                               | — |                                        |   | 62,875                                     |   |                                                                                 |    |   |   | —     |   |   | 62,875     |   |
| Net loss for the year ended December 31, 2007                                 |   | —          |   |                                               | — |                                        |   | —                                    |   |                                                                                 | — |   |   | (7,610,753  | )      |   | (7,610,753 | )      |
|                                                                          |   |                  |        |                                                    |         |                                        |        |                                            |   |                                                                                      |         |   |        |             |   |        |            |   |
|                                                                          |   |             |   |                                               |    |                                        |   |                                       |   |                                                                                 |    |   |   |        |   |   |       |   |
| BALANCE, January 1, 2008                                                      |   | 8,249,106        |   |                                               | 8,249   |                                        |   | 13,739,714                                 |   |                                                                                 | — |   |   | (13,658,664 | )      |   | 89,299     |   |
|                                                                          |   |             |   |                                               |    |                                        |   |                                       |   |                                                                                 |    |   |   |        |   |   |       |   |
| Stock Based Compensation, March 31, 2008                                      |   | —          |   |                                               | — |                                        |   | 415,778                                    |   |                                                                                 |    |   |   | —     |   |   | 415,778    |   |
| Director Stock Based Compensation, March 31, 2008                             |   | —          |   |                                               | — |                                        |   | 62,875                                     |   |                                                                                 |    |   |   | —     |   |   | 62,875     |   |
|                                                                          |   |             |   |                                               |    |                                        |   |                                       |   |                                                                                 |    |   |   |        |   |   |       |   |
| Restricted Stock Based Compensation, March 31, 2008                           |   | —          |   |                                               | — |                                        |   | 37,500                                     |   |                                                                                 |    |   |   | —     |   |   | 37,500     |   |
| Guaranty Warrant Expense, March 31, 2008                                      |   | —          |   |                                               | — |                                        |   | 606,233                                    |   |                                                                                 |    |   |   | —     |   |   | 606,233    |   |
| Common Stock Exchanged for Professional Services, June, 2008                  |   | 2,036            |   |                                               | 2       |                                        |   | 11,998                                     |   |                                                                                 |    |   |   | —     |   |   | 12,000     |   |
| Stock Based Compensation, June 30, 2008                                       |   | —          |   |                                               | — |                                        |   | 242,221                                    |   |                                                                                 |    |   |   | —     |   |   | 242,221    |   |
| Director Stock Based Compensation, June 30, 2008                              |   | —          |   |                                               | — |                                        |   | 62,875                                     |   |                                                                                 |    |   |   | —     |   |   | 62,875     |   |
| Restricted Stock Based Compensation, June 30, 2008                            |   | —          |   |                                               | — |                                        |   | 37,500                                     |   |                                                                                 |    |   |   | —     |   |   | 37,500     |   |
| Guaranty Warrant Expense, June 30, 2008                                       |   | —          |   |                                               | — |                                        |   | 1,095,849                                  |   |                                                                                 |    |   |   | —     |   |   | 1,095,849  |   |
| Common Stock Exchanged for Professional Services, July 11, 2008               |   | 11,620           |   |                                               | 12      |                                        |   | 24,401                                     |   |                                                                                 |    |   |   | —     |   |   | 24,413     |   |
| Guaranty Warrant Expense, July 31, 2008                                       |   | —          |   |                                               | — |                                        |   | 340,417                                    |   |                                                                                 |    |   |   | —     |   |   | 340,417    |   |
| Stock Based Compensation, September 30, 2008                                  |   | —          |   |                                               | — |                                        |   | 96,503                                     |   |                                                                                 |    |   |   | —     |   |   | 96,503     |   |
|                                                                          |   |             |   |                                               |    |                                        |   |                                       |   |                                                                                 |    |   |   |        |   |   |       |   |
| Director Stock Based Compensation, September 30, 2008                         |   | —          |   |                                               | — |                                        |   | 62,875                                     |   |                                                                                 |    |   |   | —     |   |   | 62,875     |   |
| Restricted Stock Based Compensation, September 30, 2008                       |   | —          |   |                                               | — |                                        |   | 37,500                                     |   |                                                                                 |    |   |   | —     |   |   | 37,500     |   |
| Common Stock Exchanged for Professional Services, September 5, 2008           |   | 18,750           |   |                                               | 19      |                                        |   | 14,981                                     |   |                                                                                 |    |   |   | —     |   |   | 15,000     |   |
| Common Stock Issued for Restricted Stock Options, September 8, 2008           |   | 20,000           |   |                                               | 20      |                                        |   | (20                                        | )      |                                                                                 |    |   |   | —     |   |   | —    |   |
| Common Stock Issued for Debt Issuance Costs, September 24, 2008               |   | 333,333          |   |                                               | 333     |                                        |   | 199,667                                    |   |                                                                                 |    |   |   | —     |   |   | 200,000    |   |
| Common Stock Issued for Professional Services, December 4, 2008               |   | 68,253           |   |                                               | 68      |                                        |   | 14,932                                     |   |                                                                                 |    |   |   |        |   |   | 15,000     |   |
| Common Stock Issued for Professional Services, December 4, 2008               |   | 68,252           |   |                                               | 68      |                                        |   | 14,932                                     |   |                                                                                 |    |   |   | —     |   |   | 15,000     |   |
| Stock Based Compensation, December 31, 2008                                   |   | —          |   |                                               | — |                                        |   | 139,325                                    |   |                                                                                 |    |   |   | —     |   |   | 139,325    |   |
|                                                                          |   |             |   |                                               |    |                                        |   |                                       |   |                                                                                 |    |   |   |        |   |   |       |   |
| Director Stock Based Compensation, December 31, 2008                          |   | —          |   |                                               | — |                                        |   | 62,875                                     |   |                                                                                 |    |   |   | —     |   |   | 62,875     |   |
| Restricted Stock Based Compensation, December 31, 2008                        |   | —          |   |                                               | — |                                        |   | 37,500                                     |   |                                                                                 |    |   |   | —     |   |   | 37,500     |   |
| Stock Options Payable, December 31, 2008                                      |   | —          |   |                                               | — |                                        |   |                                       |   |                                                                                 | 14,372  |   |   | —     |   |   | 14,372     |   |
| Net loss for the year ended December 31, 2008                                 |   | —          |   |                                               | — |                                        |   | —                                    |   |                                                                                 | — |   |   | (8,050,358  | )      |   | (8,050,358 | )      |
|                                                                          |   |                  |   |                                                    |         |                                        |        |                                            |   |                                                                                      |         |   |        |             |   |        |            |   |
|                                                                          |   |             |   |                                               |    |                                        |   |                                       |   |                                                                                 |    |   |   |        |   |   |       |   |
| BALANCE, December 31, 2008                                                    |   | 8,771,350        |   | $                                                  | 8,771   |                                        | $      | 17,358,431                                 |   | $                                                                                    | 14,372  |   | $      | (21,709,022 | )      | $      | (4,327,448 | )      |
|                                                                          |   |                  |   |                                                    |         |                                        |        |                                            |   |                                                                                      |         |   |        |             |   |        |            |   |

See notes to consolidated financial statements.

F-6

----

|                                                        |
|-------------------------------------------------------------|
| **KEYON COMMUNICATIONS HOLDINGS INC. AND RELATED ENTITIES** |
|                                                        |
| **CONSOLIDATED STATEMENTS OF CASH FLOWS**                   |
| **FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007**          |
|                                                             |

|                                                                 |   |     |       |     |   |       |   |
|----------------------------------------------------------------------|--------|----------|------------|----------|--------|------------|--------|
|                                                                 |   | **2008** |       | **2007** |   |
|                                                                 |   |     |       |     |   |
| **CASH FLOWS FROM OPERATIONS:**                                      |   |     |       |     |   |       |   |
| Net loss                                                             |   | $        | (8,050,358 | )        | $      | (7,610,753 | )      |
| Adjustments to reconcile net loss to net cash flows from operations: |   |     |       |     |   |       |   |
| Depreciation expense                                                 |   |     | 2,342,661  |     |   | 2,259,166  |   |
| Goodwill asset impairment                                            |   |     | 97,635     |     |   | —    |   |
| Gain on disposal of equipment                                        |   |     | (10,782    | )        |   | —    |   |
| Amortization expense on subscriber base                              |   |     | 402,044    |     |   | 313,740    |   |
| Stock based compensation expense                                     |   |     | 3,337,826  |     |   | 1,606,893  |   |
| Warrant interest expense                                             |   |     | 71,264     |     |   | 133,847    |   |
| Professional services in exchange for stock                          |   |     | 81,413     |     |   | 226,105    |   |
|                                                                 |   |     |       |     |   |       |   |
| Change in assets and liabilities, net of effect of acquisitions:     |   |     |       |     |   |       |   |
| Accounts receivable                                                  |   |     | (35,494    | )        |   | 25,210     |   |
| Inventory                                                            |   |     | 128,176    |     |   | 8,056      |   |
| Prepaid expenses and other current assets                            |   |     | 1,061      |     |   | 48,699     |   |
| Refundable deposits                                                  |   |     | (1,203     | )        |   | (5         | )      |
| Other assets                                                         |   |     | (50,837    | )        |   | 66,692     |   |
| Accounts payable and accrued expenses                                |   |     | 133,527    |     |   | 1,672,664  |   |
| Accounts payable and accrued expenses - related party                |   |     | 43,139     |     |   | —    |   |
| Proceeds from cash overdraft                                         |        |          | —    |          |        | 234,656    |        |
| Payment on cash overdraft                                            |        |          | (177,963   | )        |        | —    |        |
| Deferred rent liability                                              |   |     | (56,919    | )        |   | (7,673     | )      |
| Deferred revenue                                                     |   |     | (80,504    | )        |   | (98,492    | )      |
|                                                                 |   |          |            |     |        |            |   |
| **Net cash flows from operations**                                   |   |     | (1,825,314 | )        |   | (1,121,196 | )      |
|                                                                 |   |     |       |     |   |       |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                            |   |     |       |     |   |       |   |
|                                                                 |        |          |            |          |        |            |        |
| Capital expenditures for property and equipment                      |   |     | (165,348   | )        |   | (819,597   | )      |
| Proceeds on disposal of equipment                                    |   |     | 4,367      |     |   | —    |   |
| Acquisition of SpeedNet and Microlnk                                 |   |     | —    |     |   | (4,118,236 | )      |
|                                                                 |   |          |            |     |        |            |   |
| **Net cash flows from investing activities**                         |   |     | (160,981   | )        |   | (4,937,833 | )      |
|                                                                 |   |     |       |     |   |       |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                            |   |     |       |     |   |       |   |
| Payments on loans payable - related party                            |   |     | —    |     |   | (160,000   | )      |
| Proceeds from term note payable - related party                      |   |     | 1,500,000  |     |   | 3,000,000  |   |
| Payments on notes payable                                            |   |     | (64,026    | )        |   | (27,695    | )      |
| Proceeds from notes payable                                          |   |     | 531,293    |     |   | 81,993     |   |
| Payments on capital lease obligations                                |   |     | (851,322   | )        |   | (691,702   | )      |
| Proceeds from notes payable - related party                          |   |     | 567,011    |     |   | —    |   |
| Payments on notes payable - related party                            |   |     | —    |     |   | (25,000    | )      |
| Proceeds from stock issuance                                         |   |     | 14,372     |     |   | 4,193,743  |   |
|                                                                 |   |          |            |     |        |            |   |
| **Net cash flows from financing activities**                         |   |     | 1,697,328  |     |   | 6,371,338  |   |
|                                                                 |   |          |            |     |        |            |   |
| **NET INCREASE/ (DECREASE) IN CASH**                                 |   |     | (288,967   | )        |   | 312,309    |   |
|                                                                 |   |     |       |     |   |       |   |
| **CASH - Beginning of period**                                       |   |     | 316,999    |     |   | 4,690      |   |
|                                                                 |   |          |            |     |        |            |   |
| **CASH - End of period**                                             |   | $        | 28,032     |     | $      | 316,999    |   |
|                                                                 |   |          |            |     |        |            |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:**               |   |     |       |     |   |       |   |
|                                                                 |   |     |       |     |   |       |   |
| Acquistion - SpeedNet:                                               |   |     |       |     |   |       |   |
| Accounts receivable                                                  |   |     | —    |     |   | 73,197     |   |
| Prepaid assets                                                       |   |     | —    |     |   | 109,913    |   |
| Goodwill                                                             |   |     | —    |     |   | 1,282,052  |   |
| Subscriber Base                                                      |   |     | —    |     |   | 916,301    |   |
| Trademark                                                            |   |     | —    |     |   | 16,667     |   |
| Property and equipment                                               |   |     | —    |     |   | 1,618,459  |   |
| Inventory                                                            |   |     | —    |     |   | 308,666    |   |
| Accounts payable and accrued expenses                                |   |     | —    |     |   | (180,846   | )      |
| Deferred Revenue                                                     |   |     | —    |     |   | (431,912   | )      |
| Capital lease obligations                                            |   |     | —    |     |   | (254,242   | )      |
|                                                                 |   |          |            |     |        |            |   |
|                                                                 |   | $        | —    |     | $      | 3,458,255  |   |
|                                                                 |   |          |            |     |        |            |   |
|                                                                 |   |     |       |     |   |       |   |
| Acquistion - Microlnk:                                               |   |     |       |     |   |       |   |
| Accounts receivable                                                  |   |     | —    |     |   | 28,770     |   |
| Prepaid assets                                                       |   |     | —    |     |   | 6,010      |   |
| Goodwill                                                             |   |     | —    |     |   | 108,164    |   |
| Subscriber Base                                                      |   |     | —    |     |   | 226,264    |   |
| Property and equipment                                               |   |     | —    |     |   | 340,573    |   |
| Accounts payable and accrued expenses                                |   |     | —    |     |   | (23,222    | )      |
| Deferred Revenue                                                     |   |     | —    |     |   | (26,577    | )      |
|                                                                 |   |          |            |     |        |            |   |
|                                                                 |   | $        | —    |     | $      | 659,981    |   |
|                                                                 |   |          |            |     |        |            |   |
|                                                                 |   |     |       |     |   |       |   |
|                                                                 |   |          |            |     |        |            |   |
| Stock issued to shareholders for notes payable                       |   | $        | —    |     | $      | 1,065,999  |   |
|                                                                 |   |          |            |     |        |            |   |
| Stock issued to shareholders for notes payable interest              |   | $        | —    |     | $      | 100,561    |   |
|                                                                 |   |          |            |     |        |            |   |
| Cash received from shareholders for option exercise                  |   | $        | 14,372     |     | $      | —    |   |
|                                                                 |   |          |            |     |        |            |   |
| Common stock exchange for professional services                      |   | $        | 81,413     |     | $      | 226,105    |   |
|                                                                 |   |          |            |     |        |            |   |
| Warrants for debt issuance costs                                     |   | $        | 200,000    |     | $      | 45,782     |   |
|                                                                 |   |          |            |     |        |            |   |
| Warrant interest expense                                             |   | $        | 71,264     |     | $      | 133,847    |   |
|                                                                 |   |          |            |     |        |            |   |
| Stock based compensation                                             |   | $        | 3,337,826  |     | $      | 1,606,893  |   |
|                                                                 |   |          |            |     |        |            |   |
| Deferred rent liability for tenant improvement                       |   | $        | —    |     | $      | 265,000    |   |
|                                                                 |   |          |            |     |        |            |   |
| Capital lease obligations for property and equipment                 |   | $        | 898,811    |     | $      | 859,348    |   |
|                                                                 |   |          |            |     |        |            |   |
| **Cash payments for:**                                               |   |     |       |     |   |       |   |
| Interest                                                             |   | $        | 873,118    |     | $      | 631,824    |   |
|                                                                 |   |          |            |     |        |            |   |
| Tax                                                                  |   | $        | —    |     | $      | —    |   |
|                                                                 |   |          |            |     |        |            |   |

See notes to consolidated financial statements.

F-7

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**Note 1 – Organization and Nature of Business**

          On August 9, 2007, KeyOn Communications, Inc. became a publicly-traded company by virtue of a merger with a publicly-traded company, Grant Enterprises, Inc. (“Grant”), a holding company with no operating business (the “Merger”). In connection with the merger, 900,001 shares of Grant remained outstanding and all other outstanding shares of Grant were cancelled. Also, in        connection with the merger, Grant issued 6,650,069 shares of its common stock for all outstanding common stock of KeyOn. Upon closing of the Merger transaction, a wholly owned subsidiary of Grant merged with and into KeyOn, and KeyOn, as the surviving corporation, became a wholly-owned subsidiary of Grant. All pre-merger assets and liabilities of Grant were split-off from Grant, leaving KeyOn’s business as the surviving operations of Grant. As a result of the transaction, the        former owners of KeyOn became the controlling stockholders of Grant and Grant changed its name to KeyOn Communications Holdings, Inc. Accordingly, the merger of KeyOn and Grant is a reverse merger. Effective on August 9, 2007, and for all reporting periods thereafter, the Company’s operating activities, including any prior comparative period, will include only those of KeyOn Communications Holdings, Inc.

          KeyOn Communications, Inc. (“KeyOn” or “the Company”), was incorporated on December 16, 2004, under the laws of the State of Nevada. The Company provides wireless broadband, satellite video and voice-over-IP (VoIP) services primarily to small and rural markets in the Western and Midwestern United States. KeyOn’s markets are located in eleven (11) Western and        Midwestern states: Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Nebraska, Nevada, Ohio, South Dakota, and Texas. The Company has eight wholly-owned organizations (in combination referred to as the “related entities”): KeyOn Communications, LLC; KeyOn SIRIS, LLC; KeyOn Grand Junction, LLC; KeyOn Idaho Falls, LLC; KeyOn Pahrump, LLC; KeyOn Pocatello, LLC and KeyOn SpeedNet LLC and KeyOn Spectrum Holdings, LLC.

          KeyOn Communications, LLC (KeyOn LLC), a wholly-owned limited liability operating entity of the Company, was organized on February 26, 2002 under the laws of the State of Nevada, to serve a market located in Las Vegas, Nevada and its surrounding areas with wireless broadband services. It will continue its operations until February 26, 2502 or until dissolved, if sooner.

          KeyOn Pahrump, LLC (Pahrump), a wholly-owned limited liability operating entity of the Company, was organized on September 26, 2003 under the laws of the State of Nevada, to serve a market located in Pahrump, Nevada and its surrounding areas with a wireless broadband service as previously described. It will continue its operations until September 26, 2503 or until dissolved, if        sooner.

          KeyOn SIRIS, LLC (SIRIS), a wholly-owned limited liability operating entity of the Company, was organized on June 16, 2005 under the laws of the State of Nevada, to serve markets KeyOn acquired in June 2005 located in southern Iowa with a wireless broadband service as previously described. It will continue its operations until June 16, 2505 or until

F-8

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

dissolved, if sooner.

          KeyOn Grand Junction, LLC (Grand Junction), a wholly-owned limited liability operating entity of the Company, was organized on May 31, 2005 under the laws of the State of Nevada, to serve a market located in Grand Junction, Colorado and its surrounding areas with a wireless broadband service as previously described. It will continue its operations until May 31, 2505 or until dissolved, if        sooner.

          KeyOn Idaho Falls, LLC (Idaho Falls), a wholly-owned limited liability operating entity of the Company, was organized on May 31, 2005 under the laws of the State of Nevada, to serve a market located in Idaho Falls, Idaho and its surrounding areas with a wireless broadband service as previously described. It will continue its operations until May 31, 2505 or until dissolved, if        sooner.

          KeyOn Pocatello, LLC (Pocatello), a wholly-owned limited liability operating entity of the Company, was organized on May 31, 2005 under the laws of the State of Nevada to serve a market located in Pocatello, Idaho and its surrounding areas with a wireless broadband service as previously described. It will continue its operations until May 31, 2505 or until dissolved, if sooner.

          KeyOn SpeedNet, LLC (SpeedNet LLC), a wholly-owned limited liability operating entity of the Company, was organized on June 27, 2006 under the laws of the State of Nevada. It served as an acquisition subsidiary in the acquisition of SpeedNet. SpeedNet LLC houses the previous operations of SpeedNet, including wireless broadband markets operating the states of Idaho, Illinois, Indiana, Iowa,        Kansas, Nebraska, Ohio, South Dakota, and Texas. It will continue its operations until June 27, 2506 or until dissolved, if sooner.

          KeyOn Spectrum Holdings, LLC (Spectrum Holdings), a wholly-owned limited liability operating entity of the Company, was organized on November 26, 2007 under the laws of the State of Nevada. It has no current operations and serves as a subsidiary to pursue potential spectrum acquisitions. It will continue its operations until November 26, 2507 or until dissolved, if sooner.

**Note 2 – Summary of Significant Accounting Policies**

          **Estimates**

          Management uses estimates and assumptions in preparing these financial statements in accordance with U.S. generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used, and such        variances could be significant.

F-9

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          **Revenue Recognition**

          The Company prepares its financial statements on the accrual method of accounting. Under this basis, income is recognized when earned, and expenses are generally recognized when incurred. The Company charges a recurring subscription fee for providing its various Internet access services to its subscribers and recognizes revenues when they are earned, which generally occurs as the service is        provided. Subscriptions to the services are in the form of annual or two year contracts and are generally billed monthly, quarterly, semiannually or annually in advance. Payments received in advance for subscriptions are deferred and recognized as the services are provided. Service initiation fees are recognized at time of installation. For the DISH retailer line of business, the Company recognizes revenues at the time of installation.

          **Cash and Cash Equivalents**

          The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. For financial statement purposes, investments in money market funds are considered a cash equivalent and are included in cash and cash equivalents.

          **Property and Equipment**

          Property and equipment are carried at cost. Depreciation has been calculated using the straight-line method over the estimated useful lives of the respective classes of assets or the life of the capital lease which range from 2 years to 7 years. An asset begins to be depreciated once that asset has been placed into service.

          The Company reviews property and equipment for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Recoverability of any asset “held-for-use” is determined by comparing the carrying amount of the asset to the undiscounted net cash flows expected to be generated from the use of the asset. If the        carrying amount is greater than the undiscounted net cash flows expected to be generated by the asset, the asset’s carrying amount is reduced to its fair value. An asset “held-for-sale” is reported at the lower of the carrying value amount or the fair value less the cost to sell.

          **Accounts Receivable**

          The billing policy of the Company and its related entities is to bill the majority of its subscribers through electronic transactions, such as credit or debit card, and electronic check. Accounts receivable arise from providing services to clients whose credit cards are expired or invalid, or who are not billed electronically. These accounts receivable are stated at their estimated realizable        amounts, net of an allowance of doubtful collections, based on a review of outstanding receivables, historical collection information, and existing economic

F-10

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

conditions. The allowance totaled $70,793 and $136,436 as of December 31, 2008 and 2007 respectively.

          **Inventory**

          With the purchase of SpeedNet Services, Inc., the Company began to maintain a consistent stock supply of customer premise equipment, installation supplies, and tower replacement parts. The value of this inventory was $158,019 and $291,268 as of December 31, 2008 and 2007, respectively. The Company also began to carry inventory in 2007 in support of its launch as a reseller of satellite video        service from DISH Network Corporation (“DISH”). The value of this inventory was $14,415 and $9,342 as of December 31, 2008 and 2007, respectively. The inventory is carried at the incurred cost value of the invoiced amount from the suppliers. Once the DISH installation is complete, the revenue is recognized and the cost of inventory is expensed to operating expense.

          **Acquisition Costs and Intangible Assets**

          Intangible assets with indefinite lives (e.g., trademarks) are not amortized and are tested annually for impairment of value. Impairment occurs when the fair value of the asset is less than its carrying amount. If impaired, the asset’s carrying amount is reduced to its fair value.

          Intangible assets with definite lives (e.g., customer lists and non-compete agreements) are amortized over their estimated useful lives and tested for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may be impaired. Amortization has been calculated using the straight-line method over the estimated useful lives of the intangible assets which range        from 3 years to 7 years. An asset begins to be amortized once that asset has been placed into service. Impairment occurs when the fair value of the asset is less than its carrying amount. If impaired, the asset is written down to its fair value.

          Acquisition costs, which may include certain intangible assets, are capitalized as incurred as part of the related investment. Once a potential acquisition is identified as no longer attainable, such costs are charged to expense.

          Intangible assets, including goodwill, are accounted for under the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Under SFAS 142, intangible assets, other than goodwill, are identified and segregated between amortizable and non-amortizable assets. Amortizable intangibles are amortized over their        estimated, contractual, or regulated useful lives. Goodwill and other non-amortizable assets are reviewed, at least annually, for impairment in the carrying value of the intangible asset. In addition, this review also includes the net carrying value of amortizable intangible assets. If impairment is deemed to have occurred, a loss for such impairment is recorded as part of current operations. We test our goodwill for impairment annually during our fourth fiscal quarter and in interim        periods if certain events occur indicating that the carrying value of goodwill may be

F-11

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

impaired. We review the value of our intangible assets in accordance with the applicable accounting literature for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. In the fourth quarter of fiscal 2008 we conducted an impairment test of our goodwill and intangible assets which resulted in a        $97,635 impairment charge to our Pocatello goodwill as discussed in Note 4. As of December 31, 2008, we had $1,641,138 of goodwill and $2,220,548 of net intangible assets remaining on our balance sheet, which we currently believe to be realizable based on the estimated fair value of these assets. As of December 31, 2007, we had $1,738,773 of goodwill and $2,720,227 of net intangible assets. Goodwill was not impaired during the year ended December 31, 2007.

          **Deferred Revenues**

          Payments received in advance for subscriptions are deferred and recognized as the services are provided. The amount of revenue that was deferred was $310,689 and $391,193 at December 31, 2008 and 2007, respectively.

           **Reclassifications**

          Certain reclassifications have been made to the 2007 financial statement amounts to conform to the 2008 financial presentation

          **Fair Value of Financial Instruments**

          The carrying amount of the financial instruments including cash and cash equivalents, receivables and payables (including accrued expenses and debt borrowings) are reasonable estimates of their fair value, as such financial instruments are short-term in nature, bear interest at current market rates, or are subject to frequent re-pricing.

          **Advertising and Marketing Costs**

          Advertising and marketing costs of $320,812 and $558,922, respectively, for the years ended December 31, 2008 and 2007 were expensed as incurred.

          **Income Taxes**

          The Company has adopted SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under SFAS 109, deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities        are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109 the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation is established, when necessary, to reduce deferred income tax assets to the amount that is more likely than not to be realized. The Company recorded a        full valuation loss for the net loss incurred for the year ended December 31, 2008 and 2007, respectively.

F-12

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          As single-member limited liability companies, KeyOn LLC, KeyOn Pahrump LLC, SIRIS, Grand Junction, Idaho Falls, Pocatello, SpeedNet LLC and Spectrum Holdings are not taxed as separate entities for federal income tax purposes. Rather, these organizations’ taxable items of income, deduction, loss, and credit are included with the federal income tax return of the Company. Accordingly, the        members separately account for their share of the organization’s income, deductions, losses and credits. Therefore, no separate provision for income tax expense or benefit has been recognized in the accompanying consolidated financial statements for these related entities, but was considered for KeyOn as part of its SFAS 109 reporting requirement.

          In July 2006, FASB issued Financial Accounting Standards Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a        company’s income tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 utilizes a two-step approach for evaluating tax positions. Step one, *Recognition*, occurs when a company concludes that a tax position is more likely than not to be sustained upon examination, Step two, *Measurement*, is based on the largest amount of benefit, which is more likely than not to        be realized on ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle to be recorded as an adjustment to the beginning balance of retained earnings; and, therefore, is effective for the Company in the first quarter of fiscal 2008. For the year ended December 31, 2008, there were no implications on the Company’s consolidated financial position, results of operations or cash        flows.

          **Stock-Based Compensation**

          Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123”). SFAS No. 123R supersedes APB No. 25, “Accounting for Stock Issued to        Employees”, and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based upon their fair values. Stock based compensation for the twelve months ended December 31, 2008 and 2007, was $3,337,826 and $1,606,893, respectively.

          We have estimated the fair value of our option awards granted after December 1, 2005, using the Black-Scholes option pricing model. Expected volatilities are based on the historical volatility of our valuation during prior financings. The expected term of options granted is 3 to 5 years and represents the period of time that options granted are expected to be outstanding. The risk-free rate for        periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

F-13

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          The table summarizes the value of outstanding options as of December 31, 2008 and as of December 31, 2007.

|                                                    |   |     |    |     |   |    |   |
|---------------------------------------------------------|--------|----------|---------|----------|--------|---------|--------|
|                                                    |   | **2008** |    | **2007** |   |
|                                                    |   |     |    |     |   |    |   |
| **Black-Scholes Option Valuation Assumptions**          |   |     |    |     |   |    |   |
| Average fair value of options granted during the period |   | $        | 1.32    |     | $      | 1.46    |   |
| Average Expected term (in years)                        |   |     | 5       |     |   | 5       |   |
| Average Expected volatility                             |   |     | 123.02  | %        |   | 162.32  | %      |
| Average Expected dividend yield                         |   |     | — |     |   | — |   |
| Average Risk free rate                                  |   |     | 2.81    | %        |   | 4.88    | %      |

**Consolidation Policy**

          The accompanying consolidated balance sheets and consolidated statements of operations, stockholders’ equity, and cash flows, referred to as “KeyOn Communications Holdings, Inc.,” includes the accounts of KeyOn Communications, Inc., KeyOn Communications, LLC, KeyOn Pahrump, LLC, KeyOn SIRIS, LLC, KeyOn Grand Junction, LLC, KeyOn Idaho Falls, LLC, KeyOn Pocatello, LLC, and        KeyOn SpeedNet LLC (as of February 1, 2007) all of which are under common ownership. Intercompany balances and transactions have been eliminated in consolidation.

**Going Concern**

          The accompanying consolidated financial statements are prepared assuming that the Company will continue as a going concern and contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. Certain factors, including current liabilities exceeding current assets and the presence of recurring losses and negative cash flow, among others, indicate the        Company may be unable to continue as a going concern for a reasonable period of time.

          Management has taken the following steps to strengthen the financial condition of the Company. Certain of these initiatives are described below:

*Operations*

          During 2008, the Company sought to become more efficient operationally, the results of which allowed KeyOn to reduce headcount and other related expenses. The Company materially reduced its headcount from March 31, 2008 to April 15, 2009. In addition, the Company modified work schedules across the organization and continued to narrow its marketing efforts in the second half of fiscal year 2008,        choosing to focus its efforts on its existing customer base to obtain new customer referrals. These initiatives resulted in fewer gross customer additions but reduced expenses in this area. In light of fewer gross additions, customer installation expenses and capital expenditures for customers premise equipment are reduced as well as the need to procure additional lease financing debt. The Company

F-14

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

increased its charges for new subscriber installations, resulting in a faster break-even point for new subscriber additions.

          The Company has an ongoing effort to reduce operating expenses and increase overall operating efficiencies. To the extent the rent for a tower significantly exceeds the revenues generated by customers being served, the Company has terminated those lease agreements resulting in decreased tower expenses. Additionally, the Company has combined networks so that it can purchase fewer circuits and        save on internet termination costs.

*Financial Restructuring*

          In addition to the operational changes, management has undertaken a variety of measures to restructure the Company’s current and long-term liabilities. In October 2008, we restructured a capital lease obligation with an existing lease financing company. By amending this material agreement, the Company was able to suspend certain monthly payment obligations through November 2008 and make        reduced payments over an extended 24 month maturity period. In March of 2009, the Company executed a second restructuring with another one of its existing lease financing companies. The effect of this restructuring also served to reduce the monthly payment obligations of the Company and extended the payments for an additional 24 months. Beginning in August and continuing through December 2008, the Company raised additional capital in the amount of $1,001,877 through the issuance of        subordinated secured notes. The note holders consisted of existing shareholders as well as members and affiliates of management. The Company’s $4.5 million senior secured Promissory Note held by Sun West Bank matured on February 8, 2009. However, on March 27, 2009, the Company and Sun West Bank amended the Promissory Note and extended its maturity until June 4, 2009. Finally, in March of 2009, the Company raised $300,000 of subordinated secured notes from existing shareholders,        the terms of which are still being negotiated between the holders and the Company’s independent members of the board of directors.

          In order to continue our acquisition and organic growth strategies, as well as to sustain our current capital needs, management projects that we will require funds from sources outside of our normal operations. To the extent we are unable to obtain the required capital from existing shareholders of the Company, management intends to either generate internal cash from further restructurings        already commenced in the first quarter of 2009 and raise additional outside capital from institutions or other third parties.

          **Recent Accounting Pronouncements**

          The following pronouncements have been issued by the Financial Accounting Standards Board (“FASB”):

          In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands

F-15

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of SFAS 157 will change current practice. The provisions of SFAS        157 are effective as of the beginning of the Company’s 2009 fiscal year. The Company is currently evaluating the impact of SFAS 157, but does not expect the adoption of SFAS 157 to have a material impact on its consolidated financial position, results of operations or cash flows. For the year ended December 31, 2008, there was no impact on the Company’s consolidated financial position, results of operations or cash flows due to SFAS 157.

          In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. For        the year ended December 31, 2008, there was no impact on the Company’s consolidated financial position, results of operations or cash flows due to SFAS 159.

          In June 2001, the FASB issued FAS 141, Business Combinations, which was established to (1) better reflect investments made in acquired companies, and (2) to provide additional information regarding acquired intangible assets. FAS 141 mandates that all assets acquired and liabilities assumed are valued at their fair value. FAS 141 was revised in December 2007, and is effective for business        combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This revision represents a major departure from the historical cost accounting that many companies use currently. The Company is currently evaluating FAS 141 to determine its impact on its future consolidated financial position, results of operations or cash flows.

          In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements”. This statement amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the de-consolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is equity in the        consolidated financial statements. SFAS No. 160 is effective for fiscal years and interim periods beginning after December 15, 2008. The adoption of SFAS 160 is not expected to have a material impact on the Company’s financial position, results of operation or cash flows.

          In December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110 regarding the use of a simplified method, as discussed in SAB No. 107 (SAB 107), in developing an estimate of expected term of plain vanilla share options in accordance with SFAS No. 123 (R), Share-Based Payment. In particular, the staff indicated in SAB 107 that it will accept a company’s election to use the        simplified method, regardless of whether the

F-16

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

company has sufficient information to make more refined estimates of expected term. At the time SAB 107 was issued, the staff believed that more detailed external information about employee exercise behavior (e.g., employee exercise patterns by industry and/or other categories of companies) would, over time, become readily available to companies. Therefore, the staff stated in SAB 107 that it would not expect a company to use the simplified method for        share option grants after December 31, 2007. The staff understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. The Company currently uses the simplified method for “plain vanilla” share options and warrants, and will assess the impact of SAB 110 for fiscal year 2009. It is        not believed that this will have an impact on the Company’s consolidated financial position, results of operations or cash flows.

          In March 2008, the Financial Accounting Standards Board, or FASB, issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. This standard requires companies to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for        under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company has not yet adopted the provisions of SFAS No. 161, but does not expect it to have a material impact on its        consolidated financial position, results of operations or cash flows.

          In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS No. 162 sets forth the level of authority to a given accounting pronouncement or document by category. Where there might be conflicting guidance between two categories, the more authoritative category will prevail. SFAS No.        162 will become effective 60 days after the SEC approves the PCAOB’s amendments to AU Section 411 of the AICPA Professional Standards. SFAS No. 162 has no effect on the Company’s financial position, statements of operations, or cash flows at this time.

          In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts-and interpretation of FASB Statement No. 60”. SFAS No. 163 clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claims liabilities. This        statement also requires expanded disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those years. SFAS No. 163 has no effect on the Company’s financial position, statements of operations, or cash flows at this time.

F-17

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**Note 3 – Equipment**

          Equipment at December 31, 2008 and at December 31, 2007, consisted of the following:

|                                |   |           |       |           |   |       |   |
|-------------------------------------|--------|----------------|------------|----------------|--------|------------|--------|
|                                |   | **12/31/2008** |       | **12/31/2007** |   |
|                                |   |           |       |           |   |
| Subscriber equipment                |   | $              | 6,051,100  |           | $      | 5,329,361  |   |
| Fixed wireless tower site equipment |   |           | 2,656,229  |           |   | 2,353,683  |   |
| Software and consulting costs       |   |           | 611,649    |           |   | 572,728    |   |
| Computer and office equipment       |   |           | 418,030    |           |   | 417,077    |   |
| Vehicles                            |   |           | 241,106    |           |   | 277,439    |   |
| Leasehold improvements              |   |           | 312,100    |           |   | 312,100    |   |
|                                |   |                |            |                |        |            |        |
|                                |   |           | 10,290,214 |           |   | 9,262,388  |   |
| Less: accumulated depreciation      |   |           | (6,997,969 | )              |   | (4,691,168 | )      |
|                                |   |                |            |                |        |            |        |
|                                |   |           |       |           |   |       |   |
| Fixed assets - net                  |   | $              | 3,292,245  |           | $      | 4,571,220  |   |
|                                |   |                |            |                |        |            |        |

          Depreciation for the company is recorded on a straight-line basis. Depreciation expense for the year ended December 31, 2008 and 2007 was $2,342,661 and $2,259,166 respectively.

**Note 4 – Intangible Assets**

          We completed the annual testing of goodwill for impairment as of December 31, 2008, the end of our fourth fiscal quarter, concluding that the goodwill for one of our business units was impaired. As a result, we determined the fair value of the goodwill for the Pocatello reporting unit was below its carrying value and needed to be adjusted to $250,922. Based on the results of our appraisal and        valuation activities of SpeedNet, the fair value was greater than its carrying value and no other action was deemed necessary related to SpeedNet. The carrying value of the Pocatello goodwill was $348,557, resulting in an impairment charge of $97,635.

          The following table summarizes the changes in goodwill related to the Pocatello reporting unit:

|                               |   |   |    |   |
|------------------------------------|--------|--------|---------|--------|
| Goodwill balance December 31, 2007 |   | $      | 348,557 |   |
| Impairment charge                  |   |   | (97,635 | )      |
|                               |   |        |         |   |
| Goodwill balance December 31,2008  |   | $      | 250,922 |   |
|                               |   |        |         |   |

          Intangible assets at December 31, 2008 and at December 31, 2007, consisted of the following:

F-18

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                           |   |           |      |           |   |      |   |
|--------------------------------|--------|----------------|-----------|----------------|--------|-----------|--------|
|                           |   | **12/31/2008** |      | **12/31/2007** |   |
|                           |   |           |      |           |   |
| Goodwill                       |   | $              | 1,641,138 |           | $      | 1,738,773 |   |
| Subscriber base                |   |           | 1,290,887 |           |   | 1,290,887 |   |
| Trademark                      |   |           | 16,667    |           |   | 16,667    |   |
|                           |   |                |           |           |        |           |   |
|                           |   |           | 2,948,692 |           |   | 3,046,327 |   |
| Less: accumulated amortization |   |           | (728,144  | )              |   | (326,100  | )      |
|                           |   |                |           |           |        |           |   |
|                           |   |           |      |           |   |      |   |
| Intangible assets - net        |   | $              | 2,220,548 |           | $      | 2,720,227 |   |
|                           |   |                |           |           |        |           |   |

          Amortization expense is recorded for the customer list asset on a straight-line basis. Amortization expense for the year ended December 31, 2008 and 2007 was $402,044 and $313,740, respectively.

          Estimated amortization expense for future fiscal years is as follows:

|       |   |   |    |   |
|------------|--------|--------|---------|--------|
| 2009       |   |   | 402,044 |   |
| 2010       |   |   | 109,493 |   |
| 2011       |   |   | 21,189  |   |
| 2012       |   |   | 21,189  |   |
| 2013       |   |   | 8,828   |   |
| Thereafter |   |   | — |   |
|       |   |        |         |   |
|       |   | $      | 562,743 |   |
|       |   |        |         |   |

**Note 5 – Line of Credit and Other Debt**

          The Company executed a loan agreement with Sun West Bank on February 8, 2008, totaling $4.5 million (the “Loan”). The Company used $3.0 million of the proceeds to refinance its existing debt loan of $3.0 million with Sun West Bank. The remaining $1.5 million was available but had been fully drawn to $4,500,000 as of December 31, 2008. Monthly interest payments were not current as of        December 31, 2008 but through discussions, Sun West Bank has allowed for an additional 60 days in order to cure the late interest payments. The Loan matured on August 8, 2008, and the Company extended the Loan for a fee of $11,500 at the Company’s option for an additional six months until February 8, 2009. The initial interest rate is 7.75% and will vary with the Sun West Bank’s index rate plus 2.5 percentage points over the index. The interest rate was 7.25% as of December        31, 2008. The Loan is guaranteed by three shareholders of the Company, one being an officer of the Company. The interest is payable monthly.

          The Company holds a line of credit loan for $100,000 with Sun West Bank. The line of credit agreement was entered into on December 18, 2006. The line is a variable rate revolving line of credit loan for $100,000 due upon demand. The interest rate is the base rate plus an added margin rate of 3%. The base rate for floating commercial loans is published by Sun West Bank and varies weekly. The        variable interest rate as of December 31, 2008 was

F-19

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.25%. The interest on the line of credit is paid monthly. The line of credit is guaranteed by a shareholder and officer of the Company.

          On August 27, 2008, the Company, through the independent members of its board, issued subordinated secured notes in the aggregate amount of $718,557 to certain of its present investors and certain of its senior management to fund working capital obligations which would also allow the Company time to seek longer term financing or to pursue other strategic options. An additional $283,320 was        issued from September through December 2008. The notes bear interest at 17% per annum (compounded monthly) and mature on the earlier to occur of January 29, 2009 or a change of control (which includes the merger), among other things. Three percent of the amount of the subordinated secured notes was retained by the investors in the form of a closing payment. At December 31, 2008, the following Company officers and directors and their affiliates held the principal amount of subordinated        secured notes as related parties: our Chairman, Jerome Snyder - $103,093; our Chief Executive Officer, Jonathan Snyder - $335,052; and, our Vice President of Corporate Development and General Counsel, Jason Lazar - $128,866.

F-20

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                                                                   |   |           |     |           |   |     |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|----------|----------------|--------|----------|--------|
| **Notes payable**                                                                                                                                                      |   | **12/31/2008** |     | **12/31/2007** |   |
|                                                                                                                                                                   |   |           |     |           |   |
| A series of 17.0% subordinated secured notes payable maturing from November 2008 or January 2009, dependent upon the status of certain negotiations                    |   | $              | 414,866  |           | $      | —  |   |
| One 5.0% notes payable matured from October 9, 2008, with interest payable at maturity.                                                                                |   |           | 20,000   |           |   | —  |   |
| Two unsecured, non-interest bearing notes payable to two separate entities maturing from June 2009 to November 2009 resulting from the conversion of accounts payable. |   |           | 61,223   |           |   | —  |   |
| Note and loan payable for professional services non-interest bearing                                                                                                   |   | $              | 121,737  |           | $      | 121,737  |   |
| 7.8% note payable to American National Bank, payable monthly for 48 months for the purchase of vans                                                                    |   |           | 50,845   |           |   | 69,959   |   |
| 9.1% note payable to GMAC, payable monthly for 60 months for the purchase of two trucks                                                                                |   |           | 16,806   |           |   | 26,514   |   |
|                                                                                                                                                                   |   |                |          |           |        |          |   |
|                                                                                                                                                                   |   |           | 685,477  |           |   | 218,210  |   |
| Less current portion                                                                                                                                                   |   |           | (648,610 | )              |   | (149,685 | )      |
|                                                                                                                                                                   |   |                |          |           |        |          |   |
| Long term portion                                                                                                                                                      |   | $              | 36,867   |           | $      | 68,525   |   |
|                                                                                                                                                                   |   |                |          |           |        |          |   |
|                                                                                                                                                                   |   |           |     |           |   |     |   |
| **Notes payable-related party**                                                                                                                                        |   | **12/31/2008** |     | **12/31/2007** |   |
|                                                                                                                                                                   |   |           |     |           |   |
| A series of 17.0% subordinated secured notes payable maturing from November 2008 or January 2009, dependent upon the status of certain negotiations                    |   | $              | 567,011  |           | $      | —  |   |
|                                                                                                                                                                   |   |                |          |           |        |          |   |
| Notes payable to stockholders, unsecured, at an interest rate of 12%; convertible to equity securities                                                                 |   |           | —  |           |   | —  |   |
| Less current portion                                                                                                                                                   |   |           | (567,011 | )              |   | —  |   |
|                                                                                                                                                                   |   |                |          |           |        |          |   |
| Long term portion                                                                                                                                                      |   | $              | —  |           | $      | —  |   |
|                                                                                                                                                                   |   |                |          |           |        |          |   |

          Future minimum payments on the line of credit and other debt, which are stated at their principal amounts with initial or remaining terms of one year or more consist of the following as of December 31, 2008:

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|       |   |   |      |   |
|------------|--------|--------|-----------|--------|
| 2009       |   | $      | 5,815,621 |   |
| 2010       |   |   | 29,026    |   |
| 2011       |   |   | 7,841     |   |
| 2012       |   |   | —   |   |
| 2013       |   |   | —   |   |
| Thereafter |   |   | —   |   |
|       |   |        |           |   |
|       |   | $      | 5,852,488 |   |
|       |   |        |           |   |

**Note 6 - Operating and Capital Leases**

          The Company and its related entities lease equipment from certain parties under various capital leases expiring in 2008 through 2011. Pursuant to those capital lease financing arrangements, the Company has drawn down an additional $898,811 in the year ended December 31, 2008. On September 22, 2008, the Company entered into an Amendment of a certain Master Equipment Lease Agreement with Data        Sales Co., Inc. (the “Lender”) (the “Amendment”), pursuant to which the Lender agreed to restructure certain lease schedules, payment and purchase terms arising under that certain Master Equipment Lease Agreement executed by the Company and the Lender on December 13, 2007 (the “Master Lease”). The Lender agreed to suspend all rental payments due and owing by the Company for the months of September, October and November 2008. The Lender also has agreed        to extend and restructure the payments due and owing under the Master Lease such that in December 2008, the Company will begin to make reduced payments for the first of 24 scheduled monthly payments. Restricted stock shares of 333,333 valued at $200,000 were issued as part of the amended agreement with the Lender.

          In addition, the related entities lease tower and roof-top space under operating leases with terms that are typically for 5 years and contain automatic renewals for 2 or 3 additional 5 year terms. Finally, several also have various operating leases for office space, equipment, and vehicles that generally are for 3 to 5 year terms. The total amount of fixed assets capitalized through leasing is        $3,489,059 as of December 31, 2008.

          Future minimum lease payments under the capital leases, which are stated at their principal amounts with initial or remaining terms of one year or more consist of the following as of December 31, 2008:

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|   |                                |   |   |      |   |
|--------|-------------------------------------|--------|--------|-----------|--------|
|   | 2009                                |   | $      | 872,855   |   |
|   | 2010                                |   |   | 634,457   |   |
|   | 2011                                |   |   | 454,240   |   |
|   | 2012                                |   |   | —   |   |
|   |                                |   |        |           |   |
|   | Total mimimum lease payments        |   |   | 1,961,552 |   |
|   | Less amounts representing interest  |   |   | (510,751  | )      |
|   |                                |   |        |           |   |
|   |                                |   |   | 1,450,801 |   |
|   |                                |   |   |      |   |
|   | Less current portion                |   |   | (596,411  | )      |
|   |                                |   |        |           |   |
|   |                                |   |   |      |   |
|   | Long term capital lease obligations |   | $      | 854,390   |   |
|   |                                |   |        |           |   |

          Future minimum lease payments under the operating leases with initial or remaining terms of one year or more consist of the following at December 31, 2008:

|   |       |   |   |      |   |
|--------|------------|--------|--------|-----------|--------|
|   | 2009       |   | $      | 658,000   |   |
|   | 2010       |   |   | 478,194   |   |
|   | 2011       |   |   | 341,393   |   |
|   | 2012       |   |   | 217,187   |   |
|   | 2013       |   |   | 54,135    |   |
|   | Thereafter |   |   | 19,919    |   |
|   |       |   |        |           |   |
|   |       |   |   |      |   |
|   | Total      |   | $      | 1,768,827 |   |
|   |       |   |        |           |   |

          The total rental expense included in operating expenses for operating leases included above is $1,284,715 and $1,090,002 for the year ended December 31, 2008 and December 31, 2007, respectively.

**Note 7 - Related Party Transactions**

          Related parties that entered into transactions with the Company include officers and stockholders. At December 31, 2008, the following Company officers and directors held the principal amount of subordinated secured notes as related parties: Jerome Snyder - $103,093; Jonathan Snyder - $335,052; and, Jason Lazar - $128,866. In aggregate, the amount of accrued interest payable to these officers        totaled $43,139 as of December 31, 2008.

          Transactions with related parties as of and for the year ended December 31, 2008 and for the year ended December 31, 2007:

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                               |   |           |      |           |   |      |   |
|--------------------------------------------------------------------|--------|----------------|-----------|----------------|--------|-----------|--------|
|                                                               |   | **12/31/2008** |      | **12/31/2007** |   |
|                                                               |   |           |      |           |   |      |   |
| Term loan payable - related party (see also Note 5)                |   | $              | 4,500,000 |           | $      | 3,000,000 |   |
| Current portion of notes payable - related party (see also Note 5) |   |           | 567,011   |           |   | —   |   |
| Accounts payable and accrued expenses - related party              |   |           | 43,139    |           |   | —   |   |
| Revolving line of credit - related party (see also Note 5)         |   |           | 100,000   |           |   | 100,000   |   |
|                                                               |   |                |           |           |        |           |   |
|                                                               |   | $              | 5,210,150 |           | $      | 3,100,000 |   |
|                                                               |   |                |           |           |        |           |   |

**Note 8 - Business Combinations**

          On January 31, 2007, through a wholly owned subsidiary, SpeedNet LLC purchased the assets of SpeedNet Services, Inc. (“SpeedNet”), including subscriber contracts, accounts, and fixed assets, and assumed certain operating liabilities for $3,458,255 in cash, with certain adjustments to the purchase price for working capital, deferred revenue and the assumption of certain capital lease        obligations. Also, On October 22, 2007, the Company acquired substantially all of the assets and assumed certain liabilities of MicroLnk, LLC, a Nebraska limited liability company, (“MicroLnk”), pursuant to an Asset Purchase Agreement. As consideration for these acquired assets, the Company paid $659,981 in cash.

          The financial results for the year ended December 31, 2007 for KeyOn Communications Holdings, Inc. include eleven months of operations from SpeedNet LLC, and two months of operations for the MicroLnk fourth quarter 2007 acquisition. These financial results reflected on a pro forma basis (unaudited) by adding in the January 2007 SpeedNet Services, Inc. and January through October 2007 of        MicroLnk financial results are reported as follows:

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**Keyon Communications Holdings, Inc. and Related Entities****Pro forma Condensed Consolidated Statement of Operations (unaudited)        For the Year Ended December 31, 2007**(Dollars in Millions)

|                                  |   |                                               |       |                                                                 |   |                                                    |   |            |     |   |   |       |                                                |   |           |   |   |       |   |
|---------------------------------------|--------|----------------------------------------------------|------------|----------------------------------------------------------------------|--------|---------------------------------------------------------|--------|-----------------|----------|--------|--------|------------|-----------------------------------------------------|--------|----------------|--------|--------|------------|--------|
|                                  |   | **KeyOn year                    ended 12/31/2007** |       | **Jan 2007                    SpeedNet                    Services** |   | **MicroLnk period                    ended 10/22/2007** |   | **Adjustments** |     |        |   |       | **Pro forma annual                    total KeyOn** |   |
|                                  |   |                                               |       |                                                                 |   |                                                    |   |            |     |        |   |       |                                                |   |
| **Revenue**                           |   | $                                                  | 7,185,433  |                                                                 | $      | 482,435                                                 |   | $               | 567,911  |   | $      | 278,972    |                                                |   | i              |   | $      | 8,514,751  |   |
|                                  |   |                                               |       |                                                                 |   |                                                    |   |            |     |   |   |       |                                                |        |           |   |   |       |   |
| **Total Operating Costs and Expense** |   |                                               | 14,153,088 |                                                                 |   | 710,670                                                 |   |            | 720,281  |   |   | (3,623,792 | )                                                   |        | a,b,c,d,e,f, h |   |   | 11,960,247 |   |
|                                  |   |                                                    |            |                                                                      |        |                                                         |        |                 |          |        |        |            |                                                     |   |           |   |        |            |   |
|                                  |   |                                               |       |                                                                 |   |                                                    |   |            |     |   |   |       |                                                |        |           |   |   |       |   |
| **Loss from Operations**              |   |                                               | (6,967,655 | )                                                                    |   | (228,235                                                | )      |            | (152,370 | )      |   | 3,902,764  |                                                |   |           |   |   | (3,445,496 | )      |
|                                  |   |                                               |       |                                                                 |   |                                                    |   |            |     |   |   |       |                                                |        |           |   |   |       |   |
| **Total Other Income (Expense)**      |   |                                               | (643,098   | )                                                                    |   | (18,869                                                 | )      |            | (662     | )      |   | 148,587    |                                                |        | g, h           |   |   | (514,042   | )      |
|                                  |   |                                                    |            |                                                                      |        |                                                         |        |                 |          |        |        |            |                                                     |   |           |   |        |            |   |
|                                  |   |                                               |       |                                                                 |   |                                                    |   |            |     |   |   |       |                                                |        |           |   |   |       |   |
| **Net Loss**                          |   | $                                                  | (7,610,753 | )                                                                    | $      | (247,104                                                | )      | $               | (153,032 | )      | $      | 4,051,351  |                                                |   |           |   | $      | (3,959,538 | )      |
|                                  |   |                                                    |            |                                                                      |        |                                                         |        |                 |          |        |        |            |                                                     |   |           |   |        |            |   |

|   |                                                                                                                                                                             |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| a.     | $.3M represents the elimination of retention bonuses (plus payroll taxes) paid to top employees to stay during sale of business and elimination of duplicative resource salaries |
|   |                                                                                                                                                                             |
| b.     | $.05M represents the depreciation adjustment for January for new fair market valuation of assets                                                                                 |
|   |                                                                                                                                                                             |
| c.     | $.2M represents an adjustment rent due to relocation into one location                                                                                                           |
|   |                                                                                                                                                                             |
| d.     | $1.8M represents an adjustment for non-cash related expenses                                                                                                                     |
|   |                                                                                                                                                                             |
| e.     | $1.3M represents deal related expenses incurred primarily in Q4 2007                                                                                                             |
|   |                                                                                                                                                                             |
| f.     | $.2M represents an adjustment to salaries for additional headcount for deal related activities                                                                                   |
|   |                                                                                                                                                                             |
| g.     | $.02M represents an adjustment of interest charged on SpeedNet Services other debt that is not a liability under KeyOn SpeedNet                                                  |
|   |                                                                                                                                                                             |
| h.     | $.13M represents non-cash interest expense on warrants                                                                                                                           |
|   |                                                                                                                                                                             |
| i.     | To record $.2M of service credits as network expenses and $.1M of promotional credits as customer acquisition expenses                                                           |

**Note 9 - Capital Stock, Stock Based Compensation, and Warrants**

          On December 31, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” requiring us to recognize expenses related to the fair value of its employee stock option awards. We recognize the cost of all share-based awards on a straight line vesting basis over the vesting period of the award.

***Common Shareholders’ Equity***

          On August 9, 2007, KeyOn Communications, Inc. became a publicly-traded company by virtue of a merger with a publicly-traded company, Grant Enterprises, Inc. (“Grant”), a holding company with no operating business (the “Merger”). KeyOn later changed the name of Grant to KeyOn Communications Holdings, Inc. (“KeyOn Holdings”) and KeyOn and its subsidiaries        became wholly owned subsidiaries of KeyOn Holdings. KeyOn Holdings’ shares were listed on the OTC Bulletin Board under the symbol “KYCS”. On October 26, 2007, KeyOn Holdings effected a 1-for-2 reverse stock split of the Company’s common stock, par value $0.001 per share and the Company’s ticker symbol was changed to “KEYO” (“Reverse Split”) All common share, option and warrant amounts have been adjusted to reflect the Reverse        Split.

          Concurrent with the Merger, KeyOn Holdings raised $2,088,500 (net of $118,500 in offering costs) with the sale of 551,750 shares of common stock in an equity offering.

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Upon closing of the Merger transaction, a wholly owned subsidiary of Grant merged with and into KeyOn, and KeyOn, as the surviving corporation, became a wholly-owned subsidiary of Grant. All pre-merger assets and liabilities of Grant were split off from Grant leaving KeyOn’s business as the surviving operations of Grant. After accounting for the Merger and the equity financing, KeyOn Holdings had 8,101,770 shares outstanding.

          In connection with the acquisition of SpeedNet, the Company raised both equity and debt capital for the purchase and for general working capital purposes. On or about January 31, 2007, KeyOn raised an aggregate of $1,608,050 in the sale of 422,617 shares of common stock. On January 31, 2007, 306,566 shares of common stock together with, 45,967 warrants to purchase common stock were issued in        connection with the conversion of the Company’s Senior Unsecured Promissory Notes.

          Common stock of 6,861 shares valued at $3.80 per share was issued on March 22, 2007, for payment of professional services performed by a third party. Common stock of 50,000 shares valued at $4.00 per share was issued on August 9, 2007, for the payment of professional services performed by a third party.

          The Company is authorized to issue up to 95,000,000 shares of common stock with a par value of $.001 for each share. 8,771,350 and 8,249,106 shares were issued and outstanding as of December 31, 2008 and December 31, 2007, respectively.

          The Company entered into an agreement on January 10, 2008 with Sid Ganju, an employee, for the issuance of 100,000 shares of restricted common stock. The agreement calls for the shares to be issued over a two year period beginning July 10, 2008. The Company is recording compensation expense monthly over the life of the agreement. For the year ended December 31, 2008, compensation expense        totaled $150,000.

          During the year ended December 31, 2008, 522,244 shares of common stock were issued. Stock was issued during the year ended December 31, 2008 as follows: 333,333 shares of stock valued at $200,000 were issued as part of the amended lease agreement with Data Sales, Inc. 20,000 shares of stock were issued as part of the restricted stock agreement with a member of the Company’s executive        management team. 166,875 shares of stock valued at $69,413 were issued as payment for prior period professional services rendered. Additionally, 2,036 shares of stock valued at $12,000 were issued as part of a contractual agreement for professional services rendered.

***Preferred Shareholders’ Equity***

          The Company is authorized to issue up to 5,000,000 shares of Series A Convertible Preferred Stock (“preferred stock”) with a par value of $0.001 for each share. No shares of preferred stock were issued and outstanding as of December 31, 2008 and 2007, respectively.

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

***Warrants***

          The Company has issued common stock warrants with a warrant strike price ranging from $3.31 to $8.00 for each share of common stock and an average price of $5.28 for each share of common stock. These warrants have expiration dates of three to seven years from their date of issue. 1,712,735 warrants were outstanding at December 31, 2008.

          As of December 31, 2008, a total of 1,712,735 warrants to purchase shares of our common stock remain outstanding and are currently exercisable as follows:

|   |                   |   |                                              |   |                |   |   |       |   |   |
|--------|------------------------|--------|---------------------------------------------------|--------|---------------------|--------|--------|------------|--------|--------|
|   | **Number of Warrants** |   | **Exercise Price                    ($ / share)** |   | **Expiration Date** |   |
|   |                        |   |                                                   |   |                     |   |
|   |                   |   |                                              |   |                |   |
|   | 2,055                  |   |                                              | $      | 3.31                |   |   | 1/19/2009  |   |   |
|   | 1,058                  |   |                                              | $      | 3.31                |   |   | 1/30/2009  |   |   |
|   | 1,451                  |   |                                              | $      | 3.31                |   |   | 2/2/2009   |   |   |
|   | 272                    |   |                                              | $      | 3.31                |   |   | 2/10/2009  |   |   |
|   | 4,654                  |   |                                              | $      | 3.31                |   |   | 3/23/2009  |   |   |
|   | 2,569                  |   |                                              | $      | 3.31                |   |   | 4/17/2009  |   |   |
|   | 3,747                  |   |                                              | $      | 3.31                |   |   | 5/31/2009  |   |   |
|   | 3,929                  |   |                                              | $      | 3.31                |   |   | 6/30/2009  |   |   |
|   | 3,747                  |   |                                              | $      | 3.31                |   |   | 7/20/2009  |   |   |
|   | 4,805                  |   |                                              | $      | 3.31                |   |   | 8/3/2009   |   |   |
|   | 6,165                  |   |                                              | $      | 3.31                |   |   | 8/31/2009  |   |   |
|   | 3,143                  |   |                                              | $      | 3.31                |   |   | 10/19/2009 |   |   |
|   | 3,295                  |   |                                              | $      | 3.31                |   |   | 1/17/2010  |   |   |
|   | 109,354                |   |                                              | $      | 3.81                |   |   | 1/31/2010  |   |   |
|   | 3,567                  |   |                                              | $      | 3.31                |   |   | 4/16/2010  |   |   |
|   | 2,992                  |   |                                              | $      | 3.31                |   |   | 6/5/2010   |   |   |
|   | 13,146                 |   |                                              | $      | 3.81                |   |   | 6/7/2010   |   |   |
|   | 6,166                  |   |                                              | $      | 3.31                |   |   | 6/22/2010  |   |   |
|   | 4,745                  |   |                                              | $      | 3.31                |   |   | 7/19/2010  |   |   |
|   | 281,875                |   |                                              | $      | 6.70                |   |   | 8/9/2012   |   |   |
|   | 750,000                |   |                                              | $      | 4.00                |   |   | 2/4/2013   |   |   |
|   | 250,000                |   |                                              | $      | 6.00                |   |   | 2/4/2013   |   |   |
|   | 250,000                |   |                                              | $      | 8.00                |   |   | 2/4/2013   |   |   |

          As of December 31, 2007, a total of 473,675 warrants to purchase shares of our common stock were outstanding and exercisable. A total of 1,250,000 warrants were issued during the year ended December 31, 2008. Additionally, 10,940 shares expired during the year ended December 31, 2008. In the year ending December 31, 2008, no shares were exercised. The amount expensed in the year ending December        31, 2008 was $2,042,499 as compensation expense for the 1,250,000 warrants.

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

***Stock Option Plans***

          On April 25, 2006, KeyOn’s Board of Directors and stockholders adopted the 2006 Stock Incentive Plan (the “2006 Plan”). Under the 2006 Plan, KeyOn was authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options and restricted stock. The 2006 Plan was administered by KeyOn’s Board of Directors. Prior to the        time of the Merger, there were 20,278 KeyOn stock options outstanding under the 2006 Plan. Immediately following the closing of the Merger, these options were exchanged for options to purchase 612,831 shares of our common stock under our 2007 Incentive Stock and Awards Plan (the “2007 Plan”) with a weighted average exercise price of approximately $2.48 per share. Following this exchange, KeyOn terminated the 2006 Plan.

          On August 9, 2007, our Board of Directors and stockholders adopted the 2007 Plan. The purpose of the 2007 Plan is to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons into our development and financial success. Under        the 2007 Plan, we are authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long term incentive awards. The 2007 Plan is administered by the Compensation Committee at the direction of the Board of Directors.

          Activity for stock options for the fiscal years ended December 31, 2008 and 2007 is as follows:

|                          |   |                  |      |                         |   |                                |         |   |   |   |   |   |   |   |
|-------------------------------|--------|-----------------------|-----------|------------------------------|--------|-------------------------------------|--------------|--------|--------|--------|--------|--------|--------|--------|
|                          |   | **Number of Options** |      | **Range of Price Per Share** |   | **Weighted Average Exercise Price** |         |
|                          |   |                       |      |                              |   |                                     |         |
| Balance, December 31, 2006    |   |                  | 672,138   |                         |   | $                                   | 0.00 - $2.48 |   |   |   | $      | 0.41   |   |   |
| Granted                       |   |                  | 741,187   |                         |   | $                                   | 0.00 - $8.16 |   |   |   | $      | 2.58   |   |   |
| Exercised                     |   |                  | (816      | )                            |   | $                                   | 0.00         |   |   |   | $      | 0.00   |   |   |
| Converted to Restricted Stock |   |                  | (640,496  | )                            |   | $                                   | 0.00         |   |   |   | $      | 0.00   |   |   |
| Forfeited                     |   |                  | (159,146  | )                            |   | $                                   | 0.00 - $2.48 |   |   |   | $      | 2.45   |   |   |
| Balance, December 31, 2007    |   |                  | 612,867   |                         |   | $                                   | 2.48 - $8.16 |   |   |   | $      | 3.07   |   |   |
| Granted                       |   |                  | 1,322,143 |                         |   | $                                   | 0.09 - $3.00 |   |   |   | $      | 0.66   |   |   |
| Exercised                     |   |                  | —   |                         |   | $                                   | 0.00         |   |   |   | $      | 0.00   |   |   |
| Converted to Restricted Stock |   |                  | —   |                         |   | $                                   | 0.00         |   |   |   | $      | 0.00   |   |   |
| Forfeited                     |   |                  | (69,729   | )                            |   | $                                   | 2.48 - $8.16 |   |   |   | $      | 3.74   |   |   |
| Balance, December 31, 2008    |   |                  | 1,865,281 |                         |   | $                                   | 2.48 - $5.00 |   |   |   | $      | 1.32   |   |   |

          As of December 31, 2007, 612,867 options are outstanding. As of January 1, 2007, 672,138 options were outstanding. For the year ended December 31, 2007, 741,187 options were granted, 159,146 were forfeited and 816 were exercised. Compensation expense recorded on stock options for the year ended December 31, 2007 totaled $1,606,893. During the three months ended September 30, 2007, all employee        options, totaling 640,496 shares, at the $0.0007 strike price were converted to common stock shares. The range of strike price per outstanding option as of December 31, 2007, is $2.48 to $8.16 and the weighted average strike price is $3.07 per share.

          As of December 31, 2008, 1,865,281 options are outstanding. As of January 1, 2008, 612,867 options were outstanding. For the year ended December 31, 2008, 1,322,143 options

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

were granted, 69,729 were forfeited and none were exercised. Compensation expense recorded on stock options for the year ended December 31, 2008 totaled $1,145,327. Compensation expense recorded on restricted stock options for the year ended December 31, 2008, totaled $150,000. The range of strike price per outstanding option as of December 31, 2008, is $0.09 to $5.00 and the weighted average strike price is $1.32 per share.

**Note 10 - Subsequent Events**

***Loan Extension***

          On March 27, 2009, KeyOn entered into an extension of the Loan, pursuant to which we obtained a one-hundred and twenty (120) day extension of the Loan until June 4, 2009 (the “Extension”). As consideration for the Extension, the Company agreed to pay renewal and documentation fees of $1,200.00. All other terms and conditions of the Loan remained the same.

***Subordinated Secured Notes***

          In March of 2009, the Company entered into an amendment with the existing Subordinated Secured Note Holders extending the maturity of the Notes until August 31, 2009. Also, in March of 2009, KeyOn issued $300,000 of subordinated secured notes to certain existing shareholders. The terms of these notes are still being negotiated between the holders and the Company’s independent members of        the board of directors.

***Termination of the Merger Agreement with Internet America, Inc.***

          On November 14, 2008, KeyOn Communications Holdings, Inc., (“KeyOn” or the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Internet America, Inc. (“Internet America”), a Texas corporation and IA Acquisition, Inc. (“AcquisitionSub”), a Delaware corporation wholly owned by Internet America, pursuant        to which AcquisitionSub was to be merged with and into KeyOn with KeyOn continuing as the surviving corporation wholly-owned by Internet America (the “Merger”).

          Pursuant to the Merger Agreement, the Company and its shareholders were to receive an aggregate of 16,155,906 shares of Internet America common stock in a stock-for-stock exchange for all outstanding shares of KeyOn common stock, which shares were to be registered pursuant to an S-4 Registration Statement. Upon completion of the Merger, KeyOn shareholders were to own 45%, and Internet America        shareholders were to own 55%, of the aggregate number of outstanding shares of common and preferred stock of the Company.

          Effective February 19, 2009, KeyOn notified Internet America and AcquisitionSub that it was terminating the Merger Agreement as a result of certain material breaches to the Merger Agreement by Internet America. KeyOn believes that there are now termination fees due and owing to KeyOn as a result of these breaches. In response, by letter dated February

----

**KEYON COMMUNICATIONS HOLDINGS, INC.        AND RELATED ENTITIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19, 2009, Internet America has disputed our right to termination of the Merger Agreement, and has alleged certain breaches by KeyOn of the Merger Agreement and as a result of these alleged breaches by KeyOn, Internet America has demanded payment of termination fees from KeyOn. Despite the receipt of this demand, we believe that KeyOn will prevail in this matter and intend to contest any claims that may be brought by Internet America. Additionally, we        believe that the Merger Agreement was terminated by its terms as it was not consummated by February 28, 2009.

***Restructured payment schedule with a secured lender***

          On or about March 13, 2009, KeyOn entered into an amendment with one of our secured lenders to restructure certain payments under a Master Lease Agreement. The amendment reduced the dollar amount of monthly payments and extended the maturity of all schedules in the aggregate under the Master Lease Agreement for twenty-four month term.

----