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|                               |   |
|------------------------------------|--------|
| UNITED STATES                      |
| SECURITIES AND EXCHANGE COMMISSION |
| Washington, DC 20549               |
|                               |
| **FORM 10-Q**                      |

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

For the quarterly period ended March 31, 2010

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 001-33842

|                                                   |
|--------------------------------------------------------|
| **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 |   | 68164      |   |
|   |                                                                  |   |            |   |
|   | (Address of Principal Executive Offices)                         |   | (Zip Code) |   |

 

|                                                                               |
|------------------------------------------------------------------------------------|
| (402) 998-4000                                                                     |
|                                                                                    |
| (Registrant’s Telephone Number, Including Area Code)                         |
|                                                                               |
|                                                                                    |
| (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No        x

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.) Yes o No        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. (Check one): 

|   |                      |                        |   |
|--------|---------------------------|-----------------------------|--------|
|   | Large accelerated filer o | Accelerated filer o         |   |
|   |
|   | Non-accelerated filer o   | Smaller reporting company x |   |

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

As of May 17, 2010, 21,582,383 shares of the issuer’s common stock, $0.001 par value per share, were outstanding. 

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**KEYON COMMUNICATIONS HOLDINGS, INC.**

**Table of Contents**

|     |                                                                                                           |   |     |   |
|----------|----------------------------------------------------------------------------------------------------------------|--------|----------|--------|
|     |                                                                                                           |   | **Page** |
|     |                                                                                                           |   |          |
| PART I   | FINANCIAL INFORMATION                                                                                          |   |     |   |
|     |                                                                                                           |   |     |   |
| Item 1.  | Financial Statements                                                                                           |   | 1        |   |
|     |                                                                                                           |   |     |   |
|     | Condensed Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009                   |   | 2        |   |
|     |                                                                                                           |   |     |   |
|     | Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009 (Unaudited) |   | 3        |   |
|     |                                                                                                           |   |     |   |
|     | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (Unaudited) |   | 4        |   |
|     |                                                                                                           |   |     |   |
|     | Notes to Condensed Consolidated Financial Statements (Unaudited)                                               |   | 5        |   |
|     |                                                                                                           |   |     |   |
| Item 2.  | Management’s Discussion and Analysis of Financial Condition and Results of Operations                    |   | 18       |   |
|     |                                                                                                           |   |     |   |
| Item 4T. | Controls and Procedures                                                                                        |   | 21       |   |
|     |                                                                                                           |   |     |   |
| PART II  | OTHER INFORMATION                                                                                              |   |     |   |
|     |                                                                                                           |   |     |   |
| Item 6.  | Exhibits                                                                                                       |   | 22       |   |

i

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**PART I – FINANCIAL INFORMATION**

**Item 1. Financial Statements.**

**KEYON COMMUNICATIONS HOLDINGS, INC.****AND SUBSIDIARIES**

FOR THE THREE MONTHS ENDED MARCH 31, 2010

1

----

|                                                        |
|-------------------------------------------------------------|
| **KEYON COMMUNICATIONS HOLDINGS INC. AND RELATED ENTITIES** |
|                                                        |
| **CONDENSED CONSOLIDATED BALANCE SHEETS**                   |
| **AS OF MARCH 31, 2010 (UNAUDITED) AND DECEMBER 31, 2009**  |
|                                                             |

|                                                                                                                                                                                     |   |     |        |     |   |        |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-------------|----------|--------|-------------|--------|
|                                                                                                                                                                                     |   | **2010** |        | **2009** |   |
|                                                                                                                                                                                     |   |     |        |     |   |
| **ASSETS**                                                                                                                                                                               |   |     |        |     |   |        |   |
| CURRENT ASSETS:                                                                                                                                                                          |   |     |        |     |   |        |   |
| Cash                                                                                                                                                                                     |   | $        | 9,727,636   |     | $      | 125,083     |   |
| Accounts receivable, net of allowance for doubtful accounts                                                                                                                              |   |     | 108,411     |     |   | 155,228     |   |
| Inventories                                                                                                                                                                              |   |     | 108,873     |     |   | 114,150     |   |
| Prepaid expenses and other current assets                                                                                                                                                |   |     | 97,646      |     |   | 114,296     |   |
|                                                                                                                                                                                     |   |          |             |     |        |             |   |
| Total current assets                                                                                                                                                                     |   |     | 10,042,566  |     |   | 508,757     |   |
|                                                                                                                                                                                     |   |          |             |     |        |             |   |
|                                                                                                                                                                                     |   |     |        |     |   |        |   |
| PROPERTY AND EQUIPMENT - Net                                                                                                                                                             |   |     | 1,538,933   |     |   | 1,614,454   |   |
|                                                                                                                                                                                     |   |     |        |     |   |        |   |
| OTHER ASSETS                                                                                                                                                                             |   |     |        |     |   |        |   |
| Goodwill                                                                                                                                                                                 |   |     | 1,628,831   |     |   | 1,341,816   |   |
| Subscriber base - net                                                                                                                                                                    |   |     | 180,098     |     |   | 182,669     |   |
| Trademarks                                                                                                                                                                               |   |     | 16,667      |     |   | 16,667      |   |
| Refundable deposits                                                                                                                                                                      |   |     | 70,416      |     |   | 70,416      |   |
| Debt issuance costs - net                                                                                                                                                                |   |     | 346,350     |     |   | 117,548     |   |
|                                                                                                                                                                                     |   |          |             |     |        |             |   |
| Total other assets                                                                                                                                                                       |   |     | 2,242,362   |     |   | 1,729,116   |   |
|                                                                                                                                                                                     |   |          |             |     |        |             |   |
|                                                                                                                                                                                     |   |     |        |     |   |        |   |
| TOTAL ASSETS                                                                                                                                                                             |   | $        | 13,823,861  |     | $      | 3,852,327   |   |
|                                                                                                                                                                                     |   |          |             |     |        |             |   |
|                                                                                                                                                                                     |   |     |        |     |   |        |   |
| **LIABILITIES AND STOCKHOLDERS’ (DEFICIT)**                                                                                                                                        |   |     |        |     |   |        |   |
|                                                                                                                                                                                     |   |     |        |     |   |        |   |
| CURRENT LIABILITIES:                                                                                                                                                                     |   |     |        |     |   |        |   |
| Accounts payable and accrued expenses                                                                                                                                                    |   | $        | 1,625,433   |     | $      | 1,833,520   |   |
| Revolving line of credit - related party                                                                                                                                                 |   |     | —     |     |   | 100,000     |   |
| Term loan payable - related party                                                                                                                                                        |   |     | —     |     |   | 147,016     |   |
| Current portion of notes payable                                                                                                                                                         |   |     | 148,223     |     |   | 150,450     |   |
| Current portion of deferred rent liability                                                                                                                                               |   |     | 64,706      |     |   | 63,665      |   |
| Current portion of capital lease obligations                                                                                                                                             |   |     | 700,296     |     |   | 643,039     |   |
| Deferred revenue                                                                                                                                                                         |   |     | 196,856     |     |   | 213,674     |   |
|                                                                                                                                                                                     |   |          |             |     |        |             |   |
| Total current liabilities                                                                                                                                                                |   |     | 2,735,514   |     |   | 3,151,364   |   |
|                                                                                                                                                                                     |   |          |             |     |        |             |   |
|                                                                                                                                                                                     |   |     |        |     |   |        |   |
| LONG-TERM LIABILITIES:                                                                                                                                                                   |   |     |        |     |   |        |   |
| Deferred rent liability, less current maturities                                                                                                                                         |   |     | 64,593      |     |   | 80,094      |   |
| Term loan payable - related party                                                                                                                                                        |   |     | —     |     |   | 3,902,984   |   |
| Notes payable, less current maturities                                                                                                                                                   |   |     | 15,001,980  |     |   | 7,842       |   |
| Capital lease obligations, less current maturities                                                                                                                                       |   |     | 375,110     |     |   | 503,477     |   |
|                                                                                                                                                                                     |   |          |             |     |        |             |   |
| Total long term liabilities                                                                                                                                                              |   |     | 15,441,683  |     |   | 4,494,397   |   |
|                                                                                                                                                                                     |   |          |             |     |        |             |   |
|                                                                                                                                                                                     |   |     |        |     |   |        |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                            |   |     |        |     |   |        |   |
|                                                                                                                                                                                     |   |     |        |     |   |        |   |
| STOCKHOLDERS’ (DEFICIT):                                                                                                                                                           |   |     |        |     |   |        |   |
| Series A preferred stock, $0.001 par value; 60,000,000 shares authorized; 0 shares issued and outstanding at December 31, 2009 and at March 31, 2010                                     |   |     | —     |     |   | —     |   |
| Common stock, $0.001 par value; 115,000,000 shares authorized; 20,686,056 shares issued and outstanding at December 31, 2009; 21,181,439 shares issued and outstanding at March 31, 2010 |   |     | 21,181      |     |   | 20,686      |   |
| Common stock payable for exercised options                                                                                                                                               |   |     | 187,500     |     |   | 101,433     |   |
| Additional paid-in capital                                                                                                                                                               |   |     | 26,137,071  |     |   | 24,428,922  |   |
| Deferred compensation                                                                                                                                                                    |   |     | (429,431    | )        |   | (39,751     | )      |
| Accumulated deficit                                                                                                                                                                      |   |     | (30,269,657 | )        |   | (28,304,724 | )      |
|                                                                                                                                                                                     |   |          |             |     |        |             |   |
| Total stockholders’ (deficit)                                                                                                                                                      |   |     | (4,353,336  | )        |   | (3,793,434  | )      |
|                                                                                                                                                                                     |   |          |             |     |        |             |   |
|                                                                                                                                                                                     |   |     |        |     |   |        |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT)                                                                                                                                      |   | $        | 13,823,861  |     | $      | 3,852,327   |   |
|                                                                                                                                                                                     |   |          |             |     |        |             |   |

See notes to condensed consolidated financial statements.

2

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|                                                            |
|-----------------------------------------------------------------|
| **KEYON COMMUNICATIONS HOLDINGS INC. AND SUBSIDIARIES**         |
|                                                            |
| **CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)** |
|                                                                 |

|                                                               |   |                                     |       |     |   |       |   |
|--------------------------------------------------------------------|--------|------------------------------------------|------------|----------|--------|------------|--------|
|                                                               |   | **For the Three Months Ended March 31,** |       |
|                                                               |   | **2010**                                 |       | **2009** |   |
| REVENUES:                                                          |   |                                     |       |     |   |       |   |
| Service and installation revenue                                   |   | $                                        | 1,554,428  |     | $      | 1,831,991  |   |
| Support and other revenue                                          |   |                                     | 40,531     |     |   | 34,181     |   |
|                                                               |   |                                          |            |     |        |            |   |
|                                                               |   |                                     |       |     |   |       |   |
| Total revenues                                                     |   |                                     | 1,594,959  |     |   | 1,866,172  |   |
|                                                               |   |                                          |            |     |        |            |   |
|                                                               |   |                                     |       |     |   |       |   |
| OPERATING COSTS AND EXPENSES:                                      |   |                                     |       |     |   |       |   |
| Payroll, bonuses and taxes                                         |   |                                     | 1,077,292  |     |   | 872,570    |   |
| Professional fees                                                  |   |                                     | 904,649    |     |   | 37,093     |   |
| Network operating costs                                            |   |                                     | 665,274    |     |   | 708,186    |   |
| Depreciation and amortization                                      |   |                                     | 470,495    |     |   | 639,457    |   |
| Other general and administrative expense                           |   |                                     | 290,040    |     |   | 308,385    |   |
| Installation expense                                               |   |                                     | 51,575     |     |   | 47,353     |   |
| Marketing and advertising                                          |   |                                     | 50,652     |     |   | 15,353     |   |
|                                                               |   |                                          |            |     |        |            |   |
|                                                               |   |                                     |       |     |   |       |   |
| Total operating costs and expenses                                 |   |                                     | 3,509,977  |     |   | 2,628,397  |   |
|                                                               |   |                                          |            |     |        |            |   |
|                                                               |   |                                     |       |     |   |       |   |
| LOSS FROM OPERATIONS                                               |   |                                     | (1,915,018 | )        |   | (762,225   | )      |
|                                                               |   |                                     |       |     |   |       |   |
| OTHER INCOME (EXPENSE):                                            |   |                                     |       |     |   |       |   |
| Gain/(loss) on disposal of equipment                               |   |                                     | 1,459      |     |   | —    |   |
| Other income - other                                               |   |                                     | 151,897    |     |   | —    |   |
| Interest income                                                    |   |                                     | 853        |     |   | 1          |   |
| Interest expense                                                   |   |                                     | (204,124   | )        |   | (260,354   | )      |
|                                                               |   |                                          |            |     |        |            |   |
| Total other income (expense)                                       |   |                                     | (49,915    | )        |   | (260,353   | )      |
|                                                               |   |                                          |            |     |        |            |   |
|                                                               |   |                                     |       |     |   |       |   |
| PROVISION FOR INCOME TAXES                                         |   |                                     | —    |     |   | —    |   |
|                                                               |   |                                          |            |     |        |            |   |
|                                                               |   |                                     |       |     |   |       |   |
| NET LOSS                                                           |   | $                                        | (1,964,933 | )        | $      | (1,022,578 | )      |
|                                                               |   |                                          |            |     |        |            |   |
|                                                               |   |                                     |       |     |   |       |   |
| Net loss per common share—basic and diluted                  |   | $                                        | (0.09      | )        | $      | (0.12      | )      |
|                                                               |   |                                          |            |     |        |            |   |
|                                                               |   |                                     |       |     |   |       |   |
| Weighted average common shares outstanding—basic and diluted |   |                                     | 20,944,853 |     |   | 8,828,837  |   |
|                                                               |   |                                          |            |     |        |            |   |

See notes to condensed consolidated financial statements

3

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|                                                               |
|--------------------------------------------------------------------|
| **KEYON COMMUNICATIONS HOLDINGS INC. AND SUBSIDIARIES**            |
|                                                               |
| **CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**                |
| **FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)** |
|                                                                    |

|                                                                 |   |     |       |     |   |       |   |
|----------------------------------------------------------------------|--------|----------|------------|----------|--------|------------|--------|
|                                                                 |   | **2010** |       | **2009** |   |
| **CASH FLOWS FROM OPERATIONS:**                                      |   |     |       |     |   |       |   |
| Net loss                                                             |   | $        | (1,964,933 | )        | $      | (1,022,577 | )      |
| Adjustments to reconcile net loss to net cash flows from operations: |   |     |       |     |   |       |   |
| Depreciation expense                                                 |   |     | 416,063    |     |   | 538,946    |   |
| Amortization expense on subscriber base                              |   |     | 54,431     |     |   | 100,511    |   |
| Stock based compensation expense                                     |   |     | 232,056    |     |   | 187,482    |   |
| Warrant expense for professional services                            |   |     | 182,566    |     |   | —    |   |
| Professional services paid for in common stock                       |   |     | 123,834    |     |   | —    |   |
| Amortization of debt issuance costs                                  |   |     | 21,198     |     |   | 36,798     |   |
| Gain on sale of asset                                                |   |     | (1,459     | )        |   | —    |   |
|                                                                 |   |     |       |     |   |       |   |
| Change in assets and liabilities, net of effect of acquisitions:     |   |     |       |     |   |       |   |
| Accounts receivable                                                  |   |     | 50,218     |     |   | (53,440    | )      |
| Inventory                                                            |   |     | 5,277      |     |   | 6,703      |   |
| Prepaid expenses and other current assets                            |   |     | 19,230     |     |   | (8,021     | )      |
| Other assets                                                         |   |     | (250,000   | )        |   | (7,732     | )      |
| Accounts payable and accrued expenses                                |   |     | (219,429   | )        |   | 48,324     |   |
| Accounts payable and accrued expenses - related party                |   |     | —    |     |   | 26,925     |   |
| Payment on cash overdraft                                            |   |     | —    |     |   | (3,193     | )      |
| Deferred rent liability                                              |   |     | (14,460    | )        |   | (14,205    | )      |
| Deferred revenue                                                     |   |     | (24,425    | )        |   | 27,136     |   |
|                                                                 |   |          |            |     |        |            |   |
|                                                                 |   |     |       |     |   |       |   |
| **Net cash flows from operations**                                   |   |     | (1,369,833 | )        |   | (136,343   | )      |
|                                                                 |   |     |       |     |   |       |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                            |   |     |       |     |   |       |   |
| Capital expenditures for property and equipment                      |   |     | (103,714   | )        |   | —    |   |
| Proceeds on disposal of equipment                                    |   |     | 1,800      |     |   | 791        |   |
|                                                                 |   |          |            |     |        |            |   |
|                                                                 |   |     |       |     |   |       |   |
| **Net cash flows from investing activities**                         |   |     | (101,914   | )        |   | 791        |   |
|                                                                 |   |     |       |     |   |       |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                            |   |     |       |     |   |       |   |
| Proceeds from revolving line of credit - related parties             |   |     | —    |     |   | 50         |   |
| Payment on revolving line of credit - related parties                |   |     | (100,000   | )        |   | —    |   |
| Payment on term loan payable - related parties                       |   |     | (4,050,000 | )        |   | —    |   |
| Payments on notes payable                                            |   |     | (77,576    | )        |   | (27,711    | )      |
| Proceeds from notes payable                                          |   |     | 15,000,000 |     |   | 154,639    |   |
| Proceeds from warrants exercised                                     |   |     | 456,108    |     |   | —    |   |
| Payments on capital lease obligations                                |   |     | (154,232   | )        |   | (74,962    | )      |
| Proceeds from notes payable - related party                          |   |     | —    |     |   | 103,094    |   |
|                                                                 |   |          |            |     |        |            |   |
|                                                                 |   |     |       |     |   |       |   |
| **Net cash flows from financing activities**                         |   |     | 11,074,300 |     |   | 155,110    |   |
|                                                                 |   |          |            |     |        |            |   |
|                                                                 |   |     |       |     |   |       |   |
| **NET INCREASE/ (DECREASE) IN CASH**                                 |   |     | 9,602,553  |     |   | 19,558     |   |
|                                                                 |   |     |       |     |   |       |   |
| **CASH - Beginning of period**                                       |   |     | 125,083    |     |   | 28,032     |   |
|                                                                 |   |          |            |     |        |            |   |
|                                                                 |   |     |       |     |   |       |   |
| **CASH - End of period**                                             |   | $        | 9,727,636  |     | $      | 47,590     |   |
|                                                                 |   |          |            |     |        |            |   |
|                                                                 |   |     |       |     |   |       |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:**               |   |     |       |     |   |       |   |
|                                                                 |   |     |       |     |   |       |   |
| Stock issued for acquisition - Affinity:                             |   |     |       |     |   |       |   |
| Network equipment                                                    |   | $        | 118,205    |     | $      | —    |   |
| Customer premise equipment                                           |   |     | 20,150     |     |   | —    |   |
| Customer base                                                        |   |     | 51,860     |     |   | —    |   |
| Vehicles                                                             |   |     | 9,840      |     |   | —    |   |
| Office equipment                                                     |   |     | 5,795      |     |   | —    |   |
| Prepaid expenses                                                     |   |     | 2,580      |     |   | —    |   |
| Accounts receivable                                                  |   |     | 3,401      |     |   | —    |   |
| Accounts payable and accrued expenses                                |   |     | (11,342    | )        |   | —    |   |
| Loan payable                                                         |   |     | (69,487    | )        |   | —    |   |
| Deferred subscription income                                         |   |     | (7,607     | )        |   | —    |   |
| Goodwill                                                             |   |     | 287,016    |     |   | —    |   |
|                                                                 |   |          |            |     |        |            |   |
|                                                                 |   |     |       |     |   |       |   |
|                                                                 |   | $        | 410,411    |     | $      | —    |   |
|                                                                 |   |          |            |     |        |            |   |
|                                                                 |   |     |       |     |   |       |   |
|                                                                 |   |     |       |     |   |       |   |
| Warrant interest expense                                             |   | $        | —    |     | $      | 39,798     |   |
|                                                                 |   |          |            |     |        |            |   |
| Common stock payable subscription sales                              |   | $        | 456,108    |     | $      | —    |   |
|                                                                 |   |          |            |     |        |            |   |
| Common stock issued for common stock payable                         |   | $        | 370,041    |     | $      | —    |   |
|                                                                 |   |          |            |     |        |            |   |
| Common stock issued for professional services                        |   | $        | 123,834    |     | $      | —    |   |
|                                                                 |   |          |            |     |        |            |   |
| Capital lease obligations for property and equipment                 |   | $        | 83,122     |     | $      | 50,794     |   |
|                                                                 |   |          |            |     |        |            |   |
|                                                                 |   |     |       |     |   |       |   |
| **Cash payments for:**                                               |   |     |       |     |   |       |   |
| Interest                                                             |   | $        | 241,004    |     | $      | 234,241    |   |
|                                                                 |   |          |            |     |        |            |   |
| Tax                                                                  |   | $        | —    |     | $      | —    |   |
|                                                                 |   |          |            |     |        |            |   |

See notes to condensed consolidated financial statements.

4

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

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

          On August 9, 2007, KeyOn Communications, Inc.(“KeyOn”) became a publicly-traded company by virtue of a merger with Grant Enterprises, Inc. (“Grant”), a publicly-traded company with nominal operations (the “Merger”). In connection with the Merger, a newly formed subsidiary of KeyOn merged with and into KeyOn, and KeyOn, as the surviving corporation, became a        wholly-owned subsidiary of Grant. Grant subsequently changed its name to KeyOn Communications Holdings, Inc. The Merger was accounted for as a reverse acquisition and recapitalization of KeyOn. 

          KeyOn Communications, Inc., 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 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 

5

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

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**

          **Basis of Presentation**

          The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not contain all the information and footnotes required by accounting principles generally        accepted in the United States of America for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to make        the financial position of the Company as of March 31, 2010 and the results of operations for the three months ended March 31, 2010 and 2009 and cash flows for the three months ended March 31, 2010 and 2009 not misleading. The unaudited condensed consolidated financial statements for the three months ended March 31, 2010, and March 31, 2009 should be read in conjunction with the audited financial statements for the years ended December 31, 2009 and 2008 as contained in the Form 10K/A        filed on April 16, 2010. 

          **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. 

          **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 satellite video business, in which the Company is a retailer of video services from DISH Network Corporation (“DISH”), 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. The Company maintains cash balances at two banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company had $9,425,853 and none in        excess of the federally insured program as of March 31, 2010 and December 31, 2009, respectively. 

          **Inventories**

          The Company maintains a consistent stock supply of customer premise equipment, installation supplies, and 

6

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

tower replacement parts. The value of this inventory was $94,673 and $99,950 as of March 31, 2010 and December 31, 2009, respectively. The Company also began to carry inventory in 2007 in support of its launch as a retailer of satellite video service from DISH. The value of this inventory was $14,200 as of March 31, 2010 and December 31, 2009. 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 

          **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., subscriber 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. 

          Intangible assets, including goodwill, are accounted for under the provisions of Accounting Standards Codification (“ASC”) 350, “Intangibles--Goodwill and Other”. Under ASC 350, 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 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 2009 we conducted an impairment test of our goodwill and intangible assets        which resulted in a $85,906 impairment charge to our Pocatello goodwill and a $213,416 impairment charge to our Speednet goodwill. 

          **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 $196,856 and $213,674 at March 31, 2010 and December 31, 2009, respectively. 

          **Reclassifications**

          Certain reclassifications have been made to the 2009 financial amounts to conform to the 2010 financial presentation. 

          **Income Taxes**

          The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of        assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. 

          The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A        valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to 

7

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

realize deferred income tax assets in the future in excess of their net recorded amount, the would make an adjustment to the valuation allowance which would reduce the provision for income taxes. 

          The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the        effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. 

          **Stock-Based Compensation**

          The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes pricing model to calculate the fair value of options and warrants issued to both        employees and non-employees. Stock issued for compensation is valued using the market price of the stock on the date of the related agreement. The Company recorded total stock-based compensation of $232,056 for the three month period ended March 31, 2010, compared to $187,482 for the same period in 2009. 

          **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, KeyOn        SpeedNet LLC and KeyOn Spectrum Holdings, LLC all of which are under common ownership. Intercompany balances and transactions have been eliminated in consolidation. 

**          Recent Accounting Pronouncements**

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

          In September 2008, the FASB issued exposure drafts that eliminate qualifying special purpose entities from the guidance of SFAS No. 140 (ASC Topic 860), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and FASB Interpretation 46 (ASC Topic 810) (revised December 2003), “Consolidation of Variable Interest Entities an        interpretation of ARB No. 51 (ASC Topic 810),” as well as other modifications. The Company adopted this Statement in the first quarter of 2010 without significant impact to the financial statements. 

          In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4;”), to address challenges in estimating fair value when the volume and level of activity for an asset or liability have significantly        decreased. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under        current market conditions. This FSP is effective for interim and annual reporting periods ending after June 15, 2009. The Company is currently evaluating FSP FAS 157-4 to determine its impact on its future consolidated financial position, results of operations, or cash flows. 

          In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140”. SFAS No. 166 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” by eliminating the concept of special-purpose 

8

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

entity, requiring the reporting entity to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk to the assets, changes the requirements for the de-recognition of financial assets, and provides for the sellers of the assets to make additional disclosures. This Statement shall be effective as of the Company’s first interim reporting period that begins after        November 15, 2009. Earlier application is prohibited. The Company does not anticipate any significant financial impact from adoption of SFAS No. 166. 

          In December 2009, the FASB issued Accounting Standards Update 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for Statement 166. (See FAS 166 effective date below) 

          In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”. SFAS No. 167 addresses the effect on FASB Interpretation 46(R), “Consolidation of Variable Interest Entities” of the elimination of the qualifying special-purpose entity concept of SFAS No. 166, “Accounting for Transfers of Financial Assets”. SFAS No. 167 also amends        the accounting and disclosure requirements of FASB Interpretation 46(R) to enhance the timeliness and usefulness of information about an enterprise’s involvement in a variable interest entity. This Statement shall be effective as of the Company’s first interim reporting period that begins after November 15, 2009. Earlier application is prohibited. The Company does not anticipate any significant financial impact from adoption of SFAS No. 167. 

          In June 2009, the Securities and Exchange Commission’s Office of the Chief Accountant and Division of Corporation Finance announced the release of Staff Accounting Bulletin (SAB) No. 112. This staff accounting bulletin amends or rescinds portions of the interpretive guidance included in the Staff Accounting Bulletin Series in order to make the relevant interpretive guidance consistent        with current authoritative accounting and auditing guidance and Securities and Exchange Commission rules and regulations. Specifically, the staff is updating the Series in order to bring existing guidance into conformity with recent pronouncements by the Financial Accounting Standards Board, namely, Statement of Financial Accounting Standards No. 141 (revised 2007) (ASC Topic 805), Business Combinations, and Statement of Financial Accounting Standards No. 160 (ASC Topic 810),        Non-controlling Interests in Consolidated Financial Statements. The statements in staff accounting bulletins are not rules or interpretations of the Commission, nor are they published as bearing the Commission’s official approval. They represent interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the Federal securities laws. 

          On June 30, 2009, the FASB issued Accounting Standard Update (ASU) No. 2009-01 (Topic 105) – Generally Accepted Accounting Principles – amendments based on – Statement of Financial Accounting Standards No. 168 – The FASB Accounting and Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. Beginning with this Statement the FASB will no        longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standard Updates. This ASU includes FASB Statement No. 168 in its entirety. While ASU’s will not be considered authoritative in their own right, they will serve to update the Codification, provide the bases for conclusions and changes in the Codification, and provide background information about the guidance. The Codification        modifies the GAAP hierarchy to include only two levels of GAAP: authoritative and non-authoritative. ASU No. 2009-01 is effective for financial statements issued for the interim and annual periods ending after September 15, 2009, and the Company does not expect any significant financial impact upon adoption. 

          On July 1, 2009, the FASB officially launched the FASB ASC 105 -- *Generally Accepted Accounting Principles*, which established the FASB Accounting Standards Codification (“the Codification”), as the single official source of authoritative, nongovernmental, U.S. GAAP, in addition to guidance issued by the Securities and Exchange Commission. The Codification is designed to        simplify U.S. GAAP into a single, topically ordered structure. All guidance contained in the Codification carries an equal level of authority. The Codification is effective for interim and annual periods ending after September 15, 2009. Accordingly, the Company refers to the Codification in respect of the appropriate accounting standards throughout this document as “FASB ASC”. Implementation of the Codification did not have any impact on the Company’s consolidated        financial statements. 

9

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

          In August 2009, the FASB issued ASU No. 2009-05 – Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value. This ASU clarifies the fair market value measurement of liabilities. In circumstances where a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more        of the following techniques: a technique that uses quoted price of the identical or a similar liability or liabilities when traded as an asset or assets, or another valuation technique that is consistent with the principles of Topic 820 such as an income or market approach. ASU No. 2009-05 was effective upon issuance and it did not result in any significant financial impact on the Company upon adoption. 

          In September 2009, the FASB issued ASU No. 2009-12 – Fair Value Measurements and Disclosures (Topic 820) – Investments in Certain Entities That Calculate Net Asset Value per Share (or its equivalent). This ASU permits use of a practical expedient, with appropriate disclosures, when measuring the fair value of an alternative investment that does not have a readily determinable fair        value. ASU No. 2009-12 is effective for interim and annual periods ending after December 15, 2009, with early application permitted. Since the Company does not currently have any such investments, it does not anticipate any impact on its financial statements upon adoption. 

          In January 2010, the FASB issued ASU No. 2010-06 regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements. This ASU requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers. Further, this ASU requires additional        disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements. This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We are currently evaluating the impact of this ASU; however, we do not expect the adoption of this ASU to have a material impact on our consolidated financial        statements. 

          In February 2010, the FASB issued ASU No. 2010-09 regarding subsequent events and amendments to certain recognition and disclosure requirements. Under this ASU, a public company that is a SEC filer, as defined, is not required to disclose the date through which subsequent events have been evaluated. This ASU is effective upon the issuance of this ASU. The adoption of this ASU did not have a        material impact on our consolidated financial statements. 

          In April 2010, the FASB issued ASU No. 2010-18 regarding improving comparability by eliminating diversity in practice about the treatment of modifications of loans accounted for within pools under Subtopic 310-30 – Receivable – Loans and Debt Securities Acquired with Deteriorated Credit Quality (“Subtopic 310-30”). Furthermore, the amendments clarify guidance about        maintaining the integrity of a pool as the unit of accounting for acquired loans with credit deterioration. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors. The amendments in this Update are effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual        period ending on or after July 15, 2010. The amendments are to be applied prospectively. Early adoption is permitted. We are currently evaluating the impact of this ASU; however, we do not expect the adoption of this ASU to have a material impact on our consolidated financial statements. 

**Note 3 – Equipment**

          Equipment at March 31, 2010 and December 31, 2009, consisted of the following: 

10

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

|                                |   |          |       |           |   |       |   |
|-------------------------------------|--------|---------------|------------|----------------|--------|------------|--------|
|                                |   | **3/31/2010** |       | **12/31/2009** |   |
|                                |   |          |       |           |   |       |   |
| Subscriber equipment                |   | $             | 6,260,808  |           | $      | 6,206,078  |   |
| Fixed wireless tower site equipment |   |          | 2,990,272  |           |   | 2,816,295  |   |
| Software and consulting costs       |   |          | 623,202    |           |   | 594,170    |   |
| Computer and office equipment       |   |          | 532,393    |           |   | 459,089    |   |
| Vehicles                            |   |          | 232,649    |           |   | 242,574    |   |
| Leasehold improvements              |   |          | 312,100    |           |   | 312,100    |   |
|                                |   |               |            |                |        |            |        |
|                                |   |          | 10,951,424 |           |   | 10,630,306 |   |
| Less: accumulated depreciation      |   |          | (9,412,491 | )              |   | (9,015,852 | )      |
|                                |   |               |            |                |        |            |        |
|                                |   |          |       |           |   |       |   |
| Fixed assets - net                  |   | $             | 1,538,933  |           | $      | 1,614,454  |   |
|                                |   |               |            |                |        |            |        |

          Depreciation expense for the three months ended March 31, 2010 and March 31, 2009 was $416,063 and $538,946 respectively. 

**Note 4 – Intangible Assets**

          Intangible assets at March 31, 2010 and December 31, 2009, consisted of the following: 

|                           |   |          |       |           |   |       |   |
|--------------------------------|--------|---------------|------------|----------------|--------|------------|--------|
|                           |   | **3/31/2010** |       | **12/31/2009** |   |
|                           |   |          |       |           |   |       |   |
| Goodwill                       |   | $             | 1,628,831  |           | $      | 1,341,816  |   |
| Subscriber base                |   |          | 1,365,275  |           |   | 1,313,415  |   |
| Trademark                      |   |          | 16,667     |           |   | 93,585     |   |
|                           |   |               |            |           |        |            |   |
|                           |   |          | 3,010,773  |           |   | 2,748,816  |   |
| Less: accumulated amortization |   |          | (1,185,177 | )              |   | (1,130,746 | )      |
|                           |   |               |            |           |        |            |   |
|                           |   |          |       |           |   |       |   |
| Intangible assets - net        |   | $             | 1,825,596  |           | $      | 1,618,070  |   |
|                           |   |               |            |           |        |            |   |

          Amortization expense for the three months ended March 31, 2010 and March 31, 2009 was $54,431 and $100,511, respectively. 

          Estimated amortization expense for the remainder of 2010 and future fiscal years is as follows: 

|       |   |   |    |   |
|------------|--------|--------|---------|--------|
| 2010       |   | $      | 78,485  |   |
| 2011       |   |   | 45,985  |   |
| 2012       |   |   | 45,359  |   |
| 2013       |   |   | 10,269  |   |
| 2014       |   |   | — |   |
| Thereafter |   |   | — |   |
|       |   |        |         |   |
|       |   | $      | 180,098 |   |
|       |   |        |         |   |

**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”). On June 18, 2009, the Company entered into a Change in Terms Agreement with Sun West Bank, whereby the Company made a principal reduction payment of $450,000. Pursuant to the Change in Terms 

11

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

Agreement, the payment reduced the Loan to $4.05 million with Sun West Bank and extended its maturity until June 4, 2015. Payments for the first year are interest only at 7.25% fixed interest rate. A shareholder in the Company is also a minority shareholder and Board member of the lending institution. As a member of the bank’s Board and Loan Committee, the shareholder abstained from voting on this transaction as required under the appropriate        banking regulations. The Loan was guaranteed by three shareholders of the Company, one being an officer of the Company. The interest is payable monthly. The loan and all accrued interest were repaid in full on February 5, 2010. 

          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 March 31, 2010 was 7.75%. The interest on the line of credit is paid monthly. The line of credit is guaranteed by a shareholder and officer of the Company. The line of credit was paid down to a zero balance as of March 31, 2010. 

          On February 1, 2010, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with The California Capital Limited Partnership (“CCLP”). On February 5, 2010, pursuant to the Note Purchase Agreement, the Company issued to CCLP a secured convertible promissory note for the principal sum of $15,000,000 (the “Note”). The Note generally        bears interest at the rate of 8% per annum. However, prior to September 30, 2010, interest under the Note shall accrue on the outstanding principal amount, at the election of CCLP, at the rate of 4% per annum and be payable in cash or at the rate of 8% per annum and be payable in shares of Series Cal Cap Preferred Stock, with such shares of Series Cal Cap Preferred Stock. The Note matures on February 5, 2015, unless accelerated by CCLP upon an event of default. 

          The Note is convertible into shares of Series Cal Cap Preferred Stock as well as common stock, at the option of CCLP, upon maturity or mandatorily in certain circumstances, as fully described in the Company’s Current Report on Form 8-K filed on February 5, 2010. Pursuant to the terms of the Note, if the Company had been successful in any of its ARRA applications, the Note would have        mandatorily converted into shares of Series Cal Cap Preferred Stock. The Company also entered into a Registration Rights Agreement, a Security Agreement (the “Security Agreement”) and various ancillary certificates, dated February 5, 2010. Pursuant to the Security Agreement between CCLP and the Company, the Company’s obligations under the Note are secured by a perfected security interest in all of the assets and properties of the Company, including the stock of its        subsidiaries. 

          The Company had the following notes payable at March 31, 2010 and December 31, 2009:

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

|                                                                                                                                                                                                                              |   |          |       |           |   |     |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|------------|----------------|--------|----------|--------|
| **Notes payable**                                                                                                                                                                                                                 |   | **3/31/2010** |       | **12/31/2009** |   |
|                                                                                                                                                                                                                              |   |          |       |           |   |     |   |
|      Convertible note has a term of 5 years. Prior to 09/30/10, holder can elect to receive interest at 8% per annum if paid in the form of Preferred Stock or interest at 4% per annum if paid in cash. |   | $             | 15,000,000 |           | $      | —  |   |
|      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                                                                                                 |   |          | 24,758     |           |   | 30,181   |   |
|      9.1% note payable to GMAC, payable monthly for 60 months for the purchase of two trucks                                                                                                             |   |          | 3,708      |           |   | 6,374    |   |
|                                                                                                                                                                                                                              |   |               |            |           |        |          |   |
|                                                                                                                                                                                                                              |   |          | 15,150,203 |           |   | 158,292  |   |
| Current portion                                                                                                                                                                                                                   |   |          | (148,223   | )              |   | (150,450 | )      |
|                                                                                                                                                                                                                              |   |               |            |           |        |          |   |
| Long term portion                                                                                                                                                                                                                 |   | $             | 15,001,980 |           | $      | 7,842    |   |
|                                                                                                                                                                                                                              |   |               |            |           |        |          |   |

|                                |   |          |    |           |   |      |   |
|-------------------------------------|--------|---------------|---------|----------------|--------|-----------|--------|
| **Term loan payable-related party** |   | **3/31/2010** |    | **12/31/2009** |   |
| Term loan payable - current         |   | $             | — |           | $      | 147,016   |   |
| Term loan payable - long term       |   |          | — |           |   | 3,902,984 |   |
|                                |   |               |         |           |        |           |   |
|                                |   | $             | — |           | $      | 4,050,000 |   |
|                                |   |               |         |           |        |           |   |

          Future minimum payments on the notes payable, which are stated at their principal amounts with initial or remaining terms of one year or more consist of the following as of March 31, 2010: 

|       |   |   |   |       |   |
|------------|--------|--------|--------|------------|--------|
| 2010       |   |   | $      | 142,360    |   |
| 2011       |   |   |   | 2,590,682  |   |
| 2012       |   |   |   | 3,696,071  |   |
| 2013       |   |   |   | 4,005,682  |   |
| 2014       |   |   |   | 4,338,151  |   |
| Thereafter |   |   |   | 377,257    |   |
|       |   |   |        |            |   |
|       |   |   | $      | 15,150,203 |   |
|       |   |   |        |            |   |

**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 $83,122 in the three months ended March 31, 2010. On March 12, 2009, the Company entered into an Amendment of a certain Master Equipment Lease Agreement with one of        the Company’s secured lenders (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 November 9, 2005 (the “Master Lease”). The Lender also has agreed to extend and restructure the payments due and owing under the Master Lease such that beginning in April 2009, the        Company began to make the restructured payments with the final payment in March 2011. 

          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        $3,622,975 as of March 31, 2010. 

13

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

          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 March 31, 2010: 

|                                |   |   |      |   |
|-------------------------------------|--------|--------|-----------|--------|
| 2010                                |   |   | 661,713   |   |
| 2011                                |   |   | 607,637   |   |
| 2012                                |   |   | 55,171    |   |
| 2013                                |   |   | 6,909     |   |
| 2014                                |   |   | 179       |   |
|                                |   |        |           |   |
| Total mimimum lease payments        |   |   | 1,331,609 |   |
| Less amounts representing interest  |   |   | (256,203  | )      |
|                                |   |        |           |   |
|                                |   |   | 1,075,406 |   |
|                                |   |   |      |   |
| Less current portion                |   |   | (700,296  | )      |
|                                |   |        |           |   |
| Long term capital lease obligations |   | $      | 375,110   |   |
|                                |   |        |           |   |

          Future minimum lease payments under the operating leases with initial or remaining terms of one year or more consist of the following at March 31, 2010: 

|       |   |   |      |   |
|------------|--------|--------|-----------|--------|
| 2010       |   | $      | 694,633   |   |
| 2011       |   |   | 772,079   |   |
| 2012       |   |   | 444,008   |   |
| 2013       |   |   | 235,135   |   |
| 2014       |   |   | 48,391    |   |
| Thereafter |   |   | 15,604    |   |
|       |   |        |           |   |
|       |   |   |      |   |
| Total      |   | $      | 2,209,850 |   |
|       |   |        |           |   |

          The total rental expense included in operating expenses for operating leases included above is $353,676 and $351,031 for the three months ended March 31, 2010 and 2009, respectively. 

**Note 7 - Related Party Transactions**

          Related parties that entered into transactions with the Company include officers and stockholders. Transactions with related parties as of March 31, 2010 and December 31, 2009 are the following: 

|                                                          |   |          |    |           |   |      |   |
|---------------------------------------------------------------|--------|---------------|---------|----------------|--------|-----------|--------|
|                                                          |   | **3/31/2010** |    | **12/31/2009** |   |
|                                                          |   |          |    |           |   |      |   |
| Term loan payable-curent - related party (see also Note 5)    |   | $             | — |           | $      | 147,016   |   |
| Term loan payable-long term - related party (see also Note 5) |   |          | — |           |   | 3,902,984 |   |
| Revolving line of credit - related party (see also Note 5)    |   |          | — |           |   | 100,000   |   |
|                                                          |   |               |         |           |        |           |   |
|                                                          |   | $             | — |           | $      | 4,150,000 |   |
|                                                          |   |               |         |           |        |           |   |

          The loan and all accrued interest were repaid in full on February 5, 2010 with proceeds from the Note of $15,000,000 issued to CCLP. The revolving line of credit was also paid down to $0 as of March 31, 2010. 

14

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**Note 8 - Business Combinations**

          On December 4, 2009, the Company purchased the assets of SkyWi, Inc., pursuant to an Asset Purchase Agreement, from Data Sales, Inc., including subscriber contracts, accounts, and fixed assets for 33,388 shares of common stock and a total purchase price of $66,442. The purchase price breakdown is as follows: 

|                      |   |   |    |   |
|---------------------------|--------|--------|---------|--------|
| Subscriber Base           |   | $      | 22,528  |   |
| Property and equipment    |   |   | 65,600  |   |
| Less: Gain on acquisition |   |   | (21,686 | )      |
|                      |   |        |         |   |
| Total consideration       |   | $      | 66,442  |   |
|                      |   |        |         |   |

          On February 3, 2010, the Company purchased the assets of Affinity Wireless, LLC, pursuant to an Asset Purchase Agreement, including subscriber contracts, accounts, and fixed assets for 141,521 shares of common stock and a total purchase price of $410,411. The preliminary purchase price breakdown is as follows: 

|                                  |   |   |    |   |
|---------------------------------------|--------|--------|---------|--------|
| Network equipment                     |   | $      | 118,205 |   |
| Customer premise equipment            |   |   | 20,150  |   |
| Customer base                         |   |   | 51,860  |   |
| Vehicles                              |   |   | 9,840   |   |
| Office equipment                      |   |   | 5,795   |   |
| Prepaid expenses                      |   |   | 2,580   |   |
| Accounts receivable                   |   |   | 3,401   |   |
| Accounts payable and accrued expenses |   |   | (11,342 | )      |
| Loan payable                          |   |   | (69,487 | )      |
| Deferred subscription income          |   |   | (7,607  | )      |
| Goodwill                              |   |   | 287,016 |   |
|                                  |   |        |         |   |
|                                  |   |   |    |   |
|                                  |   | $      | 410,411 |   |
|                                  |   |        |         |   |

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

          The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes pricing model to calculate the fair value of options and warrants issued to both        employees and non-employees. Stock issued for compensation is valued using the market price of the stock on the date of the related agreement. 

***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”). 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. 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 are listed on the OTC Bulletin Board under the symbol “KEYO”. 

          The Company is authorized to issue up to 115,000,000 shares of common stock with a par value of $.001 for each share. 21,181,439 and 20,686,056 shares were issued and outstanding as of March 31, 2010 and December 31, 2009, respectively. 

15

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

          During the three month period ended March 31, 2010, 495,383 shares of common stock were issued. Stock was issued during the three months ended March 31, 2010 as follows: 66,667 shares of stock recorded as common stock payable as of December 31, 2009, priced at $1.50 for total proceeds of $100,000 for subscription sales, 55,556 shares of stock valued at $123,890 were issued as payment for        contractual agreements for professional services, 228,774 shares were issued for warrants exercised totaling $268,608, 2,865 were issued for common stock payable as of December 31, 2009 of $1,433, and 141,521 were issued for the purchase of the Affinity Wireless, LLC assets. 

          During the year ended December 31, 2009, 11,914,706 shares of common stock were issued. Stock was issued during the year ended December 31, 2009 as follows: 5,677,984 shares of stock priced at $3,088,951 for subscription sales, 3,693,069 were issued for secured subordinated notes and accrued interest totaling $1,517,286, 80,000 shares of stock were issued as part of the restricted stock        agreement, 2,272,778 shares of stock valued at $327,945 were issued as payment for contractual agreements for professional services, 100,000 shares were issued for warrants exercised totaling $50,000, 57,487 were issued for common stock payable as of December 31, 2008, and 33,388 were issued for the purchase of the SkyWi assets. 

***Preferred Shareholders’ Equity***

          The Company is authorized to issue up to 60,000,000 shares of 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 March 31, 2010 and December 31, 2009, respectively. 

***Warrants***

          The Company has 3,693,642 common stock warrants outstanding and exercisable as of March 31, 2010 with a warrant strike price ranging from $0.50 to $8.00 and an average price of $2.85 for each share of common stock. These warrants have expiration dates of three to five years from their date of issue. As of December 31, 2009, a total of 3,936,291 warrants to purchase shares of our common stock        were outstanding and exercisable. 400,000 warrants were issued in during the three months ended March 31, 2010. 478,774 warrants were exercised during the three months ended March 31, 2010. 13,875 warrants were forfeited due to expiration during the three months ended March 31, 2010. 150,000 warrants became unexercisable as a result of certain conditions not being fulfilled during the three months ended March 31, 2010. The amount expensed to interest expense for the amortization of the        debt issuance costs during the three months ended March 31, 2010, was $21,198. 

***Stock Option Plans***

          On August 9, 2007, our Board of Directors and stockholders adopted the 2007 Incentive Stock and Awards Plan (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 Board of Directors. 

          As of December 31, 2009, 2,440,000 options were outstanding. During the three months ended March 31, 2010, the Company did not grant any options to purchase shares of common stock, pursuant to the 2007 Plan. For the three months ended March 31, 2010, 150,000 options were forfeited. As of March 31, 2010, 2,290,000 options were outstanding. 

          Compensation expense recorded on stock options for the three months ended March 31, 2010, totaled $232,056. The range of strike price per outstanding option is $0.25 to $5.00 and the weighted average strike price is $1.04 per share. 

16

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**Note 10 – Subsequent Events**

**Acquisitions**

          On April 30, 2010, the Company entered into an agreement to acquire substantially all of the wireless broadband assets and assume certain liabilities from Dynamic Broadband Corporation, an Iowa corporation. The assets to be acquired are used in the businesses of operating wireless broadband networks that provide high-speed Internet access and other related services to subscribers in Iowa and        Minnesota. The wireless broadband assets exclude DYBB’s managed service business known as “X-Wires.” 

          As consideration for the acquired assets, the Company has agreed to issue shares of common stock as well as assume certain obligations of DYBB. The total purchase price of the transaction is $2,520,000, subject to further adjustments as described in the Asset Purchase Agreement. The Asset Purchase Agreement contains customary representations and warranties by the Company and DYBB. 

          On December 21, 2009, we entered into an agreement to acquire certain assets and assume certain liabilities from RidgeviewTel, LLC, a Colorado limited liability company. The acquired assets are used in the businesses of operating wireless broadband networks that provide high-speed Internet access and other related services to both residential and commercial subscribers in, and around, certain        markets in Illinois. 

          On April 1, 2010, upon the satisfaction of certain closing conditions as described in the RVT Asset Purchase Agreement, we completed the purchase of the assets and assumed certain liabilities. At Closing, as partial consideration for these acquired assets, we issued 150,944 shares of common stock of the Company. The balance of the consideration consists of up to 16,772 shares of common stock,        based upon the final calculation of net working capital as described in the RVT Asset Purchase Agreement. The Company has not yet completed the purchase valuation on this acquisition. 

17

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

|        |                                                                                            |
|-------------|-------------------------------------------------------------------------------------------------|
| **Item 2.** | **Management’s Discussion and Analysis of Financial Condition and Results of Operations** |

**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 VoIP and DISH video services to both residential and business subscribers. 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. We have principally grown our business through the acquisition of wireless broadband companies operating in areas contiguous or adjacent to our existing operations as well as through the organic growth of our subscriber base. Over the past four years, we have acquired seven companies, which have increased our subscriber base and expanded our network footprint. The strategic acquisition of wireless broadband        companies is one of our core growth strategies known as “Rural UniFi” which we launched in September of 2009. From December 2009 continuing through the first quarter of 2010, we completed three acquisitions of wireless broadband assets, including subscribers and related equipment, located in Texas, Iowa and Illinois. Additionally, on April 30, 2010, we entered into an agreement to acquire substantially all of the wireless broadband assets from Dynamic Broadband Corporation        (“Dynamic Broadband”) which, when completed, will be our eighth acquisition. Dynamic Broadband provides wireless broadband and related services to commercial and residential customers in Iowa and Minnesota. We anticipate closing this transaction in the second quarter of 2010. We are engaged in ongoing discussions with numerous potential acquisition candidates and believe we are well positioned to continue to make additional acquisitions and grow our revenue and cash flow.        

          In February of 2010, we raised $15 million through the issuance of a secured convertible promissory note. We believe that this financing provided us with sufficient capital to execute our business plan, which consists of: Rural UniFi, overall organic subscriber growth and other strategic initiatives, including the participation in government programs. Specifically, our working capital position        has improved by approximately $17 million as compared to the first quarter in 2009. 

          The passage of the American Recovery and Reinvestment Act of 2009 (ARRA) and specifically, the Broadband Initiatives Program (BIP) created a unique opportunity for us to potentially access federal grants and loans for the deployment of next-generation wireless broadband networks using WiMAX technology (4G WiMAX) in qualified rural markets. The receipt of such funding would allow us to greatly        expand our network footprint and service offerings. Under BIP, there are two rounds during which applicants may seek grants and loans from the federal government. In the first round of BIP (“Round One”), we submitted eleven applications for grants and loans totaling approximately $150 million in order to build out networks across 11 states. These applications were all denied in March 2010. The second and final round of BIP (Round Two) commenced in January 2010 with        applications due on March 29, 2010. 

          In Round Two, the definitions of eligible areas were expanded to include a greater number of eligible communities and the amount of capital for “last-mile” projects, such as KeyOn’s, was increased from $1.2 billion to $1.7 billion. In light of those changes, as well as the fact that only approximately $910 million of the $1.2 billion was allocated to applicants in Round One,        management continues to believe that participation in ARRA through BIP is a significant opportunity for growth. As a result, on March 29, 2010, we submitted sixteen applications under Round Two of the BIP. Pursuant to our applications, KeyOn is seeking approximately $374 million of federal grants and loans to bring 4G WiMAX broadband to as many as 22 states and 9.6 million people in rural America. In addition, in the event our applications are awarded, we would be required to contribute        up to $163 million of third-party financing. 

**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. 

18

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

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

          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**

*Three-Month Period Ended March 31, 2010 as Compared to the Three-Month Period Ended March 31, 2009*

*          Revenues*. During the three month period ended March 31, 2010, we recognized revenues of $1,594,959, as compared to revenues of $1,866,172 during the three month period ended March 31, 2009, representing a decrease of approximately 14.5%. This decrease was the result of a net decline in subscribers. During 2009, in an effort to reduce operating costs, we reduced our marketing and other        corporate expenses, electing to focus principally on subscriber retention. As a result, during this period we experienced reduced gross subscriber additions and ordinary course subscriber churn. These factors were magnified by the general economic downturn experienced across many sectors of the economy in 2009. In the fourth quarter of 2009 and continuing into the first quarter of 2010, we began to increase our marketing expenses in an effort to grow our subscriber base. Although we        have begun to experience an increase in subscribers, we have not yet received the full financial benefit of such subscriber growth during the first quarter. In addition, we did not receive a full quarter of revenues from the acquisition completed during the first quarter of 2010. 

*          Operating Loss*. Operating expenses, which consist of payroll, bonuses, taxes and stock based compensation, depreciation and amortization, other general and administrative costs, network operating costs, marketing and advertising, installation expense, and professional fees totaled $3,509,977 for the three month period ended March 31, 2010, as compared to $2,628,397 for the three month        period ended March 31, 2009, representing a increase of approximately 33.5%. The majority of this increase, 98.4%, was due to professional fees expenses during the three month period ended March 31, 2010, as compared to the three month period ended March 31, 2009. These professional fees were almost entirely due to expenses incurred in connection with our Round Two ARRA applications. The remaining 1.6% of the increase in operating expenses was an increase in payroll expenses and        marketing expenses that was offset by a reduction in depreciation and network operating costs. Our operating loss margin increased by 79 percentage points from a total operating loss of $1,915,018 for the three month period ended March 31, 2010 as compared to a loss of $762,225 for the three month period ended March 31, 2009. By removing ARRA stimulus application expenses and non-cash stock compensation expense from payroll and professional fees of $1,162,641 for the three month period        ended March 31, 2010, and $187,482 for the three month period ended March 31, 2009, our operating expenses decreased by $93,579. Using these normalized expenses, our operating loss margin increased by only 16 percentage points from a total normalized operating loss of $752,377 for the three month period ended March 31, 2010 as compared to a loss of $574,743 for the three month period ended March 31, 2009. 

*          Payroll, Bonuses and Taxes*. Payroll, bonuses and taxes totaled $1,077,292 for the three month period ended March 31, 2010, as compared to $872,570 for the three month period ended March 31, 2009, representing an increase of approximately 23.5%. A majority of this increase, 78.3%, was primarily due to additional headcount in support of our expanded operations resulting from our Rural        Unifi initiatives and in furtherance of our organic 

19

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

growth efforts for the three month period ended March 31, 2010. The remaining portion of this increase, 21.7%, was due to non-cash stock based compensation for the three month period ended March 31, 2010. 

*          Depreciation and Amortization*. Depreciation and amortization expenses totaled $470,495 for the three month period ended March 31, 2010, as compared to $639,457 for the three month period ended March 31, 2009, representing a decrease of approximately 26.4%. This decrease was primarily due to fewer new equipment purchases stemming from slower growth during the three month period ended        March 31, 2010 as compared to the three month period ended March 31, 2009. 

*          Network Operating Costs*. Network operating costs, which consist of tower rent, Internet transport costs and Internet termination expenses, totaled $665,274 for the three month period ended March 31, 2010, as compared to $708,186 for the three month period ended March 31, 2009, representing a decrease of approximately 6.1%. The decrease was primarily due to our efforts to reduce costs by        improving our tower equipment maintenance process which resulted in fewwer tower service repairs, fewer replacement parts purchased and our rationalizing of unnecessary and underperforming transmission sites. This decrease, however, was partially offset by increased tower rent, along with Internet transport and termination expenses from acquired networks.

*          Other General and Administrative Expenses*. Other general and administrative expenses totaled $290,040 for the three month period ended March 31, 2010, as compared to $308,385 for the three month period ended March 31, 2009, representing a decrease of approximately 0.6%. This slight reduction was due to a continued focus on reducing overall expenses. 

*          Installation Expense*. Installation expense, which consists primarily of expenses associated with installation supplies, third party installation costs and transportation expenses relating to the installations, totaled $51,575 for the three month period ended March 31, 2010, as compared to $47,353 for the three month period ended March 31, 2009, representing an increase of approximately        8.9%. Installation volumes decreased by 23.9% during the three month period ended March 31, 2010 as compared to the three month period ended March 31, 2009. Fuel expense and automobile repair expenses, however, increased during the three month period ended March 31, 2010 as compared to the three month period ended March 31, 2009, more than offsetting the decrease in installation volume.

*          Professional Fees*. Professional fees, which consist of legal, accounting, and other related expenses, totaled $904,649 for the three month period ended March 31, 2010, as compared to $37,093 for the three month period ended March 31, 2009, representing an increase of approximately 2,338.9%. The majority of this increase, 90%, was due to expenses incurred in connection with our Round Two        ARRA applications. The remaining 10% was due to expenditures related to our Rural Unifi initiative. Without these professional fees from the ARRA initiative, our professional fees expense for the three month period ended March 31, 2010 would have been $47,973 as compared to $37,093 during the three months ended March 31, 2009, an increase of approximately 29%. 

*          Marketing and Advertising Expenses*. Marketing and advertising expenses totaled $50,652 for the three month period ended March 31, 2010, as compared to $15,353 for the three month period ended March 31, 2009, representing an increase of approximately 229.9%. In an attempt to grow our subscriber base organically, we began to increase our marketing initiatives during the three months ended        March 31, 2010. Our marketing costs were 3.2% of revenue for the three month period ended March 31, 2010 and 0.8% of revenue for the three month period ended March 31, 2009, representing a 2 percentage point increase. We expect to see the full impact of our marketing efforts take hold in the second quarter of 2010. 

*          Other Income and Expense*. We incurred other income and expense of $49,915 for the three month period ended March 31, 2010, as compared to $260,353 for the three month period ended March 31, 2009, representing a decrease of 80.8%. The primary reason for the decrease, 72.2%, resulted from the successful negotiation and settlement of an outstanding trade account payable. The remaining        reason for the decrease, 19.2%, was the absence of any interest expense on our subordinated secured notes during the three month period ended March 31, 2010 as compared to the three month period ended March 31, 2009, as these subordinated secured notes were satisfied in full on September 30, 2009. 

20

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

*          Net Loss*. We had a net loss of $1,964,933 for the three month period ended March 31, 2010, as compared to a net loss of $1,022,578 for the three month period ended March 31, 2009, representing an increase of approximately 92.2%. The majority of this increase, 92.2%, was due to professional fees expenses during the three month period ended March 31, 2010, as compared to the three month        period ended March 31, 2009. Furthermore, most of these professional fees were incurred in connection with our Round Two ARRA applications. The remaining 7.8% of the increase resulted from higher payroll and marketing expenses, as offset by a reduction in depreciation and network operating costs. Our net loss margin increased by 68 percentage points from a net loss of $1,964,933 for the three month period ended March 31, 2010 as compared to a net loss of $1,022,578 for the three month        period ended March 31, 2009. By removing the ARRA stimulus application expenses and non-cash stock compensation expense from payroll and professional fees of $1,162,564 for the three month period ended March 31, 2010, and $187,482 for the three month period ended March 31, 2009, our net loss improved by $32,804. Using the normalized net loss, our net loss margin increased by only 6 percentage points from a total normalized net loss of $802,292 for the three month period ended March 31,        2010 as compared to a normalized net loss of $835,096 for the three month period ended March 31, 2009. 

**Liquidity and Capital Resources**

*General*

          As of March 31, 2010 and March 31, 2009, we had cash of $9,727,636 and $47,590, respectively. 

*          Net Cash Used by Operating Activities*. Net cash used in operating activities totaled $1,369,833 for the three month period ended March 31, 2010, as compared to net cash used by operating activities of $136,343 for the three month period ended March 31, 2009. This increase in cash used in operating activities was primarily attributable to payments for professional services incurred in        connection with our Round Two ARRA applications. We also reduced our accounts payable by $316,846, or 18%, from December 31, 2009 to March 31, 2010. Finally, we prepaid $250,000 for professional fees related to capital equipment financing requirements in our Round Two ARRA applications.

*          Net Cash Used in Investing Activities*. Net cash used in investing activities totaled $101,914 for the three month period ended March 31, 2010, as compared to net cash proceeds from investing activities of $791 for the three month period ended March 31, 2009. In the three-month period ended March 31, 2010, we purchased computer software, tower and customer premise equipment with cash        totaling $103,714. 

*          Net Cash Provided By Financing Activities*. Net cash provided by financing activities totaled $11,074,300 for the three month period ended March 31, 2010, as compared to $155,110 for the three month period ended March 31, 2009. During the three month period ended March 31, 2010, we issued a secured convertible promissory note for $15,000,000 of which $4,050,000 was used to pay our        previously outstanding term bank loan, and $100,000 was used to pay down a revolving line of credit. We also received proceeds from the exercise of warrants of $456,108 during the three month period ended March 31, 2010. 

*          Working Capital*. As of March 31, 2010, we had working capital of $7,307,052. As of March 31, 2009 we had negative working capital $9,252,232. The improvement year over year is $16,559,284. 

|         |                         |
|--------------|------------------------------|
| **Item 4T.** | **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 

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

timely decisions regarding required disclosure. We were unable to conclude that our disclosure controls and internal controls over financial reporting procedures are effective, as of the end of the period covered by this report (March 31, 2010), in ensuring that material information that we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported        within the time periods specified in the Securities and Exchange Commission’s rules and forms. We are currently assessing our company-wide control environment and implementing additional processes to work towards compliance this requirement prior to the filing of our annual report for the year ended December 31, 2010. 

**Changes in Internal Control over Financial Reporting**

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

**PART 11 – OTHER INFORMATION**

|        |          |
|-------------|---------------|
| **Item 6**. | **Exhibits.** |

|            |                                                         |            |   |
|-----------------|--------------------------------------------------------------|-----------------|--------|
| **Exhibit No.** |                                                         | **Description** |   |
|                 |                                                         |                 |   |
|            |                                                         |
| 31.1*           | Section 302 Certification by the Principal Executive Officer |
|            |                                                         |
| 31.2*           | Section 302 Certification by the Principal Financial Officer |
|            |                                                         |
| 32.1*           | Section 906 Certification by the Principal Executive Officer |
|            |                                                         |
| 32.2*           | Section 906 Certification by the Principal Financial Officer |

|   |           |
|--------|----------------|
|        |
| *      | Filed herewith |

22

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**SIGNATURES**

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 

|                 |                                |                                  |
|----------------------|-------------------------------------|---------------------------------------|
|                 | KEYON COMMUNICATIONS HOLDINGS, INC. |
|                 |                                |                                  |
| Date: March 17, 2010 | By:                                 |                                  |
|                 |                                |                                       |
|                 |                                | Jonathan Snyder                       |
|                 |                                | President and Chief Executive Officer |
|                 |                                | (Principal Executive Officer)         |
|                 |                                |                                  |
| Date: March 17, 2010 | By:                                 |                                  |
|                 |                                |                                       |
|                 |                                | Annette Eggert                        |
|                 |                                | Chief Financial Officer               |
|                 |                                | (Principal Financial Officer)         |

23

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**KEYON COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**EXHIBIT INDEX**

|            |   |                                                         |   |
|-----------------|--------|--------------------------------------------------------------|--------|
| **Exhibit No.** |   | **Description**                                              |   |
|                 |   |                                                              |   |
|            |   |                                                         |   |
| 31.1*           |   | Section 302 Certification by the Principal Executive Officer |
|            |   |                                                         |   |
| 31.2*           |   | Section 302 Certification by the Principal Financial Officer |
|            |   |                                                         |   |
| 32.1*           |   | Section 906 Certification by the Principal Executive Officer |
|            |   |                                                         |   |
| 32.2*           |   | Section 906 Certification by the Principal Financial Officer |

|   |           |
|--------|----------------|
|        |
| *      | Filed herewith |

24

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