---

---

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

|                                                        |                                                                                          
|------------------------------------------------------- | -----------------------------------------------------------------------------------------
|x                                                       | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE SECURITIES EXCHANGE ACT OF 1934 
|                                                        |                                                                                          
|                                                        | For the quarterly period ended March 31, 2011                                            
|                                                        |                                                                                          
|o                                                       | TRANSITION 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 |  | (I.R.S. Employer   
|Incorporation or Organization)  |  | 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 x No o

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 the 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
|(Do not
 check if a smaller reporting company) |                          |  

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 16,
2011, 23,768,211 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
|                                                                                                                           |  |     
|                                                                                                                           |  |     
|Condensed Consolidated Balance Sheets as of March 31, 2011
 (Unaudited) and December 31, 2010                              |  | 1   
|                                                                                                                           |  |     
|Condensed Consolidated Statements of Operations for the three months
 ended March 31, 2011 and 2010 (Unaudited)            |  | 2   
|                                                                                                                           |  |     
|Condensed Consolidated Statements of Stockholders Equity (Deficit)
 for the three months ended March 31, 2011 (Unaudited) |  | 3   
|                                                                                                                           |  |     
|Condensed Consolidated Statements of Cash Flows for the three months
 ended March 31, 2011 and 2010 (Unaudited)            |  | 4   

i

---



PART I  FINANCIAL INFORMATION

Item 1. Financial Statements.

KEYON
COMMUNICATIONS HOLDINGS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                               |  |                  |             |                     |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ----------- | ------------------- | - | ----------- | -
|                                                                                                                                                                               |  | March
 31,
 2011 |             | December
 31,
 2010 |  
|                                                                                                                                                                               |  | (unaudited)      |             |                     |  
|                                                                                                                                                                               |  |                  |             |                     |  
|ASSETS                                                                                                                                                                         |  |                  |             |                     |   |             |  
|CURRENT ASSETS:                                                                                                                                                                |  |                  |             |                     |   |             |  
|Cash and cash equivalents                                                                                                                                                      |  | $                | 1,859,804   |                     | $ | 766,264     |  
|Accounts receivable, net of allowance for doubtful accounts                                                                                                                    |  |                  | 463,205     |                     |   | 282,951     |  
|Marketable securities                                                                                                                                                          |  |                  | 750,077     |                     |   | 5,746,612   |  
|Prepaid expenses and other current assets                                                                                                                                      |  |                  | 364,781     |                     |   | 278,671     |  
|                                                                                                                                                                               |  |                  |             |                     |   |             |  
|Total current assets                                                                                                                                                           |  |                  | 3,437,867   |                     |   | 7,074,498   |  
|                                                                                                                                                                               |  |                  |             |                     |   |             |  
|PROPERTY AND EQUIPMENT - Net                                                                                                                                                   |  |                  | 4,839,796   |                     |   | 3,406,340   |  
|OTHER ASSETS                                                                                                                                                                   |  |                  |             |                     |   |             |  
|Goodwill                                                                                                                                                                       |  |                  | 2,227,802   |                     |   | 1,815,095   |  
|Subscriber base  net                                                                                                                                                          |  |                  | 2,185,596   |                     |   | 864,867     |  
|Trademarks                                                                                                                                                                     |  |                  | 16,567      |                     |   | 16,567      |  
|Deposits                                                                                                                                                                       |  |                  | 43,480      |                     |   | 85,386      |  
|Debt issuance costs  net                                                                                                                                                      |  |                  | 269,414     |                     |   | 278,880     |  
|                                                                                                                                                                               |  |                  |             |                     |   |             |  
|Total other assets                                                                                                                                                             |  |                  | 4,742,859   |                     |   | 3,060,795   |  
|                                                                                                                                                                               |  |                  |             |                     |   |             |  
|TOTAL ASSETS                                                                                                                                                                   |  | $                | 13,020,522  |                     | $ | 13,541,633  |  
|                                                                                                                                                                               |  |                  |             |                     |   |             |  
|CURRENT LIABILITIES:                                                                                                                                                           |  |                  |             |                     |   |             |  
|Accounts payable                                                                                                                                                               |  | $                | 2,072,535   |                     | $ | 2,017,896   |  
|Accrued expenses                                                                                                                                                               |  |                  | 455,767     |                     |   | 186,481     |  
|Accrued interest expenses                                                                                                                                                      |  |                  | 9,700       |                     |   | 1,096,787   |  
|Revolving line of credit                                                                                                                                                       |  |                  | 1,224,271   |                     |   | 1,215,938   |  
|Current portion of notes payable                                                                                                                                               |  |                  | 691,227     |                     |   | 396,847     |  
|Current portion of capital lease obligations                                                                                                                                   |  |                  | 556,752     |                     |   | 644,119     |  
|Deferred Rent                                                                                                                                                                  |  |                  | 68,543      |                     |   | 66,835      |  
|Deferred revenue                                                                                                                                                               |  |                  | 230,105     |                     |   | 253,596     |  
|Derivative liability                                                                                                                                                           |  |                  |            |                     |   | 2,390,515   |  
|                                                                                                                                                                               |  |                  |             |                     |   |             |  
|Total current Liabilities                                                                                                                                                      |  |                  | 5,308,900   |                     |   | 8,269,014   |  
|                                                                                                                                                                               |  |                  |             |                     |   |             |  
|LONG-TERM LIABILITIES:                                                                                                                                                         |  |                  |             |                     |   |             |  
|Convertible note (net of a $13,041,549 discount at December 31, 2010)                                                                                                          |  |                  |            |                     |   | 1,958,451   |  
|Notes payable, less current maturities                                                                                                                                         |  |                  | 661,571     |                     |   | 505,312     |  
|Capital lease obligations, less current portion                                                                                                                                |  |                  | 45,386      |                     |   | 145,605     |  
|Deferred rent liability, less current portion                                                                                                                                  |  |                  |            |                     |   | 16,147      |  
|Deferred tax liability                                                                                                                                                         |  |                  | 179,581     |                     |   | 165,471     |  
|                                                                                                                                                                               |  |                  |             |                     |   |             |  
|Total long-term liabilities                                                                                                                                                    |  |                  | 886,538     |                     |   | 2,790,986   |  
|                                                                                                                                                                               |  |                  |             |                     |   |             |  
|TOTAL LIABILITIES                                                                                                                                                              |  |                  | 6,195,438   |                     |   | 11,060,000  |  
|                                                                                                                                                                               |  |                  |             |                     |   |             |  
|STOCKHOLDERS EQUITY:                                                                                                                                                          |  |                  |             |                     |   |             |  
|Preferred Stock - 30,000,000 shares authorized with 30,000,000 shares
 designated in the following class:                                                                      |  |                  |             |                     |   |             |  
|Series A preferred stock, 30,000,000 shares authorized; 16,315,068 shares
 issued, liquidation preference of 24,472,602                                                        |  |                  | 16,315,068  |                     |   |            |  
|Common stock, $0.001 par value; 115,000,000 shares authorized;
 23,768,211 and 23,668,211 shares
 issued and outstanding at March 31, 2011 and December 31, 2010, respectively |  |                  | 23,768      |                     |   | 23,668      |  
|Additional paid-in capital                                                                                                                                                     |  |                  | 34,692,074  |                     |   | 28,718,581  |  
|Accumulated deficit                                                                                                                                                            |  |                  | (44,205,995 | )                   |   | (26,261,840 | )
|Accumulated other comprehensive income                                                                                                                                         |  |                  | 169         |                     |   | 1,224       |  
|                                                                                                                                                                               |  |                  |             |                     |   |             |  
|Total stockholders equity                                                                                                                                                     |  |                  | 6,825,084   |                     |   | 2,481,633   |  
|                                                                                                                                                                               |  |                  |             |                     |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                     |  | $                | 13,020,522  |                     | $ | 13,541,633  |  
|                                                                                                                                                                               |  |                  |             |                     |   |             |  

See notes to condensed
consolidated financial statements.

1

---



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

|                                                    |  |                                 |             |      |   |             |  
|--------------------------------------------------- |  | ------------------------------- | ----------- | ---- | - | ----------- | -
|                                                    |  | For the Quarter Ended March 31, |            
|                                                    |  |                                 |            
|                                                    |  | 2011                            |             | 2010 |  
|                                                    |  |                                 |             |      |  
|REVENUES:                                           |  |                                 |             |      |   |             |  
|Service and installation revenue                    |  | $                               | 2,345,822   |      | $ | 1,554,428   |  
|Support and other revenue                           |  |                                 | 19,816      |      |   | 40,531      |  
|                                                    |  |                                 |             |      |   |             |  
|Total revenues                                      |  |                                 | 2,365,638   |      |   | 1,594,959   |  
|                                                    |  |                                 |             |      |   |             |  
|OPERATING COSTS AND EXPENSES:                       |  |                                 |             |      |   |             |  
|Payroll, bonuses and taxes                          |  |                                 | 2,571,377   |      |   | 1,077,292   |  
|Network operating costs                             |  |                                 | 1,039,474   |      |   | 904,649     |  
|Professional fees                                   |  |                                 | 95,957      |      |   | 665,274     |  
|Depreciation and amortization                       |  |                                 | 650,386     |      |   | 470,495     |  
|General and administrative expenses                 |  |                                 | 476,470     |      |   | 290,040     |  
|Installation expense                                |  |                                 | 72,374      |      |   | 51,575      |  
|Marketing and advertising                           |  |                                 | 100,764     |      |   | 50,652      |  
|                                                    |  |                                 |             |      |   |             |  
|Total operating costs and expenses                  |  |                                 | 5,006,802   |      |   | 3,509,977   |  
|                                                    |  |                                 |             |      |   |             |  
|LOSS FROM OPERATIONS                                |  |                                 | (2,641,164  | )    |   | (1,915,018  | )
|OTHER INCOME (EXPENSE):                             |  |                                 |             |      |   |             |  
|Gain/(loss) on disposal of equipment                |  |                                 | 246,197     |      |   | 1,459       |  
|Other income                                        |  |                                 | 13,775      |      |   | 151,897     |  
|Interest income                                     |  |                                 | 704         |      |   | 853         |  
|Interest expense                                    |  |                                 | (13,327,210 | )    |   | (535,100    | )
|Fair value of derivative in excess of debt proceeds |  |                                 |             |      |   | (29,792,150 | )
|Debt conversion inducement expense                  |  |                                 | (2,292,059  | )    |   |             |  
|Change in fair value of derivative instruments      |  |                                 | 159,110     |      |   | 34,341,508  |  
|                                                    |  |                                 |             |      |   |             |  
|Total other income (expense)                        |  |                                 | (15,199,483 | )    |   | 4,168,467   |  
|                                                    |  |                                 |             |      |   |             |  
|PROVISION FOR INCOME TAXES                          |  |                                 | (14,110     | )    |   |            |  
|                                                    |  |                                 |             |      |   |             |  
|NET INCOME (LOSS)                                   |  | $                               | (17,854,757 | )    | $ | 2,253,449   |  
|                                                    |  |                                 |             |      |   |             |  
|Series A Preferred Stock Dividends                  |  |                                 | (89,398     | )    |   |            |  
|OTHER COMPREHENSIVE INCOME (LOSS)                   |  |                                 |             |      |   |             |  
|Net income (loss) available to common stockholders  |  | $                               | (17,944,155 | )    | $ | 2,253,449   |  
|Unrealized gain on investments                      |  |                                 | 1,055       |      |   |            |  
|                                                    |  |                                 |             |      |   |             |  
|Total comprehensive income (loss)                   |  | $                               | (17,943,100 | )    | $ | 2,253,449   |  
|                                                    |  |                                 |             |      |   |             |  
|Net income (loss) per common share, basic           |  | $                               | (0.76       | )    | $ | 0.11        |  
|                                                    |  |                                 |             |      |   |             |  
|Net income (loss) per common share, diluted         |  | $                               | (0.76       | )    | $ | (0.05       | )
|                                                    |  |                                 |             |      |   |             |  
|Weighted average common shares outstanding, basic   |  |                                 | 23,718,211  |      |   | 20,382,567  |  
|                                                    |  |                                 |             |      |   |             |  
|Weighted average common shares outstanding, diluted |  |                                 | 23,718,211  |      |   | 34,719,514  |  
|                                                    |  |                                 |             |      |   |             |  

See notes to condensed consolidated financial statements

2

---



|                                                          
|----------------------------------------------------------
|KEYON
COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY        
|                                                          
|CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(UNAUDITED)
|                                                          
|                                                          

|                                                         |  |              |  |                         |        |        |            |        |   |                            |  |                     |            |                                        |   |                                      |   |   |        |   |   |             |  
|-------------------------------------------------------- |  | ------------ |  | ----------------------- | ------ | ------ | ---------- | ------ | - | -------------------------- |  | ------------------- | ---------- | -------------------------------------- | - | ------------------------------------ | - | - | ------ | - | - | ----------- | -
|                                                         |  | Common Stock |  | Class A Preferred Stock |        |        |            |        |   |                            |  |                     |           
|                                                         |  |              |  |                         |        |        |            |        |   |                            |  |                     |           
|                                                         |  | Shares       |  | Amount                  |        | Shares |            | Amount |   | Additional
Paid-In
Capital |  | Accumulated
Deficit |            | Accumulated
Other
Comprehensive
Income |   | Total Stockholders
Equity (Deficit) |  
|                                                         |  |              |  |                         |        |        |            |        |   |                            |  |                     |            |                                        |   |                                      |  
|                                                         |  |              |  |                         |        |        |            |        |   |                            |  |                     |            |                                        |   |                                      |   |   |        |   |   |             |  
|BALANCE, January 1, 2011                                 |  | 23,668,211   |  | $                       | 23,668 |        |            |        |   |                            |  | $                   | 28,718,581 |                                        | $ | (26,261,840                          | ) | $ | 1,224  |   | $ | 2,481,633   |  
|Employee stock option compensation expense               |  |              |  |                         |        |        |            |        |   |                            |  |                     | 1,418,129  |                                        |   |                                      |   |   |        |   |   | 1,418,129   |  
|Purchase of ERF Wireless for Stock                       |  | 100,000      |  |                         | 100    |        |            |        |   |                            |  |                     | 31,900     |                                        |   |                                      |   |   |        |   |   | 32,000      |  
|Warrants issued as an inducement to convert debt         |  |              |  |                         |        |        |            |        |   |                            |  |                     | 2,292,059  |                                        |   |                                      |   |   |        |   |   | 2,292,059   |  
|Elimination of derivative liability                      |  |              |  |                         |        |        |            |        |   |                            |  |                     | 2,231,405  |                                        |   |                                      |   |   |        |   |   | 2,231,405   |  
|Preferred Stock issued upon conversion of note           |  |              |  |                         |        |        | 16,315,068 |        |   | 16,315,068                 |  |                     |            |                                        |   |                                      |   |   |        |   |   | 16,315,068  |  
|Dividends issued on Series A Preferred Stock             |  |              |  |                         |        |        |            |        |   |                            |  |                     |            |                                        |   | (89,398                              | ) |   |        |   |   | (89,398     | )
|Unrealized gain (loss) on marketable security investment |  |              |  |                         |        |        |            |        |   |                            |  |                     |            |                                        |   |                                      |   |   | (1,055 | ) |   | (1,055      | )
|Net loss for the three months ended March 31, 2011       |  |              |  |                         |        |        |            |        |   |                            |  |                     |            |                                        |   | (17,854,757                          | ) |   |        |   |   | (17,854,757 | )
|                                                         |  |              |  |                         |        |        |            |        |   |                            |  |                     |            |                                        |   |                                      |   |   |        |   |   |             |  
|                                                         |  |              |  |                         |        |        |            |        |   |                            |  |                     |            |                                        |   |                                      |   |   |        |   |   |             |  
|Balance, March 31, 2011                                  |  | 23,768,211   |  | $                       | 23,768 |        | 16,315,068 |        | $ | 16,315,068                 |  | $                   | 34,692,074 |                                        | $ | (44,205,995                          | ) | $ | 169    |   | $ | 6,825,084   |  
|                                                         |  |              |  |                         |        |        |            |        |   |                            |  |                     |            |                                        |   |                                      |   |   |        |   |   |             |  

See notes to condensed consolidated financial statements.

3

---



|                                                   
|---------------------------------------------------
|KEYON COMMUNICATIONS HOLDINGS INC. AND SUBSIDIARIES
|CONSOLIDATED STATEMENTS OF CASH FLOWS              
|(UNAUDITED)                                        
|                                                   
|                                                   

|                                                                                  |  |                                 |             |      |   |            |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ----------- | ---- | - | ---------- | -
|                                                                                  |  | For the Quarter Ended March 31, |            
|                                                                                  |  |                                 |            
|                                                                                  |  | 2011                            |             | 2010 |  
|                                                                                  |  |                                 |             |      |  
|CASH FLOWS FROM OPERATIONS:                                                       |  |                                 |             |      |   |            |  
|Net income (loss)                                                                 |  | $                               | (17,854,757 | )    | $ | 2,253,449  |  
|Adjustments to reconcile net loss to net cash flows used in operating
activities: |  |                                 |             |      |   |            |  
|Depreciation and amortization                                                     |  |                                 | 654,130     |      |   | 470,495    |  
|Provision for doubtful accounts                                                   |  |                                 | 91,110      |      |   | 37,632     |  
|Deferred Income tax                                                               |  |                                 | 14,110      |      |   |            |  
|(Gain) on disposal of equipment                                                   |  |                                 | (246,197    | )    |   | (1,459     | )
|Stock based compensation expense                                                  |  |                                 | 1,418,129   |      |   | 538,520    |  
|Change in fair value of derivative liability                                      |  |                                 | (159,110    | )    |   | (4,549,358 | )
|Non-cash interest expense                                                         |  |                                 | 13,051,016  |      |   | 352,174    |  
|Debt conversion inducement expense                                                |  |                                 | 2,292,059   |      |   |           |  
|                                                                                  |  |                                 |             |      |   |            |  
|Change in assets and liabilities, net effect of acquisitions                      |  |                                 |             |      |   |            |  
|Accounts receivable                                                               |  |                                 | (271,364    | )    |   | 12,586     |  
|Prepaid expenses and other current assets                                         |  |                                 | (86,109     | )    |   | 24,507     |  
|Refundable deposits                                                               |  |                                 | 41,904      |      |   |           |  
|Accounts payable and accrued expenses                                             |  |                                 | 234,522     |      |   | (238,781   | )
|Accrued interest expense                                                          |  |                                 | 236,319     |      |   | 19,350     |  
|Deferred rent liability                                                           |  |                                 | (14,439     | )    |   | (14,460    | )
|Deferred revenue                                                                  |  |                                 | (23,491     | )    |   | (24,425    | )
|                                                                                  |  |                                 |             |      |   |            |  
|Net cash flows used in operations                                                 |  |                                 | (622,168    | )    |   | (1,119,770 | )
|                                                                                  |  |                                 |             |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                                 |             |      |   |            |  
|Capital expenditures for property and equipment                                   |  |                                 | (416,388    | )    |   | (103,770   | )
|Investments in acquisitions                                                       |  |                                 | (2,794,734  | )    |   |           |  
|Proceeds on disposal of equipment                                                 |  |                                 | 252,500     |      |   | 1,800      |  
|Proceeds  from sales of marketable securities                                     |  |                                 | 6,499,991   |      |   |           |  
|Investments in  marketable securities                                             |  |                                 | (1,504,512  | )    |   |           |  
|                                                                                  |  |                                 |             |      |   |            |  
|                                                                                  |  |                                 |             |      |   |            |  
|Net cash flows provided by investing activities                                   |  |                                 | 2,036,857   |      |   | (101,970   | )
|                                                                                  |  |                                 |             |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                                 |             |      |   |            |  
|Payment on revolving line of credit-related parties                               |  |                                 |            |      |   | (100,000   | )
|Payments on term note payable - related parties                                   |  |                                 |            |      |   | (4,050,000 | )
|Deposits for future financing                                                     |  |                                 |            |      |   | (250,000   | )
|Payments on notes payable                                                         |  |                                 | (133,563    | )    |   | (77,576    | )
|Proceeds from issuance of convertible note                                        |  |                                 |            |      |   | 15,000,000 |  
|Payments on capital lease obligations                                             |  |                                 | (187,586    | )    |   | (154,232   | )
|Proceeds from stock issuance                                                      |  |                                 |            |      |   | 456,101    |  
|                                                                                  |  |                                 |             |      |   |            |  
|Net cash flows provided by (used in) financing activities                         |  |                                 | (321,149    | )    |   | 10,824,293 |  
|                                                                                  |  |                                 |             |      |   |            |  
|                                                                                  |  |                                 |             |      |   |            |  
|NET INCREASE IN CASH                                                              |  |                                 | 1,093,540   |      |   | 9,602,553  |  
|CASH - Beginning of period                                                        |  |                                 | 766,264     |      |   | 125,083    |  
|                                                                                  |  |                                 |             |      |   |            |  
|CASH - End of period                                                              |  | $                               | 1,859,804   |      | $ | 9,727,636  |  
|                                                                                  |  |                                 |             |      |   |            |  
|                                                                                  |  |                                 |             |      |   |            |  
|SUPPLEMENTAL NON-CASH DISCLOSURES FROM INVESTING
& FINANCING ACTIVITIES:          |  |                                 |             |      |   |            |  
|Stock issued for acquisition - Affinity:                                          |  |                                 |             |      |   |            |  
|Network equipment                                                                 |  | $                               |            |      | $ | 118,205    |  
|Customer premise equipment                                                        |  |                                 |            |      |   | 20,150     |  
|Subscriber 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    | )
|Obligation to subscribers                                                         |  |                                 |            |      |   | (7,607     | )
|Goodwill                                                                          |  |                                 |            |      |   | 287,016    |  
|                                                                                  |  |                                 |             |      |   |            |  
|Total Consideration                                                               |  | $                               |            |      | $ | 410,411    |  
|                                                                                  |  |                                 |             |      |   |            |  
|Wells Rural Electric:                                                             |  |                                 |             |      |   |            |  
|Subscriber base                                                                   |  | $                               | 125,642     |      |   |            |  
|Network equipment                                                                 |  |                                 | 23,348      |      |   |            |  
|Customer premise equipment                                                        |  |                                 | 195,298     |      |   |            |  
|Goodwill                                                                          |  |                                 | 34,648      |      |   |            |  
|                                                                                  |  |                                 |             |      |   |            |  
|Total cash and debt consideration                                                 |  | $                               | 378,936     |      |   |           |  
|                                                                                  |  |                                 |             |      |   |            |  
|ERF Wireless                                                                      |  |                                 |             |      |   |            |  
|Subscriber base                                                                   |  |                                 | 1,339,851   |      | $ |           |  
|Network equipment                                                                 |  |                                 | 1,219,081   |      |   |           |  
|Vehicles                                                                          |  |                                 | 40,575      |      |   |           |  
|Network equipment not deployed                                                    |  |                                 | 54,435      |      |   |           |  
|Goodwill                                                                          |  |                                 | 378,058     |      |   |           |  
|                                                                                  |  |                                 |             |      |   |            |  
|Total cash and stock consideration                                                |  |                                 | 3,032,000   |      |   |           |  
|                                                                                  |  |                                 |             |      |   |            |  
|Total paid in Stock                                                               |  |                                 | 32,000      |      |   |           |  
|                                                                                  |  |                                 |             |      |   |            |  
|Total cash consideration                                                          |  |                                 | 3,000,000   |      |   |           |  
|                                                                                  |  |                                 |             |      |   |            |  
|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     |  
|                                                                                  |  |                                 |             |      |   |            |  
|Cash payments for:                                                                |  |                                 |             |      |   |            |  
|Interest                                                                          |  |                                 | 216,785     |      |   | 241,004    |  
|                                                                                  |  |                                 |             |      |   |            |  
|Tax                                                                               |  |                                 |            |      |   |           |  
|                                                                                  |  |                                 |             |      |   |            |  

See notes to condensed consolidated financial statements.

4

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Organization and Nature of Business

On
August 9, 2007, KeyOn Communications, Inc.(KeyOn) became a publicly-traded
company upon its completion of a reverse merger and recapitalization with Grant
Enterprises, Inc. (Grant), a publicly-traded company with no operations (the
Merger). Grant subsequently changed its name to KeyOn Communications
Holdings, Inc. (the Company). KeyOn 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 Western and Midwestern
states: Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska,
Nevada, Ohio, South Dakota, and Texas. In an effort to generate additional
accounting and operational efficiencies, the Company consolidated its eight
wholly-owned subsidiaries: 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 (which
had previously been referred to as the related entities), into one,
wholly-owned operating subsidiary: KeyOn Communications, Inc.

Note 2  Liquidity and Financial Condition

The
Companys net loss amounted to $17,854,757 for the quarter ended March 31, 2011
and includes a $13,051,056 non-cash interest charge to the statement of
operations, principally relating to the acceleration of the discount of our
convertible note upon its conversion into Series A Preferred Stock on March 11,
2011 (the Conversion), and a debt conversion inducement charge of $2,292,059
from the issuance of warrants as a part of the Conversion (see Note 7 
Settlement of convertible Note). As a result, during the quarter ended March
31, 2011, net cash used in operating activities amounted to $622,168. The
Companys accumulated deficit amounted to $44,205,995 at March 31, 2011. At
March 31, 2011, The Companys working capital amounted to a deficit of
$1,871,033.

On
February 1, 2011 we sold a limited number of fixed assets and subscribers from
within one of our geographical markets for $252,500 in proceeds. These assets
had a net carrying amount of $6,303 resulting in a gain of $246,197.

We
have continued to take measures during the quarter ended March 31, 2011 to
streamline our operations and increase our overall revenue generating
capabilities by reducing and controlling operating costs and increasing our
overall base of subscribers by completing several acquisitions (See Note 4). As
a result, management anticipates that the Companys capital resources, which
consist of cash and cash equivalents of approximately $1,859,804 and marketable
securities with a fair value of approximately $750,077, will enable it to meet
its general working capital requirements, repay the current portion of its debt
obligations and continue its business development efforts through at least
April 1, 2012. However, in order to execute our long-term strategy and
penetrate new and existing markets, we may need to raise additional funds,
through public, debt financings, or other means. Management believes that we
have access to capital resources through possible public or private equity
offerings, debt financings or other means; however, we have not secured any
commitments for new financing at this time, nor can we provide any assurance that
new financing will be available on commercially acceptable terms, if needed. If
we are unable to secure additional capital, we may be required to curtail our
business development initiatives and take additional measures to reduce costs
in order to conserve our cash.

In
addition, we received an award under ARRA, specifically, Round Two of the
Broadband Initiatives Program (BIP) administered by the Rural Utilities Service
(RUS). On September 13, 2010, we were announced as a $10.2 million award winner
to build and operate networks throughout rural Nevada to nearly 100,000 rural
residents. We expect to contribute approximately $2 million in matching funds
during the projects construction. We anticipate commencing our project in the
second quarter of 2011 and will be substantially complete within two years.
Although we are currently working with our third-party contractors and
applicable RUS personnel to begin requisitioning funds pursuant to the award,
we cannot provide any assurances as to the timing of the funding of the award
or whether we will ultimately receive it. By accepting the loan and grant
funds, we also agreed to certain long-term conditions. The RUS will have a
continued interest (in the form of a retained security interest) in the assets
over their economic life, which is expected to be up to 12 years. In the event
of default of the award documents, the government could exercise the rights
under its retained security interest to gain control and ownership of these
assets. In addition, in the event of a proposed change in control of KeyOn, the
acquiring party would need to receive approval from the RUS prior to
effectuating the proposed transaction, for which pre-approval will not be
unreasonably withheld.

5

---



Note 3  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 the instructions to Form 10-Q and Article
10 of Regulation S-X of the United States Securities and Exchange Commission
(SEC). Accordingly, they do not contain all 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 intercompany balances and transactions have been eliminated
in consolidation. In the opinion of the Companys management, the accompanying
unaudited condensed consolidated financial statements contain all the
adjustments necessary (consisting only of normal recurring accruals) to present
the financial position of the Company as of March 31, 2011 and the results of
operations and cash flows for the periods presented. The results of operations
for the three months ended March 31, 2011 are not necessarily indicative of the
operating results for the full fiscal year or any future period. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2010. The
Companys accounting policies are described in the Notes to Consolidated
Financial Statements in its Annual Report on Form 10-K for the year ended
December 31, 2010, filed on March 30, 2011, and updated, as necessary, in this
Quarterly Report on Form 10-Q.

Use of Estimates

The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of net sales and expenses
during the reporting period. Actual results could differ from those estimates.
These estimates and assumptions include valuing equity securities and
derivative financial instruments issued as consideration in business
combinations and/or in financing transactions and in share based payment
arrangements, accounts receivable reserves, deferred taxes and related valuation
allowances, allocating the purchase price to the fair values of assets acquired
and liabilities assumed in business combinations (including separately
identifiable intangible assets and goodwill) and estimating the fair values of
long lived assets to assess whether impairment charges may be necessary.
Certain of our estimates, including accounts receivable and the carrying
amounts of intangible assets could be affected by external conditions including
those unique to our industry and general economic conditions. It is reasonably
possible that these external factors could have an effect on our estimates that
could cause actual results to differ from our estimates. We re-evaluate all of
our accounting estimates at least quarterly based on these conditions and record
adjustments, when necessary.

Consolidation Policy

The
accompanying consolidated balance sheets and consolidated statements of
operations, stockholders equity (deficit), and cash flows for the quarter
ended March 31, 2011, include the accounts of the Company and its wholly owned
subsidiary. All significant intercompany balances and transactions have been
eliminated in consolidation. During the year ended December 31, 2010, the
Company transferred and assigned all assets and liabilities of its wholly owned
subsidiaries into a single subsidiary.

Revenue Recognition

The
Company records revenue in accordance with SEC Staff Accounting Bulletin No.
104 based on when (i) persuasive evidence of an arrangement exists, (ii)
delivery or performance has occurred, (iii) the fee is fixed or determinable,
and (iv) collectability of the sale is reasonably assured.

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 one or two year contracts and are billed monthly,
quarterly, semi-annually or annually in advance. Payments received in advance
for subscriptions are deferred and recognized as the services are provided.
Deferred revenues for payments received in advance of subscription services
amounted to $230,105 and $253,596 at March 31, 2011 and 2010, respectively. 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.

6

---



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 it cash
and cash equivalents at high credit quality institutions, with balances, at
times, in excess of federally insured limits. As of March 31, 2011, the Company
has approximately $1,589,505 in excess of federally insured limits. Management
believed that the financial institution that holds our deposits are financially
sound and therefore pose minimal credit risk.

Marketable Securities

Marketable
securities consist of investments in government agencies notes. The maximum
maturity for any investment is six months. The Company accounts for its
marketable securities in accordance with the provisions of ASC 320-10. The
Company classifies these securities as available for sale and the securities
are reported at fair value. Unrealized gains and losses are recorded as a
component of accumulated other comprehensive income and excluded from net
income (loss). As of March 31, 2011, the Company had an unrealized gain of $169
relating to the marketable securities.

Goodwill and Intangible Assets

We
account for goodwill and intangible assets in accordance with Accounting
Standards Codification (ASC) 350 Intangibles - Goodwill and Other (ASC
350). ASC 350 requires that goodwill and other intangibles with indefinite
lives should be tested for impairment annually or on an interim basis if events
or circumstances indicate that the fair value of an asset has decreased below
its carrying value.

Goodwill
represents the excess of the purchase price over the fair value of net assets
acquired in business combinations. GAAP requires that goodwill be tested for
impairment at the reporting unit level (operating segment or one level below an
operating segment) on an annual basis and between annual tests when
circumstances indicate that the recoverability of the carrying amount of
goodwill may be in doubt. Application of the goodwill impairment test requires
judgment, including the identification of reporting units, assigning assets and
liabilities to reporting units, assigning goodwill to reporting units, and
determining the fair value. Significant judgment is required to estimate the
fair value of reporting units including estimating future cash flows,
determining appropriate discount rates and other assumptions. Changes in these
estimates and assumptions could materially affect the determination of fair
value and/or goodwill impairment. Upon consideration of our operations, we have
determined that we operate a single reporting unit.

Our
business includes one goodwill reporting unit. We annually review goodwill for
possible impairment by comparing the fair value of the reporting unit to the
carrying value of the assets. If the fair value exceeds the carrying value of
net asset, no goodwill impairment is deemed to exist. If the fair value does
not exceed the carrying value, goodwill is tested for impairment and written
down to its implied fair value if it is determined to be impaired. We
determined that goodwill was not impaired as of March 31, 2011.

Our
amortizable intangible assets consist of acquired subscriber bases. These costs
are being amortized using the straight-line method over their estimated useful
lives. We amortize customer relationships on a straight line basis over a 36 to
48 month estimated useful life.

We
review the carrying value of intangibles and other long-lived assets for
impairment at least annually or whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability
of long-lived assets is measured by comparing the carrying amount of the asset
or asset group to the undiscounted cash flows that the asset or asset group is
expected to generate. If the undiscounted cash flows of such assets are less
than the carrying amount, the impairment to be recognized is measured by the
amount by which the carrying amount of the property, if any, exceeds its fair
market value. We intend to re-evaluate the carrying amounts of our amortizable
intangibles at least quarterly to identify any triggering events. As described
above, if triggering events require us to undertake an impairment review, it is
not possible at this time to determine whether it would be necessary to record
a charge or if such charge would be material.

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 bases 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.

7

---



As
of December 31, 2010, the Company had approximately $23,238,000 and $17,377,000
of federal and state net operating loss carryovers (NOLS) which begin to
expire in 2025. The net operating loss carryovers may be subject to limitation
under Section 382 of the Internal Revenue Code should there be a greater than
50% ownership change as determined under the applicable regulations.

Management
prepared an analysis of the Companys stock ownership activity from November
2007 through March 2011 and concluded that no ownership change occurred prior
to December 31, 2010, but an ownership change did occur in March 2011 with the
result being that our ability to use $23,000,000 of federal and state NOL
carryforwards is subject to an annual limitation.

In
assessing the realization of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax strategies in making this assessment. Based on this assessment,
management has established a full valuation allowance against all of the
deferred tax assets for every period, since it is more likely than not that all
of the deferred tax assets will not be realized.

The
Company accounts for uncertain tax positions based upon authoritative guidance
that prescribes a recognition and measurement process for financial statement
recognition and measurement of a tax position taken or expected to be taken in
a tax return (ASC 740-10). The guidance also provides direction on
derecognition and classification of interest and penalties. Management has
evaluated and concluded that there are no material uncertain tax positions
requiring recognition in the financial statements for any of the periods
presented. The Company files a federal income tax return as well as income tax
returns in eight state jurisdictions in the United States. The tax years ended
December 31, 2007 through 2009 remain subject to examination for federal, state
and local income tax purposes as of December 31, 2010.

The
Companys policy is to classify assessments, if any, for tax related interest
as interest expense and penalties as tax expense

Net Loss per Share

The
Company computes basic net income (loss) per share by dividing net income
(loss) per share available to common stockholders by the weighted average
number of common shares outstanding for the period and excludes the effects of
any potentially dilutive securities. Diluted earnings per share includes the
dilution that would occur upon the exercise or conversion of all potentially dilutive
securities into common stock using the treasury stock and/or if converted
methods as applicable.

The
table of all of our common stock equivalents is as follows:

|                                                                                                               |  |              |            |              |  |            | 
|-------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ------------ |  | ---------- | 
|                                                                                                               |  | March 31,    |           
|                                                                                                               |  |              |           
|                                                                                                               |  | 2011         |            | 2010         | 
|                                                                                                               |  |              |            |              | 
|                                                                                                               |  | Common Stock |            | Common Stock | 
|                                                                                                               |  |              |            |              | 
|Common stock
 purchase warrants                                                                                |  |              | 3,750,494  |              |  | 3,943,642  | 
|Warrants to
 purchase convertible Series A preferred stock - convertible into common stock
 on a 1 for 1 basis |  |              | 10,300,000 |              |  |           | 
|Stock
 options                                                                                                 |  |              | 2,634,344  |              |  | 2,290,000  | 
|Convertible
 notes                                                                                             |  |              |           |              |  | 20,000,000 | 
|Convertible
 Series A preferred stock- convertible into common stock
 on a 1 for 1 basis                       |  |              | 16,404,466 |              |  |            | 
|                                                                                                               |  |              |            |              |  |            | 
|                                                                                                               |  |              | 33,089,304 |              |  | 26,233,642 | 
|                                                                                                               |  |              |            |              |  |            | 

The
numerator in the EPS calculation for the three months ended March 31, 2010
gives effect to addbacks of (i) $90,411 of contractual interest expense under
our convertible notes, and (ii) $330,976 of accretion of discount under the
convertible notes (recorded as interest expense) and (iii) the elimination of
the $4,549,358 change in the fair value of the derivative liability associated
with the conversion option embedded in our convertible notes. The number of
shares included in the presentation of diluted loss per share for the three
months ended March 31, 2010 includes (i) 1,454,630 employee stock options and
(ii) 1,221,205 common stock purchase warrants, each with exercises prices that
are less than the average share price of $1.91 per share for the three months
ended March 31, 2010 and (iii) 11,111,111 shares of common stock underlying the
conversion option embedded in our convertible notes outstanding as of March 31,
2010.

The
adjustment for employee stock options was calculated using the treasury stock
method and the adjustment for the conversion option embedded in our notes was
calculated using the if converted method.

8

---



Share-Based Payments

We
account for share based payments in accordance with ASC 718 Compensation 
Stock Payments which results in the recognition of expense under applicable
GAAP and requires measurement of compensation cost for all share based payment
awards at fair value on the date of grant and recognition of compensation
expense over the service period for awards expected to vest. We calculate the
fair value of stock options using the Black-Scholes option pricing model. The
fair value of restricted stock is determined based on the number of shares
granted and the fair value of our common stock on date of grant. The recognized
expense is net of expected forfeitures.

Common Stock Purchase Warrants and Derivative
Financial Instruments

The
Company classifies all of its common stock purchase warrants and derivative
financial instruments as equity if the contracts (i) require physical
settlement or net-share settlement or (ii) give the Company a choice of
net-cash settlement or settlement in its own shares (physical settlement or
net-share settlement). The Company classifies as assets or liabilities any
contracts that (i) require net-cash settlement (including a requirement to net
cash settle the contract if an event occurs and if that event is outside the
control of the Company), (ii) give the counterparty a choice of net-cash
settlement or settlement in shares (physical settlement or net-share settlement),
or (iii) contracts that contain reset provisions. The Company assesses
classification of its common stock purchase warrants and other derivatives at
each reporting date to determine whether a change in classification between
assets and liabilities is required.

Fair Value Measurements

Financial
instruments, including cash and cash equivalents, accounts payable and accrued
liabilities are carried at cost, which management believes approximates fair
value due to the short-term nature of these instruments. The fair value of
capital lease obligations and equipment loans approximates their carrying
amounts. The interest rates featured in these obligations are comparable to
those of other financial instruments with similar credit risks.

The
Company measures the fair value of financial assets and liabilities based on
the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. The Company maximizes the use of observable inputs and
minimizes the use of unobservable inputs when measuring fair value. The Company
uses three levels of inputs that may be used to measure fair value:

Level
1  quoted prices in active markets for identical assets or liabilities

Level
2  quoted prices for similar assets and liabilities in active markets or
inputs that are observable

Level
3  inputs that are unobservable (for example cash flow modeling inputs based
on assumptions)

Financial
liabilities measured at fair value on a recurring basis are summarized below:

Fair value measurements at March 31, 2011

|                       |  |                 |         |                                                                   |   |                                                   |  |                                              |   |  |   |   | 
|---------------------- |  | --------------- | ------- | ----------------------------------------------------------------- | - | ------------------------------------------------- |  | -------------------------------------------- | - |  | - | - | 
|                       |  | March 31,
 2011 |         | Quoted prices in
 active markets for
 identical assets
 (Level 1) |   | Significant
 other
 observable
 inputs
 (Level 2) |  | Significant
 unobservable
 inputs
 (Level 3) |  
|                       |  |                 |         |                                                                   |   |                                                   |  |                                              |  
|Marketable
 securities |  | $               | 750,077 |                                                                   | $ | 750,077                                           |  | $                                            |  |  | $ |  | 

The
derivative liabilities are measured at fair value using quoted market prices
and estimated volatility factors based on historical quoted market prices for
the Companys common stock, and are classified within Level 3 of the valuation
hierarchy.

9

---



The
following table sets forth a summary of the changes in the fair value of the
Companys Level 3 financial liabilities that are measured at fair value on a
recurring basis:

|                                                                           |  |                 |            |                    |   |             |  
|-------------------------------------------------------------------------- |  | --------------- | ---------- | ------------------ | - | ----------- | -
|                                                                           |  | March 31,
 2011 |            | December 31,
 2010 |  
|                                                                           |  |                 |            |                    |   |             |  
|Beginning
 Balance                                                         |  | $               | 2,390,515  |                    | $ |            |  
|Aggregate
 fair value of derivative issued                                 |  |                 |            |                    |   | 44,792,150  |  
|Issuance
 date charge for difference between fair value and note
 proceeds |  |                 |           |                    |   | (29,792,150 | )
|Change in
 fair value of derivative                                        |  |                 | (159,110   | )                  |   | (12,609,485 | )
|Elimination
 of derivative upon the conversion of related                  |  |                 |            |                    |   |             |  
|Note into
 Series A Preferred Stock to paid in capital                     |  |                 | (2,231,405 | )                  |   |            |  
|                                                                           |  |                 |            |                    |   |             |  
|                                                                           |  |                 |            |                    |   |             |  
|Ending
 Balance                                                            |  | $               |           |                    | $ | 2,390,515   |  
|                                                                           |  |                 |            |                    |   |             |  

The
significant assumptions and valuation methods that we used to determine fair
value and the change in fair value of the derivative financial instrument at
issue are discussed in Note 7 (disclosure of Notes, Loans and Derivative
Liabilities).

In
accordance with the provisions of ASC 815, the Company presented the conversion
option liability at fair value on its balance sheet, with the corresponding
changes in fair value recorded in the Companys statement of operations for the
applicable reporting periods. As disclosed in Note 7, the Company computed the
fair value of the derivative liability at the date of issuance and the
reporting date of March 31, 2011 using both the Black-Scholes option pricing
and lattice pricing methods. The value calculated using the lattice pricing
method is within 1% of the value determined under the Black-Scholes method.

The
Company developed the assumptions that were used as follows: The fair value of
the Companys common stock was obtained from quoted market prices; the term
represents the remaining contractual term of the derivative; the volatility
rate was developed based on analysis of the Companys historical stock price
volatility and the historical volatility rates of several other similarly
situated companies (using a number of observations that was at least equal to
or exceeded the number of observations in the life of the derivative financial
instrument at issue); the risk free interest rates were obtained from publicly
available US Treasury yield curve rates; the dividend yield is zero because the
Company has not paid dividends and does not expect to pay dividends in the
foreseeable future.

Recent Accounting Pronouncements

In
February 2010, the FASB issued Accounting Standards Update (ASU) 2010-09,
Subsequent Events (Topic 855)  Amendments to Certain Recognition and
Disclosure Requirements. ASC 2010-09 requires an entity that is an SEC filer
to evaluate subsequent events through the date that the financial statements
are issued and removes the requirement that an SEC filer disclose the date through
which subsequent events have been evaluated. ASC 2010-09 was effective upon
issuance. The adoption of this standard had no effect on the Companys
consolidated financial position or results of operations. Disclosures have been
modified to reflect the new requirements.

The
FASB has issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of
Supplementary Pro Forma Information for Business Combinations. This amendment
affects any public entity as defined by Topic 805, Business Combinations that
enters into business combinations that are material on an individual or
aggregate basis. The comparative financial statements should present and
disclose revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. The amendments
also expand the supplemental pro forma disclosures to include a description of
the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma
revenue and earnings. The amendments are effective for business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. The adoption of this
standard did not have a material impact on the Companys consolidated financial
position and results of operations.

In
December 2010, the FASB issued ASU 2010-28, Intangibles  Goodwill and Other
(Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts. ASU 2010-28 modifies
Step 1 of the goodwill impairment test for reporting units with zero or
negative carrying amounts by requiring an entity to perform Step 2 of the
goodwill impairment test if it is more likely than not that a goodwill
impairment exists. This update will be effective for fiscal years beginning
after December 15, 2010. The adoption of this standard did not have
a material impact on the Companys consolidated financial position and results
of operations.

10

---



Other
accounting standards that have been issued or proposed by the FASB, SEC and/or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.

Note 4 - Business Combinations

Wells Rural Electric Company

On
January 31, 2011, KeyOn Communications Holdings, Inc. purchased the assets of
Wells Rural Electric Company (WREC), pursuant to an Asset Purchase Agreement,
including subscriber contracts, accounts, and fixed assets. As consideration
for the acquired assets, we agreed to pay $378,936 in cash over a period of two
years, subject to further adjustments. Upon the satisfaction of certain closing
conditions, we initiated the Closing Payment of $94,734. The balance of the
purchase price which amount to $284,202 will be made in eight consecutive
quarterly payments and will accrue interest at the rate of 5.25% per annum (See
Note 7).

The
final purchase price is subject to adjustments for net working capital and
qualified subscribers as described in the asset purchase agreement and it is
not expected to exceed $20,000.

The preliminary allocation of
the purchase price breakdown is as follows:

|                           |  |   |         | 
|-------------------------- |  | - | ------- | 
|Subscriber base            |  | $ | 125,642 | 
|Network equipment          |  |   | 23,348  | 
|Customer premise equipment |  |   | 195,298 | 
|Goodwill                   |  |   | 34,648  | 
|                           |  |   |         | 
|Total consideration        |  | $ | 378,936 | 
|                           |  |   |         | 

Grand
Junction, Colorado market sale

On
February 1, 2011, we entered into an agreement to sell substantially all of the
wireless broadband assets and assign certain liabilities used in the operation
of our Grand Junction, Colorado network to Skybeam, Inc. As consideration for
the acquired assets, the Company agreed to accept an aggregate purchase price
of $261,000 in cash, subject to a holdback in the amount of $52,200 with which
to make post-closing purchase price adjustments based upon the number of
broadband subscribers and monthly Internet service revenue. Also, on February
1, 2011, upon the satisfaction of certain closing conditions as described in
the Asset Purchase Agreement, KeyOn completed the divesture, and received the
initial closing payment of $208,800. We received the balance of the purchase
price of $38,915 on May 2, 2011 after making certain purchase price adjustments
as described in the Asset Purchase Agreement.

The
preliminary sales price breakdown is as follows:

|                            |  |   |          |  
|--------------------------- |  | - | -------- | -
|Network
 equipment          |  | $ | 272,510  |  
|Customer
 premise equipment |  |   | 226,757  |  
|Software                    |  |   | 461      |  
|Computer
 equipment         |  |   | 2,460    |  
|Accumulated
 depreciation   |  |   | (495,885 | )
|Gain on sale
 of assets     |  |   | 246,197  |  
|                            |  |   |          |  
|                            |  |   |          |  
|Total
 consideration        |  | $ | 252,500  |  
|                            |  |   |          |  

ERF Wireless, Inc

On
February 10, 2011, we entered into an agreement to acquire certain wireless
broadband assets and assume certain liabilities used to provide wireless
Internet access and other related services from ERF Wireless, Inc., (ERF).
The assets to be acquired are used in the business of operating wireless
networks that provide high-speed Internet access and other related services to
residential and commercial subscribers in East Central Texas (the Business).
As consideration for the acquired assets, the Company paid $3,000,000 in cash,
subject to further adjustments as described in the Asset Purchase Agreement and
issue 100,000 shares of the Companys common stock. The Asset Purchase Agreement
contains customary representations and warranties by the Company and ERF. On
February 15, 2011, upon the satisfaction of the closing conditions, we
consummated this transaction by delivering $2,700,000 in cash, $300,000 in debt
consideration (see Note 7) and issued 100,000 restricted shares of our common
stock.

The
final purchase price is subject to adjustments for net working capital as
described in the asset purchase agreement which is not expected to exceed
$50,000.

11

---



The
preliminary allocation of the purchase price breakdown is as follows:

|                                |  |   |           | 
|------------------------------- |  | - | --------- | 
|Network
 equipment              |  | $ | 1,219,082 | 
|Vehicles                        |  |   | 40,575    | 
|Subscriber
 base                |  |   | 1,339,851 | 
|Network
 equipment not deployed |  |   | 54,434    | 
|Goodwill                        |  |   | 378,058   | 
|                                |  |   |           | 
|                                |  |   |           | 
|Total
 consideration            |  | $ | 3,032,000 | 
|                                |  |   |           | 

The
pro-forma financial information is presented for informational purposes only
and is not indicative of the results of operations that would have been
achieved had the acquisitions of these businesses taken place at the beginning
of each of the periods presented nor is the pro-forma financial information
intended to project expected results for any future period.

Pro forma financials

The
Company accounted for these business combinations using the acquisition method
of accounting. The results of operations for the three months ended March 31,
2011, include the revenues and expenses of these acquired businesses since
their respective dates of acquisition.

The
unaudited pro-forma financial results for the three months ended March 31, 2011
and March 31, 2010, combines the historical results of Affinity Wireless, ERF Wireless, Inc., and
Wells Rural Electric Company with those of the Company as if these acquisitions
had been completed as of the beginning of each of the periods presented. The
pro-forma weighted average number of shares outstanding also assumes that the
shares issued as purchase consideration were outstanding as of the beginning of
each of the periods presented.

As
described in Note 3, the Company adopted ASU 2010-29 relating to pro forma
disclosures effective January 1, 2011. There were no material non-recurring
pro forma adjustments directly attributable to these acquisitions.

|                                                        |  |                    |             |                    |   |            |  
|------------------------------------------------------- |  | ------------------ | ----------- | ------------------ | - | ---------- | -
|PRO FORMA COMBINED STATEMENT OF OPERATIONS              |  |                    |             |                    |   |            |  
|                                                        |  |                    |             |                    |   |            |  
|                                                        |  | Three Months Ended |             | Three Months Ended |  
|                                                        |  | 31-Mar-11          |             | 31-Mar-10          |  
|                                                        |  |                    |             |                    |   |            |  
|Total
 revenues                                         |  | $                  | 2,661,661   |                    | $ | 2,273,031  |  
|Loss from
 operations                                   |  | $                  | (2,500,021  | )                  | $ | (1,609,896 | )
|Net
 income/(loss) available to common stockholders     |  | $                  | (17,713,614 | )                  | $ | 2,558,571  |  
|Net income/(loss)
 per share, basic                     |  | $                  | (0.78       | )                  | $ | 0.12       |  
|Net
 income/(loss) per share, diluted                   |  | $                  | (0.78       | )                  | $ | (0.03      | )
|Pro forma
 weighted average shares outstanding, basic   |  |                    | 22,649,114  |                    |   | 21,096,744 |  
|Pro forma
 weighted average shares outstanding, diluted |  |                    | 23,718,211  |                    |   | 43,691,745 |  

12

---



Note 5  Property and Equipment

Property and equipment at March 31, 2011 and December 31, 2010, consisted of the following:

|                                    |  |                |             |                   |   |             |  
|----------------------------------- |  | -------------- | ----------- | ----------------- | - | ----------- | -
|                                    |  | March 31, 2011 |             | December 31, 2010 |  
|                                    |  |                |             |                   |  
|Subscriber equipment                |  | $              | 7,087,012   |                   | $ | 7,027,318   |  
|Fixed wireless tower site equipment |  |                | 6,526,385   |                   |   | 5,253,097   |  
|Software and consulting costs       |  |                | 637,371     |                   |   | 633,704     |  
|Computer and office equipment       |  |                | 754,664     |                   |   | 703,467     |  
|Vehicles                            |  |                | 287,183     |                   |   | 243,107     |  
|Leasehold improvements              |  |                | 330,029     |                   |   | 315,013     |  
|                                    |  |                |             |                   |   |             |  
|Property and equipment              |  |                | 15,622,644  |                   |   | 14,175,706  |  
|Less: accumulated depreciation      |  |                | (10,782,847 | )                 |   | (10,769,366 | )
|                                    |  |                |             |                   |   |             |  
|Property and equipment, net         |  | $              | 4,839,796   |                   | $ | 3,406,340   |  
|                                    |  |                |             |                   |   |             |  

Depreciation
expense amounted to $509,366 and $416,064 for the quarters ended March 31, 2011
and 2010 respectively.

Note 6  Intangible Assets

|                                  |  |                |           |                   |   |           | 
|--------------------------------- |  | -------------- | --------- | ----------------- | - | --------- | 
|Goodwill
Detail                   |  | March
31, 2011 |           | December
31, 2010 |  
|                                  |  |                |           |                   |  
|                                  |  |                |           |                   |   |           | 
|Pocatello Acquisition Goodwill    |  | $              | 165,016   |                   | $ | 165,016   | 
|Speednet Acquisition Goodwill     |  |                | 1,176,800 |                   |   | 1,176,800 | 
|Affinity Acquisition Goodwill     |  |                | 287,016   |                   |   | 287,016   | 
|Dynamic Broadband Acquisition     |  |                |           |                   |   |           | 
|Goodwill                          |  |                | 50,495    |                   |   | 50,495    | 
|RidgeviewTel Acquisition Goodwill |  |                | 37,970    |                   |   | 37,970    | 
|TS Wireless Acquisition Goodwill  |  |                | 56,610    |                   |   | 56,610    | 
|Southwest Wireless Acquisition    |  |                |           |                   |   |           | 
|Goodwill                          |  |                | 9,879     |                   |   | 9,879     | 
|On A Wave Acquisition Goodwill    |  |                | 31,309    |                   |   | 31,309    | 
|                                  |  |                |           |                   |   |           | 
|WREC Acquisition Goodwill         |  |                | 34,648    |                   |   |          | 
|ERF Acquisition Goodwill          |  |                | 378,059   |                   |   |          | 
|                                  |  |                |           |                   |   |           | 
|Goodwill                          |  | $              | 2,227,802 |                   | $ | 1,815,095 | 
|                                  |  |                |           |                   |   |           | 

|                                           |  |   |            |  
|------------------------------------------ |  | - | ---------- | -
|Subscriber
Base                            |  |   |            |  
|                                           |  |   |            |  
|                                           |  |   |            |  
|Subscriber
Base-December 31, 2010          |  | $ | 2,290,464  |  
|Wells
Electric Acquisition Subscriber Base |  |   | 125,642    |  
|ERF
Acquisition Subscriber Base            |  |   | 1,339,851  |  
|                                           |  |   |            |  
|Subscriber
Base- March 31, 2011            |  |   | 3,755,957  |  
|Less
accumulated amortization              |  |   | (1,570,362 | )
|                                           |  |   |            |  
|Subscriber
Base, net                       |  | $ | 2,185,595  |  
|                                           |  |   |            |  

Trademarks were $16,567 and 16,567 as of March 31, 2011 and 2010, respectively.

Amortization
expense for the three months ended March 31, 2011 and 2010 was $141,020 and $54,431,
respectively.

13

---



Note 7  Notes, Loans and Derivative
Liabilities

Lines of Credit:

In
August 2010, the Company entered into a Portfolio Loan Account agreement with
Morgan Stanley for an amount up to $5,000,000, under which it may borrow up to
the amount of marketable securities held by the Company. The amount outstanding
at March 31, 2011 was $1,224,271 at an interest rate of 2.76%. The borrowings
are due on demand. Accordingly, the outstanding balance is classified
as current. The facility agreement has no contractual expiration date.

Notes Payable

|                                                                                                                                                                                                                                 |  |                |           |                   |   |         | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | ----------------- | - | ------- | 
|                                                                                                                                                                                                                                 |  | March 31,
2011 |           | December 31,
2010 |  
|                                                                                                                                                                                                                                 |  |                |           |                   |  
|                                                                                                                                                                                                                                 |  |                |           |                   |   |         | 
|Note payable to Nevada State Bank in monthly installments of $10,828
including interest at 7% through October 2014.                                                                                                              |  | $              | 400,158   |                   | $ | 425,087 | 
|                                                                                                                                                                                                                                 |  |                |           |                   |   |         | 
|Note payable in connection with acquisition of assets and assumption
of certain liabilities of Southwest Wireless, payable in quarterly non-interest bearing payments of $30,000 through August 1, 2012. (Note 4)                |  |                | 180,000   |                   |   | 210,000 | 
|                                                                                                                                                                                                                                 |  |                |           |                   |   |         | 
|Note payable in connection with acquisition of assets and assumption
of certain liabilities of TS Wireless, payable in quarterly non-interest
bearing payments of $18,750 through June 30, 2012. (Note 4)                        |  |                | 118,750   |                   |   | 184,456 | 
|                                                                                                                                                                                                                                 |  |                |           |                   |   |         | 
|Note payable in connection with acquisition of assets and assumption
of certain liabilities of On A Wave Wireless, Inc., payable in two semi-annually non-interest bearing payments of 53,000 through October 11, 2011.
(Note 4) |  |                | 53,000    |                   |   | 59,000  | 
|                                                                                                                                                                                                                                 |  |                |           |                   |   |         | 
|Note payable to a Blencoe State Bank assumed in connection with
acquisition of On A Wave Wireless, Inc., payable in monthly installments of
$450 including interest at 7.25% through May 2014. (Note 4)                          |  |                | 14,703    |                   |   | 15,774  | 
|                                                                                                                                                                                                                                 |  |                |           |                   |   |         | 
|Note payable to Wells Rural Electric, payable in 8 quarterly
installments including interest at 5.25%                                                                                                                            |  |                | 284,202   |                   |   |        | 
|Note payable to ERF Wireless, payable in 1 non-interest bearing
payment                                                                                                                                                          |  |                | 300,000   |                   |   |        | 
|Note payable to American National Bank, payable in 48 monthly installments
including interest at 7.8%.                                                                                                                           |  |                | 1,985     |                   |   | 7,842   | 
|                                                                                                                                                                                                                                 |  |                |           |                   |   |         | 
|                                                                                                                                                                                                                                 |  |                | 1,352,798 |                   |   | 902,159 | 
|Current portion                                                                                                                                                                                                                  |  |                | 691,227   |                   |   | 396,847 | 
|                                                                                                                                                                                                                                 |  |                |           |                   |   |         | 
|Non-current portion                                                                                                                                                                                                              |  | $              | 661,571   |                   | $ | 505,312 | 
|                                                                                                                                                                                                                                 |  |                |           |                   |   |         | 

14

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Settlement of Convertible Note

On
February 5, 2010, pursuant to the Note Purchase Agreement, the Company issued
to CalCap a secured convertible promissory note for the principal sum of
$15,000,000 (the Note). On December 3, 2010, we entered into the Conversion
Agreement with CalCap, subject to stockholder approval, pursuant to which
CalCap agreed to convert all of the outstanding principal and accrued but
unpaid interest under the Note into Preferred Stock at a conversion price of
$1.00 per share. In addition, upon the conversion of the Note and in accordance
with the Conversion, we also agreed to issue CalCap a five year warrant to
purchase 4,300,000 shares of Preferred Stock at an exercise price of $0.25 per
share, a five year warrant to purchase 4,000,000 shares of Preferred Stock at
an exercise price of $0.40 per share and a five year warrant to purchase
2,000,000 shares of Preferred Stock at an exercise price of $0.60 per share
(collectively, the Warrants). Upon approval by vote of the stockholders, on
March 11, 2011, the Company issued 16,315,068 shares of Preferred Stock in
addition to 10,300,000 exercisable warrants to obtain Preferred Stock, thereby
satisfying the Note.

The
conversion of the Cal Cap Note into Series A Preferred Stock has been accounted
for as an induced conversion. The Company induced  conversion of the
Note through the issuance of warrants to purchase additional shares of Series A
Preferred Stock at exercise prices not provided for in the original Note, b)
additional voting rights granted to Preferred Stock holders relative to those
possessed by common stockholders and c) control of the Board of Directors
through the ability to appoint a majority of its members.

Under
the induced conversion accounting rules, if a convertible debt instrument is
converted to equity securities of the debtor pursuant to an inducement offer,
the debtor recognizes an expense equal to the fair value of the securities and
other consideration transferred in the transaction in excess of the fair market
value of securities issuable pursuant to the original conversion terms. The
fair value of the derivative liability, after giving the effect to the increase
in the exercise price from $0.75 to $1.00 amounted to $2,231,405 immediately
prior to the conversion of the rate. The fair value of the derivative liability
amounted to $2,390,515 at December 31, 2010. Accordingly, we recorded a
$159,110 credit to other income during the period January 1, 2011 to March 11,
2011. Upon the conversion of the Note, the derivative liability no longer
exists and was therefore reclassified to additional paid in capital. The
Company recorded accretion on the Note of $589,055 as interest expense during
the period January 1, 2011 to March 11, 2011 to a value of $2,547,416 at the
conversion date. After giving effect to the conversion, the unamortized
discount on the Note of $12,452,584 was accelerated and has been charged to
interest expense.

Derivative Financial Instrument

The
Company computed the fair value of the derivative liability at the conversion
date of March 11, 2011 using the Black-Scholes option pricing model with the
following assumptions:

|                              |  |                                 |            |  
|----------------------------- |  | ------------------------------- | ---------- | -
|Input                         |  | March 11, 2011(Conversion Date) |           
|                              |  |                                 |           
|Fair value of common stock    |  | $                               | .42        |  
|Exercise Price of Option      |  | $                               | .75        |  
|Term (years)                  |  |                                 | 3.83       |  
|Volatility                    |  |                                 | 53.25      | %
|Risk Free Interest Rate       |  |                                 | 3.12       | %
|Dividend Yield                |  |                                 | 0          | %
|Unit fair value               |  | $                               | 0.11       |  
|Shares issuable upon exercise |  |                                 | 20,000,000 |  
|                              |  |                                 |            |  
|Aggregate fair value          |  | $                               | 2,231,405  |  

15

---



Note 8 - Operating and Capital Leases

Capital Leases:

The
Company leases equipment from certain parties under various capital leases expiring
in 2011 through 2014. 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, 2011:

|                                       |  |   |          |  
|-------------------------------------- |  | - | -------- | -
|2011                                   |  | $ | 539,186  |  
|2012                                   |  |   | 139,283  |  
|2013                                   |  |   | 3,083    |  
|2014                                   |  |   | 503      |  
|Thereafter                             |  |   |         |  
|                                       |  |   |          |  
|Total minimum lease payments           |  |   | 682,055  |  
|Less amounts representing interest     |  |   | (79,917  | )
|                                       |  |   |          |  
|                                       |  |   | 602,138  |  
|Less current portion                   |  |   | (556,752 | )
|                                       |  |   |          |  
|Capital lease obligations, non-current |  | $ | 45,386   |  
|                                       |  |   |          |  

Operating Leases:

In
addition, the Company leases 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, the Company also has various operating
leases for office space, equipment, and vehicles that generally are for 3 to 5
year terms. 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, 2011:

|                                                          |  |   |           | 
|--------------------------------------------------------- |  | - | --------- | 
|For the
period of April 1, 2011 through December 31, 2011 |  | $ | 976,869   | 
|For the
years ending December2012                         |  |   | 622,326   | 
|2013                                                      |  |   | 359,620   | 
|2014                                                      |  |   | 161,443   | 
|2015                                                      |  |   | 38,528    | 
|Thereafter                                                |  |   | 6,502     | 
|                                                          |  |   |           | 
|                                                          |  | $ | 2,165,288 | 
|                                                          |  |   |           | 

The
total rental expense included in operating expenses for operating leases
included above is $462,232 and $353,676 for the quarters ended March 31, 2011
and March 31, 2010, respectively.

In
February 2007, the Company entered into a lease agreement for its corporate
offices in Omaha, Nebraska. The lease term commenced in February 2007 and
terminates five years from the date of commencement with an option to renew for
an additional five-year term. The Companys annual rent payments totaled approximately
$103,000 in 2010 and will remain at that level through March 2011, before
increasing to approximately $106,200 through March 2012. Additionally, we have
entered into a new lease for approximately 6,500 square feet of office space
for $6,825 per month in Las Vegas. This facility will serve as our headquarters
and accommodate our growth. This lease commences on May 1, 2011 and expires on
April 30, 2016.

16

---



The
landlord provided the Company with incentives as an inducement to enter the lease
agreement. These incentives included (i) an allowance of $265,000 for leasehold
improvements, (ii) an initial three-month rent-free period and (iii) a reduced
initial monthly payment schedule from April 2007 through September 2007 with
escalating monthly charges thereafter. Leasehold improvements funded by the
landlord have been (i) capitalized and are being amortized over the remaining
lease term and (ii) recognized as deferred rent and amortized ratably over the
term of the lease. The economic value of the rent-free period and the reduced
initial monthly payments are recognized as deferred rent and amortized ratably
over the term of the lease. Current and long term balances totaled $68,543 and
$0 at March 31, 2011.

Note 9  Stockholder Equity

Preferred Stock

The
Company is authorized to issue up to 145,000,000 shares of stock, of which
115,000,000 have been designated as Common Stock and 30,000,000 have been
designated as preferred stock. Of the 30,000,000 shares of preferred stock, 30,000,000
shares have been designated as Series A Preferred Stock. The Series A Preferred
Stock is entitled to certain powers, preferences and other special rights that
are summarized below. The Series A Preferred Stock is not redeemable.

Dividends

The holders of
shares of Series A Preferred Stock are entitled to receive dividends, on a pari
passu basis, out of any assets legally available therefore, prior and in
preference to any declaration or payment of any dividend (payable other than in
common stock or other securities and rights convertible into or entitling the
holder thereof to receive, directly or indirectly, additional shares of common
stock) on the common stock, at the rate of 10% of the Original Issue Price
($1.00, subject to adjustment for any stock splits, stock dividends,
combinations, recapitalizations or the like) per share per annum for the Series
A Preferred Stock, payable within 30 days following the last day of each fiscal
quarter. During the first two years following the initial issuance of the
Series A Preferred Stock, such dividends shall, at the option of the Company,
be payable in either cash or additional shares of Series A Preferred Stock
(with such shares being valued consistently with the common stock). Following
such two year period, dividends shall be paid in cash unless otherwise elected
by the holder. The Company recorded a dividend on the Series A Preferred Stock
of $89,398 for the period March 11 through March 31, 2011.

Liquidation Preference

In the event
of the liquidation, dissolution or winding up of the Company, the acquisition
of the Company by another entity as a result of which the Companys
stockholders have less than 50% control of the acquiring entitys voting power
following such acquisition or the sale of all or substantially all of the
assets of the Company, the holders of Series A Preferred Stock shall be
entitled to receive, on a pari passu basis, prior and in preference to any
distribution of any of the assets of the Company to the holders of common
stock, an amount per share equal to the greater of (i) the sum of (A) $1.50
(subject to adjustment for any stock splits, stock dividends, combinations,
recapitalizations or the like) and (B) an amount equal to all accrued but
unpaid dividends on such share and (ii) the amount of cash, securities or other
property which such holder would be entitled to receive in such sale,
liquidation, dissolution or winding up of the Company with respect to such
shares if such shares had been converted to common stock immediately prior to
such sale, liquidation, dissolution or winding up of the Company. Accordingly, the Series A Preferred Stockholders and all security holders in classes equal to or subordinate to the Series A preferred are entitled to the same consideration upon any liquidation event.

Upon
  completion of these distributions, the holders of Series A Preferred Stock
  shall not be entitled to any further participation as such in any distribution
  of the assets or funds of the Company.

Optional Conversion

Each share of
Series A Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such share into such number
of fully paid and nonassessable shares of common stock as is determined by
dividing the Original Issue Price by the Conversion Price. The initial
Conversion Price per share for shares of Series A Preferred Stock shall be the
Original Issue Price, which means that the shares of Series A Preferred Stock
are initially convertible into shares of common stock on a one-for-one basis.
In addition, each share of Series A Preferred Stock will automatically be
converted into shares of common stock at the Conversion Price at the time in
effect upon the written consent or agreement of the holders of at least a majority
of the then outstanding shares of Series A Preferred Stock.

Anti-Dilution Protection

The Series A
Preferred Stock is subject to weighted-average anti-dilution adjustments in the
event of an issuance of common stock below the then current conversion price of
the Series A Preferred Stock, as the case may be, or the issuance of any
securities convertible into common stock with an exercise or conversion price
below such conversion prices, in each case subject to certain exemptions.

17

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Mandatory Conversion

If the volume
weighted average price for any 10 consecutive trading days exceeds, $5.00
(subject to adjustment for any stock splits, stock dividends, combinations,
recapitalizations or the like), the Company may require any holder of shares of
Series A Preferred Stock to convert such shares, and any accrued but unpaid
dividends thereon, into such number of shares of common stock as provided
above.

Voting Rights

The holders of
Series A Preferred Stock are entitled to vote, together with holders of common
stock as a single class, on any matter upon which holders of common stock have
the right to vote, and shall have the right to three (3) votes for each share
of common stock into which the shares of Series A Preferred Stock held by such
holders could then be converted.

Election of Directors

So long as at
least 10,000,000 shares of Series A Preferred Stock remain outstanding, the
holders of the Series A Preferred Stock are entitled, voting together as a
single class, to elect such number of directors at or pursuant to each meeting
or consent of the Companys stockholders for the election of directors equal to
one-half of the then authorized number of directors plus one (1). Any resulting
fractional number of directors that the holders of Series A Preferred Stock are
entitled to elect hereunder shall be rounded down to the nearest whole number.

Protective Provisions

The consent of
the holders of at least a majority of the then outstanding shares of Series A
Preferred Stock voting separately as a class is required in order for the
Company to:

| |   |                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | alter or change, whether by merger, consolidation or otherwise,
 the rights, preferences or privileges of the shares of Series A Preferred
 Stock so as to affect adversely such shares;                                                                                                                                     
|
| |  | increase
 or decrease (other than by redemption or conversion) the total number of
 authorized shares of preferred stock or common stock;                                                                                                                                                                                    
|
| |  | authorize or issue, or obligate itself to issue, whether by
 merger, consolidation or otherwise, any equity security of the Company,
 including any other security convertible into or exercisable for any equity
 security, having rights, preferences or privileges senior or on parity with
 the Series A Preferred Stock;
|
| |  | effect any reclassification or recapitalization of the
 outstanding capital stock of the Company;                                                                                                                                                                                                                            
|
| |  | amend the Companys certificate of incorporation or bylaws in a
 manner that adversely effects the holders of the Series A Preferred Stock;                                                                                                                                                                                  
|
| |  | pay
 dividends or make other distributions on the capital stock of the Company
 (other than a dividend payable solely in shares of common stock); or                                                                                                                                                                         
|
| |  | approve any transaction that would be required to be disclosed
 as a related party transaction by a corporation that is subject to the
 reporting requirements under the Securities Exchange Act of 1934, as amended,
 and the rules and regulations promulgated thereunder.                                                 

Issuances of Common Stock

On February
15, 2011, we issued 100,000 shares of common stock with a fair value of $32,000
pursuant to the consummation of the ERF acquisition (See Note 4).

18

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Warrants

A
roll-forward of the Companys stock purchase warrants for the quarter ended
March 31, 2011 is as follows:

|                                     |  |                                                         |            | 
|------------------------------------ |  | ------------------------------------------------------- | ---------- | 
|                                     |  | Series A
       preferred stock
      purchase warrants |           
|                                     |  |                                                         |            | 
|Outstanding
      at January 1, 2011 |  |                                                         |           | 
|Issued                               |  |                                                         | 10,300,000 | 
|Exercised                            |  |                                                         |           | 
|Cancelled                            |  |                                                         |           | 
|Expired
 unexercised                 |  |                                                         |           | 
|                                     |  |                                                         |            | 
|                                     |  |                                                         |            | 
|Outstanding
 at March 31, 2011       |  |                                                         | 10,300,000 | 

As
of March 31, 2011, there are 14,050,494 exercisable warrants outstanding that
feature strike prices ranging from $0.20 to $8.00 per share. 8,393,333
exercisable warrants feature strike prices at or below $0.40 per share.

Stock Option Plans

A summary of
the status of our stock option plans and the changes during the quarter ended
March 31, 2011, is presented in the table below:

|                                     |  |                   |           |                                              |   |                                                                        |  |                                 |      |  |   |         | 
|------------------------------------ |  | ----------------- | --------- | -------------------------------------------- | - | ---------------------------------------------------------------------- |  | ------------------------------- | ---- |  | - | ------- | 
|                                     |  | Number of Options |           | Weighted
       Average
      Exercise Price |   | Weighted
       Average
       Remaining
       Contractual
      term |  | Aggregate
      Intrinsic Value |     
|                                     |  |                   |           |                                              |   |                                                                        |  |                                 |      |  |   |         | 
|Balance, December 31, 2010           |  |                   | 2,159,344 |                                              | $ | 0.96                                                                   |  |                                 | 4.42 |  |   |         | 
|Granted                              |  |                   | 425,000   |                                              | $ | 0.37                                                                   |  |                                 |      |  |   |         | 
|Exercised                            |  |                   |          |                                              | $ |                                                                       |  |                                 |      |  |   |         | 
|Cancelled                            |  |                   |          |                                              | $ |                                                                       |  |                                 |      |  |   |         | 
|Forfeited                            |  |                   |          |                                              | $ |                                                                       |  |                                 |      |  |   |         | 
|                                     |  |                   |           |                                              |   |                                                                        |  |                                 |      |  |   |         | 
|                                     |  |                   |           |                                              |   |                                                                        |  |                                 |      |  |   |         | 
|Balance, March 31, 2011              |  |                   | 2,584,344 |                                              | $ | 0.86                                                                   |  |                                 | 4.64 |  | $ | 461,562 | 
|                                     |  |                   |           |                                              |   |                                                                        |  |                                 |      |  |   |         | 
|                                     |  |                   |           |                                              |   |                                                                        |  |                                 |      |  |   |         | 
|Options Exercisable, March
 31, 2011 |  |                   | 2,039,344 |                                              | $ | 1.00                                                                   |  |                                 | 4.23 |  | $ | 356,062 | 
|                                     |  |                   |           |                                              |   |                                                                        |  |                                 |      |  |   |         | 

19

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The
Company calculates the fair value of stock options using the Black-Scholes
option-pricing model. The option-pricing model requires the input of subjective
assumptions, such as those included in the table above. The volatility rates
are based on historical stock prices of similarly situated companies and
expectations of the future volatility of our common stock. The expected life of
options granted is based upon the average of the vesting and contractual term.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect
at the time of grant. The total expense to be recorded in future periods will
depend on several variables, including the number of share-based awards
expected to vest.

Compensation
expense recorded for stock options during the quarter ended March 31, 2011
amounted to $1,418,129.

Unamortized
stock compensation expense as of March 31, 2011 amounted to $250,663 and is
being recognized as compensation expense through February 28, 2015.

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 Network video services to both
residential and business subscribers. We currently offer our broadband services
to residential and business subscribers in a market footprint covering over
62,000 square miles in the following 11 Western and Midwestern states: Idaho,
Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska, Nevada, Ohio, South
Dakota and Texas. We estimate our existing footprint covers approximately 2.7
million people, as well as small to mid-sized businesses in these areas. We
have principally grown our business through the acquisition of wireless
broadband companies operating in areas adjacent to our existing network
operations as well as through the organic growth of our subscriber base. From
2007 through today, we have acquired the assets of eleven companies, which has
increased our subscriber base and expanded our network footprint.

We
achieved a critical financing milestone in February 2010 through the issuance
of a $15 million Note to CalCap. We believe that this
financing provided us with sufficient capital to invest in our growth
strategies in 2010, including strategic acquisitions, 4G WiMAX deployments and
incremental sales and marketing efforts.

Our
present strategy is to achieve positive cash flow from operations by increasing
our revenues through acquisitions, value-added services that increase our ARPU
and growth in our subscriber base. In order to achieve this goal, we attempt to
keep the rate of growth in normalized operating expenses less than the growth
in revenues. Since receiving the proceeds from the CalCap Note, we believe we have
executed our principal growth strategies which consist of: Rural UniFi, overall
organic subscriber growth and strategic initiatives, including the
participation in government broadband programs such as the BIP and the
deployment of 4G WiMAX networks.

Rural Unifi

In
September of 2009, we launched Rural UniFi, which formalized our strategic
acquisition of wireless broadband companies and Rural UniFi continues to be one
of our core growth strategies. We integrate each acquired business into our
existing infrastructure and achieve economies of scale through common
management, customer service, sales and marketing and billing functions. 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.

Organic Subscriber Growth

During
the second half of 2010, we increased our organic growth efforts through
increased marketing expenses. We began to see effects of these efforts in
the first quarter of 2011 as our new customer installations increased by 83%
over the first quarter of 2010.

20

---



ARRA Stimulus Award

On
September 13, 2010, we were announced as a $10.2 million award recipient under
the BIP to deliver 4G wireless broadband services to almost 40 communities
throughout rural Nevada. Pursuant to the projects design, we will make 4G,
last-mile wireless broadband access and VoIP services available to
approximately 93,000 people, 5,522 businesses and 849 critical community facilities
in qualified rural communities throughout Nevada under Round Two of the BIP. We
plan to offer broadband service at speeds up to 8 megabits per second (Mbps).
We anticipate commencing our project in the second quarter of 2011 and will be
substantially complete within two years. We are currently working with our
third-party contractors and applicable RUS personnel to begin requisitioning
funds pursuant to the award, however, we cannot provide any assurances as to
the timing of the funding of the award or whether we will ultimately receive
it.

4G Wireless Network Deployment

We
also implemented a next-generation, 4G wireless network with the launch of our
WiMAX network in Pahrump, Nevada. We believe that the introduction of 4G
networks will help increase both subscriber growth and ARPU. We have also
launched 4G wireless services in eight markets in rural Nebraska, as well as in
Wendover, Nevada.

Characteristics of Our Revenues and Operating
Costs and Expenses

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

Operating
costs and expenses consist of payroll and related expenses, network operating
costs, marketing and advertising, professional fees, installation expense 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, consulting and recruiting resources that we
periodically utilize for functions that we do not perform internally such as
our ARRA applications. 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 expenses.

Results of Operations

Three-Month
Period Ended March 31, 2011 as Compared to the Three-Month Period Ended March
31, 2010

Revenues. During the three month period
ended March 31, 2011, we recognized revenues of $2,365,638, as compared to
revenues of $1,594,959 during the three month period ended March 31, 2010,
representing an increase of approximately 48%. Our increased revenue was a
result of the subscriber growth resulting from the completion of seven
acquisitions during the last three quarters of the year ended December 31, 2010
and the three month period ended March 31, 2011, as well as the effects of the
increase in organic marketing efforts during that second half 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 $5,006,802 for the three month period ended March 31, 2011, as compared
to $3,509,977 for the three month period ended March 31, 2010, representing a
increase of approximately $1.5 million or 43%. The majority of this increase,
81%, was due to an increase in non-cash compensation expenses during the three
month period ended March 31, 2011, as compared to the three month period ended
March 31, 2010. The additional increase of 19% was due to an increase in
payroll and other operating expenses of approximately $847,000 offset by a
reduction in professional fees of approximately $569,000. By removing non-cash
stock compensation expense from payroll and professional fees of $1,418,129 for
the three month period ended March 31, 2011 and $1,162,641 for the three month
period ended March 31, 2010 our operating expenses increased by $1,241,337.
After giving effect to the exclusion of stock compensation, our operating loss
margin increased by 5 percent from a total normalized operating loss of $1,223,035 for
the three month period ended March 31, 2011 as compared to a loss of $752,377
for the three month period ended March 31, 2010.

21

---



Payroll,
Bonuses and Taxes. Payroll, bonuses and taxes totaled $2,571,377 for the three month
period ended March 31, 2011, as compared to $1,077,292 for the three month
period ended March 31, 2010, representing an increase of approximately $1.5
million or 139%. A majority of this increase, 82%, was due to an increase of
non-cash deferred compensation expenses during the three month period ended
March 31, 2011, as compared to the three month period ended March 31, 2010. By
removing the non-recurring and non-cash expenses incurred during the three
month period ended March 31, 2011 and 2010, normalized payroll, bonuses and
taxes would be approximately $1,153,248 and $878,019, respectively, for an
increase of approximately $275,229 or 31%.The remaining portion of the
increase, 18 % was primarily due to additional headcount in support of our
expanded operations resulting from our Rural Unifi initiatives for the three
month period ended March 31, 2011.

Depreciation and Amortization.
Depreciation and amortization expenses totaled $650,386 for the three month
period ended March 31, 2011, as compared to $470,495 for the three month period
ended March 31, 2010, representing an increase of approximately 38%. This
increase was primarily due to new equipment purchases in connection to
investments acquisitions during the three month period ended March 31, 2011 as
compared to the three month period ended March 31, 2010.

Network Operating Costs. Network operating
costs, which consist of tower rent, Internet transport costs and Internet
termination expenses, totaled $1,039,474 for the three month period ended March
31, 2011, as compared to $904,649 for the three month period ended March 31,
2010, representing an increase of approximately 15%. The increase was primarily
due to an increase in network costs resulting from acquisitions in support of
our Rural UniFi initiative.

Other General and Administrative Expenses.
Other general and administrative expenses totaled $476,470 for the three month
period ended March 31, 2011, as compared to $290,040 for the three month period
ended March 31, 2010, representing an increase of approximately $186,000 or
64%. This increase was due primarily to increased office rents, office
utilities in support of our Rural UniFi initiative, travel related to
acquisitions, hiring related expenses and insurance of approximately $163,000.

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 $72,374 for the three month period ended March
31, 2011, as compared to $51,575 for the three month period ended March 31,
2010, representing an increase of approximately 40%. This is a direct result of
the increase in gross subscriber additions during the three month period ended
March 31, 2011 resulting from the effect of increased marketing expenses.

Professional Fees. Professional fees,
which consist of legal, accounting, and other related expenses, totaled $95,957
for the three month period ended March 31, 2011, as compared to $665,274 for
the three month period ended March 31, 2010, representing a decrease of
approximately 86 %. The majority of this decrease was due to expenses incurred
in connection with our Round Two ARRA applications during the three month
period ended March 31, 2010.

Marketing and Advertising Expenses.
Marketing and advertising expenses totaled $100,764 for the three month period
ended March 31, 2011, as compared to $50,652 for the three month period ended
March 31, 2010, representing an increase of approximately 99%. Due to our
ongoing efforts to organically grow our subscriber base, we continued to
increase marketing initiatives for the three month period ended March 31, 2011.
Our marketing costs were 4.26% of revenue for the three month period ended
March 31, 2011 and 3.18% of revenue for the three month period ended March 31,
2010, representing a 1.08 percentage point increase. We expect to see the full
impact of our marketing efforts during the balance of 2011.

Other Income and Expense. We incurred
other expense of $15,199,483 for the three month period ended March 31, 2011,
as compared to an income of $4,168,467 for the three month period ended
March 31, 2010, representing a decrease of $19,367,950. The primary reason for
the decrease was the derivative accounting of the conversion option bifurcated
from the CalCap Note, which included the following non-cash items: interest
expense of $13,051,016 and a debt conversion inducement charge of $2,292,059.
If the effects of the derivative accounting were removed, other Income and
Expense for the three month period ended March 31, 2011 would have totaled an
income of $143,592 as compared to an expense of $49,915 for the three months
ended March 31, 2010, an increase of approximately $193,000.

Net Income (Loss). We had a net loss of
$17,854,757 for the three month period ended March 31, 2011, as compared to a net
income of $2,253,449 for the three month period ended March 31, 2010,
representing a decrease of $20,108,206. The primary reasons for the decrease were
non-cash effects of the conversion of the CalCap note into Series A Preferred
Stock of
$15,343,075 and non-cash stock compensation expense of $1,418,129. If the
effect of the conversion of the Note and the non-cash compensation expenses are
removed our net loss would be $1,093,553, as compared to a net loss of 1,765,660 for the three months
ended March 31, 2010, an improvement of 38%.

22

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Liquidity and Capital Resources

General

We
incurred an operating loss of $2,641,164 for the three months ended March 31,
2011. At March 31, 2011, our accumulated deficit amounted to $44,205,995.
During the three months ended March 31, 2011, net cash used in operating
activities amounted to $622,168. At March 31, 2011, our working capital
amounted to a deficit of $1,871,033.

We
received an award under ARRA, specifically, Round Two of the BIP administered
by the RUS. This federal program allocated $2.5 billion for broadband
infrastructure in rural markets and created a new opportunity for us to access
federal grants and loans for the build-out of next-generation wireless networks
in eligible markets. On September 13, 2010, we were announced as a $10.2
million award winner to build and operate networks throughout rural Nevada to
nearly 100,000 rural residents. We expect to contribute approximately $2
million in matching funds during the projects construction. The RUS award
makes it possible for us to provide 4G WiMAX broadband services where it is
otherwise not economically feasible to do so, based on the high cost to deploy
communications facilities in sparsely populated rural markets. We anticipate
commencing its project in the second quarter of 2011 and will be substantially
complete within two years. We are currently working with our third-party
contractors and applicable RUS personnel to begin requisitioning funds pursuant
to the award, however, we cannot provide any assurances as to the timing of the
funding of the award or whether we will ultimately receive it.

On
February 5, 2010, we issued the Cal Cap Note in exchange for gross proceeds of
$15 million. On December 3, 2010, we entered into an agreement (the Conversion
Agreement) with Cal Cap, pursuant to which CalCap agreed to convert all of the
outstanding principal and accrued but unpaid interest under the Cal Cap Note
into shares of Series A Preferred Stock (Preferred Stock) at a conversion
price of $1.00 per share (the Conversion). The Cal Cap Note is convertible
into shares of Series Cal Cap Preferred Stock and shares of common stock. On
March 11, 2011, pursuant to the Conversion Agreement, the Company issued
16,315,068 shares of Preferred Stock, in addition to 10,300,000 exercisable
warrants to obtain Preferred Stock.

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 broadband programs

We
currently anticipate that our cash and cash equivalents will be sufficient to
meet our working capital requirements to continue our sales and marketing and
research and development through at least April 1, 2012. However, in order to
execute our long-term strategy and penetrate new and existing markets, we may
need to raise additional funds, through public or private equity offerings,
debt financings, corporate collaborations or other means. Management believes
that we may be able to access capital through public or private equity
offerings, debt financings, corporate collaborations or other means; however,
other than the $10.2 million award noted above we have not secured any
commitment for new financing at this time, nor can we provide any assurance
that new financing will be available on commercially acceptable terms, if
needed. If we are unable to secure additional capital, we may be required to
curtail our business development initiatives and take additional measures to
reduce costs in order to conserve our cash needs.

Working
Capital. As of March 31, 2011, we had negative working capital of $1,871,033.
As of March 31, 2010 we had negative working capital of $1,194,516.

Item 4T Controls and Procedures.

We maintain
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our filings under the Securities Exchange Act of
1934 as amended, (the Exchange Act) is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the SEC. This
information is accumulated and communicated to our executive officers to allow
timely decisions regarding required disclosure. As of March 31, 2011, our Chief
Executive Officer, who acts in the capacity of principal executive officer and
in the capacity of principal financial officer, have evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based upon that evaluation, our Chief Executive
Officer, we have concluded that our disclosure controls and procedures were not
effective as of March 31, 2011, based on our evaluation of these controls and
procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

23

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Disclosure Controls and Internal Controls

Disclosure
controls are designed with the objective of ensuring that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Internal controls are procedures which are
designed with the objective of providing reasonable assurance that our
transactions are properly authorized, recorded and reported and our assets are
safeguarded against unauthorized or improper use, to permit the preparation of
our financial statements in conformity with generally accepted accounting
principles, including all applicable SEC regulations.

As
of December 31, 2010, management of our Company had reported at previous dates
of assessment that we identified various deficiencies in our accounting
processes and procedures that constitute a material weakness in internal
control over financial reporting and disclosure controls. We took certain steps
during the year ended December 31, 2010 to correct previously reported material
weaknesses that include, among other things, consolidating all legacy systems
into a single unified accounting system, hiring additional personnel and undertaking
the process of documenting our controls; however, we still need to make
substantial progress in these areas before we can definitively conclude that we
have remediated our material weaknesses.

Management
has specifically observed that the Companys accounting systems and current
staffing resources in the Companys finance department are currently
insufficient to support the complexity of our financial reporting requirements.
The Company has in the past, and is continuing to experience difficulty in (i)
generating data in a form and format that facilitates the timely analysis of
information needed to produce financial reports and (ii) applying complex
accounting and financial reporting disclosure rules as required under various
aspects of GAAP and SEC reporting regulations such as those relating to
accounting for business combinations, stockholders equity transactions,
derivatives and income taxes. The Company also has limited segregation of
duties and it is becoming increasingly necessary for the Company to divide
certain custodial, recordkeeping and authorization functions between its Chief
Financial Officer, Controller, and supporting staff to mitigate the risk of
material misstatements.

We
believe that our internal control risks are sufficiently mitigated by the fact
that our Chief Executive Officer and Chief Financial Officer review and approve
substantially all of our major transactions and we have, when needed, hired
outside experts to assist us with implementing complex accounting principles.
We believe that our weaknesses in internal control over financial reporting and
our disclosure controls relate in part to the fact that we are an emerging
business with limited personnel. Management and the Board of Directors believe that
the company must allocate additional human and financial resources to address
these matters.

Changes in Internal Control over Financial
Reporting

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

24

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PART II  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

25

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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: May
16, 2011 | By:                                 | /s/ Jonathan
Snyder                                               | 
|                   |                                     |                                                                   | 
|                   |                                     | Jonathan
Snyder                                                  
|                   |                                     | President
and Chief Executive Officer and Chief Financial Officer
|                   |                                     | (Principal
Executive Officer and Principal Financial Officer)    

26

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