UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  Form
10-K
 (Mark
One)
 x
                  ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For
the fiscal year ended December 31, 2009
 OR
 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 001-33449
 
 TOWERSTREAM
CORPORATION
 (Exact
name of registrant as specified in its charter)
  Delaware
                                        (State
      or other jurisdiction of incorporation or organization)
                                      20-8259086
                                        (I.R.S.
      Employer Identification No.)55
      Hammarlund Way
                                        Middletown,
      Rhode Island
                                        (Address
      of principal executive offices)
                                      02842
                                        (Zip
      Code)
 
 Registrant’s
telephone number, including area code (401)
848-5848
 
 Securities
registered pursuant to Section 12(b) of the Act:
 Title of each class
                      
                      Name of each exchange on which
      registeredCommon
      Stock, par value $0.001 per share
                      
                      The
      NASDAQ Capital Market
 
 Securities
registered pursuant to Section 12(g) of the Act: None
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes oNo
x
 
 Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. Yes oNo
x
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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 xNo
o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 Yes   ̈    No   ̈
 
 Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§ 229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 
 Large
      accelerated filer o
                      Accelerated
      filer  oNon-accelerated
      filer  o (Do not check if
      a smaller reporting company)
                      Smaller
      reporting company  x
 
 Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes oNo
x
  The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common stock was
last sold as of the last business day of the registrant’s most recently
completed second fiscal quarter was $26,029,981.
  As
of March 15, 2010, there were 34,671,454 shares of Common Stock, par value
$0.001 per share, outstanding.
  DOCUMENTS INCORPORATED BY
REFERENCE
  Portions
of the definitive Proxy Statement for our 2010 Annual Meeting of Stockholders to
be filed with the SEC within 120 days after the close of the fiscal year ended
December 31, 2009 are incorporated by reference into Part III of this
Report.
 
  TOWERSTREAM
CORPORATION
  Table of Contents
  PagePART
      IItem
      1.
                                                                    
                                                                    Business.
                                                                    
                                                                    1Item
      1A.
                                                                    
                                                                    Risk
      Factors.
                                                                    
                                                                    6Item
      1B.
                                                                    
                                                                    Unresolved
      Staff Comments.
                                                                    
                                                                    16Item
      2.
                                                                    
                                                                    Properties.
                                                                    
                                                                    16Item
      3.
                                                                    
                                                                    Legal
      Proceedings.
                                                                    
                                                                    16Item
      4.
                                                                    
                                                                    (Removed
      and Reserved.)
                                                                    
                                                                    16PART
      IIItem
      5.
                                                                    
                                                                    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                                                                    
                                                                    17Item
      6.
                                                                    
                                                                    Selected
      Financial Data.
                                                                    
                                                                    18Item
      7.
                                                                    
                                                                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                                                                    
                                                                    18Item
      7A.
                                                                    
                                                                    Quantitative
      and Qualitative Disclosures About Market Risk.
                                                                    
                                                                    24Item
      8.
                                                                    
                                                                    Financial
      Statements and Supplementary Data.
                                                                    
                                                                    25Item
      9.
                                                                    
                                                                    Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.
                                                                    
                                                                    46Item
      9A(T).
                                                                    
                                                                    Controls
      and Procedures.
                                                                    
                                                                    46Item
      9B.
                                                                    
                                                                    Other
      Information.
                                                                    
                                                                    47PART
      IIIItem
      10.
                                                                    
                                                                    Directors,
      Executive Officers and Corporate Governance.
                                                                    
                                                                    48Item
      11.
                                                                    
                                                                    Executive
      Compensation.
                                                                    
                                                                    48Item
      12.
                                                                    
                                                                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                                                                    
                                                                    48Item
      13.
                                                                    
                                                                    Certain
      Relationships and Related Transactions, and Director
      Independence.
                                                                    
                                                                    48Item
      14.
                                                                    
                                                                    Principal
      Accountant Fees and Services.
                                                                    
                                                                    48PART
      IVItem
      15.
                                                                    
                                                                    Exhibits
      and Financial Statement Schedules.
                                                                    
                                                                    49










PART
I





Forward-Looking
Statements




Forward-looking
statements in this report, including without limitation, statements related to
Towerstream Corporation’s plans, strategies, objectives, expectations,
intentions and adequacy of resources, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following: (i) Towerstream
Corporation’s plans, strategies, objectives, expectations and intentions are
subject to change at any time at the discretion of Towerstream Corporation; (ii)
Towerstream Corporation’s plans and results of operations will be affected by
Towerstream Corporation’s ability to manage growth; and (iii) other risks and
uncertainties indicated from time to time in Towerstream Corporation’s filings
with the Securities and Exchange Commission.




In some
cases, you can identify forward-looking statements by terminology such as
‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘could,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘intends,’’
‘‘anticipates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential,’’ or
‘‘continue’’ or the negative of such terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We are under no duty to
update any of the forward-looking statements after the date of this
report.





Factors
that might affect our forward-looking statements include, among other
things:





●
            overall
      economic and business conditions;





●
            the
      demand for our goods and services;





●
            competitive
      factors in the industries in which we
compete;





●
            emergence of new technologies
      which compete with our service
offerings;





●
            changes in tax requirements
      (including tax rate changes, new tax laws and revised tax law
      interpretations);





●
            the outcome of litigation and
      governmental proceedings;





●
            interest rate fluctuations and
      other changes in borrowing
costs;





●
            other capital market conditions,
      including availability of funding
  sources;





●
            potential
      impairment of our indefinite-lived intangible assets and/or our long-lived
      assets; and





●
            changes
      in government regulations related to the broadband and Internet protocol
      industries.





Item
1. Business.





Towerstream
Corporation (“Towerstream”, “we”, “us”, “our” or the “Company”) provides
broadband services to commercial customers and delivers access over a wireless
network transmitting over both regulated and unregulated radio spectrum. Our
service supports bandwidth on demand, wireless redundancy, virtual private
networks (“VPNs”), disaster recovery, bundled data and video services. We
provide service to approximately 1,900business customers in New
York City, Boston, Chicago, Los Angeles, San Francisco, Seattle, Miami,
Dallas-Fort Worth, Philadelphia, Providence and Newport, Rhode
Island.





The
Company’s website address is http://www.towerstream.com. 
Information contained on the Company’s website is not incorporated into this
annual report on Form 10-K.  Annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all
amendments to those reports are available free of charge through the Securities
and Exchange Commission (“SEC”) website at http://www.sec.gov as soon as
reasonably practicable after those reports are electronically filed with or
furnished to the SEC.





Our
Networks





Our
broadband network is constructed in a significantly different manner than the
legacy service providers. In each of our markets, we enter into lease agreements
with building owners which we refer to as Company Locations. At these locations,
we install a significant amount of equipment on the building rooftop in order to
connect numerous customers to the Internet. We also connect to the Internet at
some of these locations by entering into either IP transit agreements or peering
arrangements with a national service provider. These connection points are
referred to as Points of Presence, or PoPs. Each PoP is “linked” to one or more
other PoPs to enhance redundancy and make sure that there is no single point of
failure. We refer to the core connectivity all of our PoPs as a Wireless Ring in
the Sky. Each PoP has a coverage area of approximately 10 miles although the
exact distance can be affected by numerous factors, most significantly, how
clear the line of sight is between the PoP and the customer
location.





We also
install equipment at each customer location which we refer to as Customer
Locations.  Equipment installed at both Company and Customer Locations
includes receivers and antennas.  A wireless connection is established
between each Customer Location to one or more PoPs through which Internet
service is provided on a wireless basis.





Markets





We intend
to grow our business by deploying our service more broadly and seeking to
rapidly increase our customer base. We intend to deploy our wireless broadband
network broadly both in terms of geography and categories of commercial and
business customers. We intend to increase the number of geographic markets we
serve, taking advantage of a staged roll-out model to deploy our services
throughout major additional United States markets. We also plan to service a
wide range of commercial customers, from small businesses to large
enterprises.




We
determine which geographic markets to enter by assessing a number of criteria in
four broad categories. First, we evaluate our ability to deploy our service in a
given market, taking into consideration our spectrum position, the availability
of towers and zoning constraints. Second, we assess the market by evaluating the
number of competitors, existing price points, demographic characteristics and
distribution channels. Third, we evaluate the economic potential of the market,
focusing on our forecasts of revenue growth opportunities and capital
requirements. Finally, we look at market clustering opportunities and other cost
efficiencies that
might be realized. Based on this approach, as of December 31, 2009, we
offered wireless broadband connectivity in ten markets covering 60% of small and
medium business (5 to 249 employees) in the top 20 metropolitan statistical
areas.





We
believe there are significant market opportunities beyond the ten markets in
which we are currently offering our services. Our long term plan is to expand
nationally into other top metropolitan markets in the United States. However,
given the difficult economic environment existing at the end of 2009, we have
determined that for the foreseeable future, we intend to focus our resources on
strengthening our market coverage in our existing markets rather than expanding
into new markets. We believe there are significant opportunities in our existing
markets. We plan to continue to monitor the broader economic environment, and
based on future changes, as well as our future operating performance, will
determine the appropriate time to enter new markets.





Sales
and Marketing





We hire
salespeople to sell our services directly to business customers. As of December
31, 2009, we employed 57 direct salespeople. We generally compensate these
employees on a salary plus commission basis.





Our
indirect sales channels include a variety of authorized representatives, such as
integrators, resellers and online operators. Authorized representatives assist
in developing awareness of and demand for our service by promoting our services
and brand as part of their own advertising and direct marketing
campaigns.


2


Competition





The
market for broadband services is highly competitive, and includes companies that
offer a variety of services using a number of distinctly different technological
platforms, such as cable networks, digital subscriber lines (“DSL”),
third-generation cellular,
satellite, wireless Internet service and other emerging technologies. We compete
with these companies on the basis of the portability, ease of use, speed and
price of our respective services. Competitors to our wireless broadband services
include:




Incumbent
Local Exchange Carriers and Common Local Exchange Carriers




We face
competition from traditional wireline operators in terms of price, performance,
discounted rates for bundles of services, breadth of service, reliability,
network security, and ease of access and use. In particular, we face competition
from traditional wireline companies like Verizon Communications Inc., Qwest
Corporation and AT&T Inc., all of which are referred to as ‘‘incumbent local
exchange carriers,’’ or (“ILECS”), as well as Covad Communications Group, Inc.,
Speakeasy, Inc., MegaPath Networks Inc., and One Communications Corporation, all
of which are referred to as ‘‘common local exchange carriers,’’ or
(“CLECS”).




Cable
Modem and DSL Services




We
compete with companies that provide Internet connectivity through cable modems
or DSL. Principal competitors include cable companies, such as Comcast
Corporation, and incumbent telephone companies, such as AT&T Inc. or Verizon
Communications Inc. Both the cable and telephone companies deploy their services
over wired networks initially designed for voice and one-way data transmission
that have subsequently been upgraded to provide for additional
services.




Cellular
and PCS Services




Cellular
and personal communications service (“PCS”) carriers are seeking to expand their
capacity to provide data and voice services that are superior to ours. These
providers have substantially broader geographic coverage than we have and, for
the foreseeable future, than we expect to have. If one or more of these
providers can deploy technologies that compete effectively with our services,
the mobility and coverage offered by these carriers will provide even greater
competition than we currently face. Moreover, more advanced cellular and PCS
technologies, such as third generation mobile technologies, currently offer
broadband service with packet data transfer speeds of up to 2,000,000 bits per
second for fixed applications, and slower speeds for mobile applications. We
expect that third generation technology will be improved to increase
connectivity speeds to make it more suitable for a range of advanced
applications.




Wireless
Broadband Service Providers




We also
face competition from other wireless broadband service providers that use
licensed and unlicensed spectrum. In addition to these commercial operators,
many local governments, universities and other governmental or
quasi-governmental entities are providing or subsidizing ‘‘WiFi’’ networks over
unlicensed spectrum, in some cases at no cost to the user. There exist numerous
small local urban and rural wireless operations offering local services that
could compete with us in certain of our present or planned geographic
markets.  In 2008, Sprint, Google, Comcast, Time Warner, Intel and
Brighthouse provided Clearwire with over $3 billion in new capital to build out
a nationwide WiMAX network for consumers.  In 2009, these entities and
an additional investor, Eagle River Holdings LLC, entered into an investment
agreement with Clearwire to provide approximately $2 billion which will go
towards the deployment of their 4G WiMAX network.





Satellite





Satellite
providers, such as WildBlue Communications, Inc. and Hughes Network Systems,
LLC, offer broadband data services that address a niche market, mainly less
densely populated areas that are unserved or underserved by competing service
providers. Although satellite offers service to a large geographic area, latency
caused by the time it takes for the signal to travel to and from the satellite
may challenge a satellite provider’s ability to provide some services, such as
Voice over Internet Protocol (“VoIP”), which reduces the size of the addressable
market.


3


Other





We
believe other emerging technologies may also seek to enter the broadband
services market. For example, we are aware that several power generation and
distribution companies are seeking to develop or have already offered commercial
broadband Internet services over existing electric power lines.





Competitive
Strengths





Even
though we face substantial existing and prospective competition, we believe that
we have a number of competitive advantages that will allow us to retain existing
customers and attract new customers over time.





Reliability





As
compared to cellular, cable and DSL networks that generally rely on
infrastructure originally designed for non-broadband purposes, our network was
designed specifically to support wireless broadband services. We also connect
the customer to our Wireless Ring in the Sky, which has no single point of
failure. This ring is fed by multiple lead Internet providers located at
opposite ends of our service cities and connected to our national ring which is
fed by multiple leading carriers. We believe that we are the only wireless
broadband provider that offers true separate egress for true redundancy. With
DSL and cable offerings, all wires are rendered dead by one backhoe swipe or
switch failure. Our Wireless Ring in the Sky is backhoe-proof and weather-proof.
As a result of these factors, our network has historically experienced
reliability rates of approximately 99%.





Flexibility





Our
wireless infrastructure and service delivery enables us to respond quickly to
changes in a customer’s broadband requirements.  We offer bandwidth
options ranging from 0.5 megabits per second up to 1 gigabit per
second.  We can usually adjust a customer’s bandwidth remotely and
without having to visit the customer location to modify or install new
equipment.  Changes can often be made on a same day
basis.





Timeliness





In many
cases, we can install a new customer and begin delivering Internet connectivity
within 3 to 5 business days after receiving a customer’s order.  Many
of the larger telecommunications companies can take 30 to 60 days to
complete an installation.  As businesses conduct more of their
business operations through the Internet, the timeliness of service delivery has
become more important.





Value





We own
our entire network, which enables us to price our services lower than most of
our competitors. Specifically, we are able to offer competitive prices because
we do not have to buy a local loop charge from the telephone
company.





Efficient
Economic Model





Our
economic model is characterized by low fixed capital and operating expenditures
relative to other wireless and wireline broadband service providers. We own our
entire network, thereby dispensing with the costs involved in using lines owned
by telephone or cable companies. Our system is expandable and covers an area up
to several miles away from each tower which will enable us to realize
incremental savings in our build-out costs as our customer base
grows.





Experienced Management
Team





We have
an experienced executive management team with more than 50 years combined
experience as company leaders. Our President and Chief Executive Officer,
Jeffrey M. Thompson, is a founder of the Company and has more than 20 years
experience in the data communications industry. Our Chief Financial Officer,
Joseph P. Hernon, has been the chief financial officer for three publicly traded
companies. Our Chief Revenue Officer, Mel Yarbrough, has more than 10 years
experience leading direct sales organizations.


4


Corporate
History





We were
organized in the State of Nevada in June 2005, and subsequently became a
public shell company, as defined by the SEC. In January 2007, we merged
with and into a wholly-owned Delaware subsidiary, for the sole purpose of
changing our state of incorporation to Delaware. In January 2007, a
wholly-owned subsidiary of ours merged with and into a private company,
Towerstream Corporation, with Towerstream Corporation being the surviving
company. Upon closing of the merger, we discontinued our former business and
succeeded to the business of Towerstream Corporation as our sole line of
business. At the same time, we also changed our name to Towerstream Corporation
and, our subsidiary, Towerstream Corporation, changed its name to Towerstream I,
Inc.





Regulatory
Matters





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





Telecommunications
Regulation





Our
wireless broadband systems can be used to provide Internet access service and
VPNs. In a March 2007 decision, the FCC classified wireless broadband Internet
access service as an interstate information service that is regulated under
Title I of the Communications Act of 1934, as amended. Accordingly, most
regulations that apply to telephone companies and other common carriers do not
apply to our wireless broadband Internet access service. For example, we are not
currently required to contribute a percentage
of gross revenues from our Internet access services to universal service funds
used to support local telephone service and advanced telecommunications services
for schools, libraries and rural health care facilities
(‘‘USF Fees’’).





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




On
August 5, 2005, the FCC adopted an Order finding that facilities-based
broadband Internet access providers are subject to the Communications Assistance
for Law Enforcement Act (“CALEA”), which requires service providers covered by
that statute to build certain law enforcement surveillance assistance
capabilities into their communications networks. The FCC required
facilities-based broadband Internet access providers to comply with CALEA
requirements by May 14, 2007. We have complied with such CALEA
requirements.





On
May 3, 2006, the FCC adopted an additional Order addressing CALEA
compliance obligations of these providers. In that order, the FCC: (i) affirmed
the May 14, 2007 compliance deadline; (ii) indicated compliance
standards are to be developed by the industry within the telecommunications
standards-setting bodies working together with law enforcement; (iii) permitted
the use of certain third parties to satisfy CALEA compliance obligations; (iv)
restricted the availability of compliance extensions; (v) concluded that
facilities-based broadband Internet access providers are responsible for any
CALEA development and implementation costs; (vi) declared that the FCC may
pursue enforcement action, in addition to remedies available through the courts,
against any non-compliant provider; and (vii) adopted interim progress report
filing requirements.





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


5


Spectrum
Regulation





The FCC
routinely reviews its spectrum policies and may change its position on spectrum
allocations from time to time. We believe that the FCC is committed to
allocating spectrum to support wireless broadband deployment throughout the
United States and will continue to modify its regulations to foster such
deployment, which will help us implement our existing and future business
plans.




Internet
Taxation





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





Employees





As of
December 31, 2009, we had 131 employees, of whom 129 are full-time employees and
2 are part-time employees.  As of February 28, 2010, we had 127
employees, of whom 125 are full-time employees and 2 are part-time employees. We
believe our employee relations are good.  Three employees are
considered members of executive management.





Item
1A.  Risk Factors.





Investing
in our common stock involves a high degree of risk. Prospective investors should
carefully consider the risks described below and other information contained in
this annual report, including our financial statements and related notes before
purchasing shares of our common stock. There are numerous and varied risks,
known and unknown, that may prevent us from achieving our goals. If any of these
risks actually occurs, our business, financial condition or results of
operations may be materially adversely affected. In that case, the trading price
of our common stock could decline and investors in our common stock could lose
all or part of their investment.




Risks
Relating to Our Business




We
may be unable to successfully execute any of our identified business
opportunities or other business opportunities that we determine to
pursue.




In order
to pursue business opportunities, we will need to continue to build our
infrastructure and strengthen our operational capabilities. Our ability to do
any of these successfully could be affected by any one or more of the following
factors:




6





·
            the ability of our equipment, our
      equipment suppliers or our service providers to perform as we
      expect;





·
            the ability of our services to
      achieve market acceptance;





·
            our ability to manage third party
      relationships effectively;





·
            our ability to identify suitable
      locations and then negotiate acceptable agreements with building owners so
      that we can establish Points of Presence (“POPs”) on their
      rooftop;





·
            our
      ability to work effectively with new customers to secure approval from
      their landlord to install our
equipment;





·
            our ability to effectively manage
      the growth and expansion of our business operations without incurring
      excessive costs, high employee turnover or damage to customer
      relationships;





·
            our ability to attract and retain
      qualified personnel which may be affected by the significant competition
      in our industry for persons experienced in network operations and
      engineering;





·
            equipment failure or interruption
      of service which could adversely affect our reputation and our relations
      with our customers;





·
            our ability to accurately predict
      and respond to the rapid technological changes in our industry and the
      evolving demands of the markets we serve;
  and





·
            our
      ability to raise additional capital to fund our growth and to support our
      operations until we reach
profitability.





Our
failure to adequately address any one or more of the above factors could have a
significant adverse impact on our ability to execute our business plan and the
long term viability of our business.




We
depend on the continued availability of leases or licenses for our
communications equipment.




We have
constructed proprietary networks in each of the markets we serve by installing
antennae on rooftops, cellular towers and other structures pursuant to lease or
license agreements to send and receive wireless signals necessary for our
network. We typically seek five year initial terms for our leases with three to
five year renewal options. Such renewal options are generally exercisable at our
discretion before the expiration of the current term. If these leases are
terminated or if the owners of these structures are unwilling to
continue to enter into leases or licenses with us in the future, we would be
forced to seek alternative arrangements with other providers. If we are unable
to continue to obtain or renew such leases on satisfactory terms, our business
would be harmed.




Our
business depends on a strong brand, and if we do not maintain and enhance our
brand, our ability to attract and retain customers may be impaired and our
business and operating results may be harmed.





We
believe that our brand is a critical part of our business. Maintaining and
enhancing our brand may require us to make substantial investments with no
assurance that these investments will be successful. If we fail to promote and
maintain the “Towerstream” brand, or if we incur significant expenses in this
effort, our business, prospects, operating results and financial condition may
be harmed. We anticipate that maintaining and enhancing our brand will become
increasingly important, difficult and expensive.




We
may pursue acquisitions that we believe complement our existing operations but
which involve risks that could adversely affect our business.




Acquisitions
involve risks that could adversely affect our business including the diversion
of management time from operations and difficulties integrating the operations
and personnel of acquired companies. In addition, any future acquisitions could
result in significant costs, the incurrence of additional debt or the issuance
of equity securities to fund the acquisition, and the assumption of contingent
or undisclosed liabilities, all of which could materially adversely affect our
business, financial condition and results of operations.




7





In
connection with any future acquisition, we generally will seek to minimize the
impact of contingent and undisclosed liabilities by obtaining indemnities and
warranties from the seller. However, these indemnities and warranties, if
obtained, may not fully cover the liabilities due to their limited scope, their
amount or duration, the financial limitations of the indemnitor or warrantor, or
for other reasons.





We
continue to consider strategic acquisitions, some of which may be larger than
those previously completed and could be material acquisitions. Integrating
acquisitions is often costly and may require significant attention from
management. Delays or other operational or financial problems that interfere
with our operations may result. If we fail to implement proper overall business
controls for companies or assets we acquire or fail to successfully integrate
these acquired companies or assets in our processes, our financial condition and
results of operations could be adversely affected. In addition, it is possible
that we may incur significant expenses in the evaluation and pursuit of
potential acquisitions that may not be successfully completed.





We
have a history of operating losses and expect to continue incurring losses for
the foreseeable future.




Our
current business was launched in 1999 and has incurred losses in each year of
operation. Prior to our merger in January 2007, Towerstream operated as an S
corporation. The accumulated deficit of the S corporation as of December 31,
2006 was $8,213,002. Concurrently with our merger, we elected to operate as a C
corporation, and reported a net loss of $8,501,725 in 2007. As of December 31,
2007, our accumulated deficit was $8,501,725, which included a recapitalization
adjustment to eliminate the S corporation deficit. We recorded a net loss of
$13,377,419 in 2008 and a net loss of $8,625,250 in 2009. We cannot anticipate
when, if ever, our operations will become profitable. We expect to incur
significant net losses as we develop our network, expand our markets, undertake
acquisitions, acquire spectrum and pursue our business strategy. We intend to
invest significantly in our business before we expect cash flow from operations
to be adequate to cover our operating expenses.




If we are
unable to execute our business strategy and grow our business, either as a
result of the risks identified in this section or for any other reason, our
business, prospects, financial condition and results of operations will be
adversely affected.





Cash
and cash equivalents represent one of our largest assets and in light of
the recent market turmoil among financial institutions and related
liquidity issues, we may be at risk of being uninsured for a large portion of
such assets or having timing problems accessing such assets.




The
market turmoil experienced over the past few years, including the failure or
insolvency of several large financial institutions and the credit crunch
affecting the short term debt markets, has caused liquidity problems for
companies and institutions across the country. As of December 31, 2009, we had
approximately $14,000,000 in cash and cash equivalents with one large financial
banking institution. Although the present regulatory response in the United
States for when a large institution becomes insolvent generally has been to have
the failing institution merge or transfer assets to more solvent entities,
thereby avoiding failures, it is possible that any financial
institution could become insolvent or fail. At times, our cash and cash
equivalents may be uninsured or in deposit accounts that exceed the Federal
Deposit Insurance Corporation (“FDIC”) insurance limits. If the institution at
which we have placed our funds were to
become insolvent or fail, we could be at risk for losing a substantial portion
of our cash deposits, or incur significant time delays in obtaining access to
such funds. In light of the limited amount of federal insurance for deposits,
even if we were to spread our cash assets among several institutions, we would
remain at risk for the amount not covered by insurance.




The
global economic crisis could have a material adverse effect on our liquidity and
capital resources.





The
recent distress in the financial markets has resulted in extreme volatility in
security prices and diminished liquidity and credit availability, and there can
be no assurance that our liquidity will not be affected by changes in the
financial markets and the global economy or that our capital resources will at
all times be sufficient to satisfy our liquidity needs. Although we believe that
cash provided
by operations and our cash and cash equivalents currently on hand will provide
us with sufficient liquidity through the current credit crisis, tightening of
the credit markets could make it more difficult for us to access funds, enter
into agreements for new debt or obtain funding through the issuance of our
securities.




In
addition, the current credit crisis is having a significant negative impact on
businesses around the world, and the impact of this crisis on our major
suppliers cannot be predicted. The inability of key suppliers to access
liquidity, or the insolvency of key suppliers, could lead to delivery delays or
failures.




8





Our
business may require additional capital for continued growth, and our growth may
be slowed if we do not have sufficient capital.





The
continued growth and operation of our business may require additional funding
for working capital, debt service, the enhancement and upgrade of our network,
the build-out of infrastructure to expand our coverage, possible acquisitions
and possible bids to acquire spectrum licenses.  We may be unable to
secure such funding when needed in adequate amounts or on acceptable terms, if
at all. To execute our business strategy, we may issue additional equity
securities in public or private offerings, potentially at a price lower than the
market price at the time of such issuance. Similarly, we may seek debt financing
and may be forced to incur significant interest expense. If we cannot secure
sufficient funding, we may be forced to forego strategic opportunities or delay,
scale back or eliminate network deployments, operations, acquisitions, spectrum
bids and other investments.




Many
of our competitors are better established and have resources significantly
greater than we have, which may make it difficult to attract and retain
customers.




The
market for broadband and related services is highly competitive, and we compete
with several other companies within each of our markets. Many of our competitors
are well established with larger and better developed networks and support
systems, longer- standing
relationships with customers and suppliers, greater name recognition and greater
financial, technical and marketing resources than we have. Our competitors may
subsidize competing services with revenue from other sources and, thus, may
offer their products and services at prices lower than ours. Our competitors may
also reduce the prices of their services significantly or may offer broadband
connectivity packaged with other products or services. We may not be able to
reduce our prices or otherwise combine our services with other products or
services, which may make it more difficult to attract and retain customers. In
addition, new competitors
may emerge for our primarily commercial and business customer base from
businesses primarily engaged in providing residential services to
consumers.





We expect
existing and prospective competitors to adopt technologies or business plans
similar to ours, or seek other means to develop services competitive with ours,
particularly if our services prove to be attractive in our target markets. This
competition may make it difficult to attract and retain customers.





We
may experience difficulties in constructing, upgrading and maintaining our
network, which could adversely affect customer satisfaction, increase customer
turnover and reduce our revenues.




Our
success depends on developing and providing products and services that give
customers high quality Internet connectivity. If the number of customers using
our network and the complexity of our products and services increase, we will
require more infrastructure and network resources to maintain the quality of our
services. Consequently, we may be required to make substantial investments to
construct and improve our facilities and equipment, and to upgrade our
technology and network infrastructure. If we do not implement these developments
successfully, or if we experience inefficiencies, operational failures or
unforeseen costs during implementation, the quality of our products and services
could decline.





We may
experience quality deficiencies, cost overruns and delays in implementing our
network improvements and expansion, in maintenance and upgrade projects,
including the portions of those projects not within our control or the control
of our contractors. Our network requires the receipt of permits and approvals
from numerous governmental bodies, including municipalities and zoning boards.
Such bodies often limit the expansion of transmission towers and other
construction necessary for our business. Failure to receive approvals in a
timely fashion can delay system rollouts and raise the cost of completing
projects. In addition, we typically are required to obtain rights from land,
building or tower owners to install our antennae and other equipment to provide
service to our customers. We may not be able to obtain, on terms acceptable to
us, or at all, the rights necessary to construct our network and expand our
services.




We also
face challenges in managing and operating our network. These challenges include
operating, maintaining and upgrading network and customer premise equipment to
accommodate increased traffic or technological advances, and managing the sales,
advertising, customer support, billing and collection functions of our business
while providing reliable network service at expected speeds and quality. Our
failure in any of these areas could adversely affect customer satisfaction,
increase customer turnover or churn, increase our costs and decrease our
revenues.




9




If
we do not obtain and maintain rights to use licensed spectrum in one or more
markets, we may be unable to operate in these markets
which could negatively impact our ability to execute our business strategy. To
the extent we secure licensed spectrum, we face increased operational costs,
greater regulatory scrutiny and may become subject to arbitrary government
decision making.





Since we
provide our services in some markets by using licensed spectrum, we must secure
and maintain sufficient rights to use licensed spectrum by obtaining licenses or
long-term leases in those markets. Obtaining licensed spectrum can be a long and
difficult process that can be costly and require a disproportionate amount of
our management resources, and may require us to incur significant debt or secure
additional capital. We may not be successful in our efforts to secure financing
and may not be deemed a qualified bidder due to our relatively small size or our
creditworthiness, or be able to acquire, lease or maintain the spectrum
necessary to execute our strategy.





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




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





·
            increases in spectrum acquisition
      costs or complexity;





·
            competitive bids, pre-bid
      qualifications and post-bid requirements for spectrum acquisitions, in
      which we may not be successful leading to, among other things, increased
      competition;





·
            adverse changes to regulations
      governing spectrum rights;





·
            the risk that acquired or leased
      spectrum will not be commercially usable or free of damaging interference
      from licensed or unlicensed operators in our or adjacent
      bands;





·
            contractual disputes with, or the
      bankruptcy or other reorganization of, the license holders, which could
      adversely affect control over the spectrum subject to such
      licenses;





·
            failure of the FCC or other
      regulators to renew spectrum licenses as they expire;
      and





·
            invalidation of authorization to
      use all or a significant portion of our
  spectrum.




In
a number of markets we utilize unlicensed spectrum which is subject to intense
competition, low barriers of entry and slowdowns due to multiple
users.




We
presently utilize unlicensed spectrum in connection with our service offerings.
Unlicensed or “free” spectrum is available to multiple users and may suffer
bandwidth limitations, interference and slowdowns if the number of users exceeds
traffic capacity. The availability of unlicensed spectrum is not unlimited and
others do not need to obtain permits or licenses to utilize the same unlicensed
spectrum that we currently or may utilize in the future, threatening our ability
to reliably deliver our services. Moreover, the prevalence of unlicensed
spectrum creates low barriers of entry in our business, creating the potential
for heightened competition.




Interruption
or failure of our information technology and communications systems could impair
our ability to provide services which could damage our reputation and adversely
affect our operating results.




Our
services depend on the continuing operation of our information technology and
communications systems. We have experienced service interruptions in the past
and may experience service interruptions or system failures in the future. Any
unscheduled service interruption adversely affects our ability to operate our
business and could result in an immediate loss of revenues. If we experience
frequent or persistent system or network failures, our reputation could be
permanently harmed. We may need to make significant capital expenditures to
increase the reliability of our systems, however, these capital expenditures may
not achieve the results we expect.


10





Excessive
customer churn may adversely affect our financial performance by slowing
customer growth, increasing costs and reducing revenues.




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





·
            billing errors and/or general
      reduction in the quality of our customer
  service;





·
            interruptions to the delivery of
      services to customers over our
network;





·
            the availability of competing
      technology, such as cable modems, DSL, third-generation cellular,
      satellite, wireless Internet service and other emerging technologies, some
      of which may be less expensive or technologically superior to those
      offered by us;





·
            changes
      in promotions and new marketing or sales initiatives;
  and





·
            new
      competitors entering the markets in which we offer
  service.




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




If
our strategy is unsuccessful, we will not be profitable and our stockholders
could lose their investment.




There is
no track record for companies pursuing our strategy. Many fixed wireless
companies have failed and there is no guarantee that our strategy will be
successful or profitable. If our strategy is unsuccessful, the value of our
company may decrease and our stockholders could lose their
investment.





We
may not be able to effectively control and manage our growth which would
negatively impact our operations.




If our
business and markets continue to grow and develop, it will be necessary for us
to finance and manage expansion in an orderly fashion. In addition, we may face
challenges in managing expanding product and service offerings, and in
integrating acquired businesses. Such events would increase demands on our
existing management, workforce and facilities. Failure to satisfy increased
demands could interrupt or adversely affect our operations and cause backlogs
and administrative inefficiencies.




The
success of our business depends on the continuing contributions of key personnel
and our ability to attract, train and retain highly qualified
personnel.




We are
highly dependent on the continued services of our Chairman, Philip Urso, and our
President and Chief Executive Officer, Jeffrey M. Thompson.  In
December 2007, we entered into a two-year employment agreement with Jeffrey M.
Thompson. The agreement automatically renews for additional one year periods
unless terminated by written notice no later than 60 days prior to the
expiration of the then current term.  We cannot guarantee that any of
these persons will stay with us for any definite period. Loss of the services of
any of these individuals could adversely impact our operations. We do not
maintain policies of “key man” insurance on our executives.




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




11





Any
acquisitions we make could result in integration difficulties that could lead to
substantial costs, delays or other operational or financial
difficulties.




We may
seek to expand by acquiring competing businesses, including those operating in
our current business markets or those operating in other geographic markets. We
cannot accurately predict the timing, size and success of our acquisition
efforts and the associated capital commitments that might be required. We expect
to encounter competition for acquisitions which may limit the number of
potential acquisition opportunities and may lead to higher acquisition prices.
We may not be able to identify, acquire or profitably manage additional
businesses or successfully integrate acquired businesses, if any, without
substantial costs, delays or other operational or financial
difficulties.





In
addition, such acquisitions involve a number of other risks,
including:





·
            failure of the acquired
      businesses to achieve expected
results;





·
            diversion of management’s
      attention and resources to
acquisitions;





·
            failure to retain key customers
      or personnel of the acquired
businesses;





·
            disappointing quality or
      functionality of acquired equipment and personnel;
    and





·
            risks associated with
      unanticipated events, liabilities or
  contingencies.




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




Our
inability to obtain capital,  internally generate cash, secure debt
financing, or use shares of our common stock to finance future acquisitions
could impair the growth and expansion of our business.




The
extent to which we will be able or willing to use shares of our common stock to
consummate acquisitions will depend on (i) the market value of our securities
which will vary, (ii) liquidity, which is presently limited, and (iii) the
willingness of potential sellers to accept shares of our common stock as full or
partial payment for their business. Using shares of our common stock for this
purpose may result in significant dilution to existing stockholders. To the
extent that we are unable to use common stock to make future acquisitions, our
ability to grow through acquisitions may be limited by the extent to which we
are able to raise capital through debt or equity financings. We may not be able
to obtain the necessary capital to finance any acquisitions. If we are unable to
obtain additional capital on acceptable terms, we may be required to reduce the
scope of expansion or redirect resources committed to internal purposes. Our
failure to use shares of our common stock to make future acquisitions may hinder
our ability to actively pursue our acquisition program.





We
rely on a limited number of third party suppliers that manufacture network
equipment, and install and maintain our network sites. If these companies fail
to perform or experience delays, shortages or increased demand for their
products or services, we may face shortage of components, increased costs, and
may be required to suspend our network deployment and our product and service
introduction.




We depend
on a limited number of third party suppliers to produce and deliver products
required for our networks. We also depend on a limited number of third parties
to install and maintain our network facilities. We do not maintain any long term
supply contracts with these manufacturers. If a manufacturer or other provider
does not satisfy our requirements, or if we lose a manufacturer or any other
significant provider, we may have insufficient network equipment for delivery to
customers and for installation or maintenance of our infrastructure, and we may
be forced to suspend the deployment of our network and enrollment of new
customers, thus impairing future growth.




12





If
our data security measures are breached, customers may perceive our network and
services as not secure, which may adversely affect our ability to attract and
retain customers and expose us to liability.




Network
security and the authentication of a customer’s credentials are designed to
protect unauthorized access to data on our network. Because techniques used to
obtain unauthorized access to or to sabotage networks change frequently and may
not be recognized until launched against a target, we may be unable to
anticipate or implement adequate preventive measures against unauthorized access
or sabotage. Consequently, unauthorized parties may overcome our encryption and
security systems, and obtain access to data on our network, including on a
device connected to our network. In addition, because we operate and control our network
and our customers’ Internet connectivity, unauthorized access or sabotage of our
network could result in damage to our network and to the computers or other
devices used by our customers. An actual or perceived breach of network
security, regardless of whether the breach is our fault, could harm public
perception of the effectiveness of our security measures, adversely affect our
ability to attract and retain customers, expose us to significant liability and
adversely affect our business prospects.





In
providing our services we could infringe on the intellectual property rights of
others, which may cause us to engage in costly litigation and, if we do not
prevail, could also cause us to pay substantial damages and prohibit us from
selling our services.




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




Risks
Relating to Our Industry




An
economic or industry slowdown may materially and adversely affect our
business.




Slowdowns
in the economy or in the wireless or broadband industry may impact demand for
wireless or broadband services, thereby reducing demand for our services, or
negatively impact other businesses or industries, thereby reducing demand for
our services by causing others to delay or abandon implementation of new systems
and technologies, including wireless broadband services. Further, the war on
terrorism, the threat of additional terrorist attacks, the political and
economic uncertainties resulting therefrom, and other unforeseen events may
impose additional risks upon and adversely affect the wireless or broadband
industry, and our business.




The
industry in which we operate is continually evolving which makes it difficult to
evaluate our future prospects and increases the risk of an investment in our
securities. Our services may become obsolete and we may not be able to develop
competitive products or services on a timely basis or at all.




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




13





·
            competition from service
      providers using more traditional and commercially proven means to deliver
      similar or alternative
services;





·
            competition from new service
      providers using more efficient, less expensive technologies, including
      products not yet invented or
developed;





·
            uncertain customer
      acceptance;





·
            realizing economies of
      scale;





·
            responding successfully to
      advances in competing technologies in a timely and cost-effective
      manner;





·
            migration toward standards-based
      technology, requiring substantial capital expenditures;
      and





·
            existing, proposed or undeveloped
      technologies that may render our wireless broadband services less
      profitable or obsolete.




As the
services offered by us and our competitors develop, businesses and consumers may
not accept our services as a commercially viable alternative to other means of
delivering wireless broadband services. As a result, our services may become
obsolete and we may be unable to develop competitive products or services on a
timely basis, or at all.




We
are subject to extensive regulation that could limit or restrict our activities.
If we fail to comply with these regulations, we may be subject to penalties,
including fines and suspensions, past due fees and interest which may adversely
affect our financial condition and results of operations.




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




We
believe that we are not required to register with the Universal Service
Administrative Company (“USAC”) as a seller of telecommunications, nor are we
required to collect USF Fees from our customers or to pay USF Fees directly. It
is possible, however, that the FCC may assert that we are a seller of
telecommunications and that we are required to register and pay USF Fees on some
or all of our gross revenues. Although we would contest any such assertion, we
could become obligated to pay USF Fees, interest and penalties to USAC with
respect to our gross revenues, past and/or future, from providing
telecommunications services, and we may be unable to retroactively bill our
customers for past USF Fees.




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




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




14





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




Risks
Relating to Our Organization




Our
certificate of incorporation allows for our board to create new series of
preferred stock without further approval by our stockholders which could
adversely affect the rights of the holders of our common stock.




Our board
of directors has the authority to fix and determine the relative rights and
preferences of preferred stock. Our board of directors also has the authority to
issue preferred stock without further stockholder approval. As a result, our
board of directors could authorize the issuance of a series of preferred stock
that would grant to such holders (i) the preferred right to our assets upon
liquidation, (ii) the right to receive dividend payments before dividends are
distributed to the holders of common stock and (iii) the right to the redemption
of the shares, together with a premium, prior to the redemption of our common
stock. In addition, our board of directors could authorize the issuance of a
series of preferred stock that has greater voting power than our common stock or
that is convertible into our common stock, which could decrease the relative
voting power of our common stock or result in dilution to our existing common
stockholders.




Our
officers and directors own a substantial amount of our common stock and,
therefore, exercise significant control over our corporate governance and
affairs which may result in their taking actions with which other shareholders
do not agree.




Our
executive officers and directors, and entities affiliated with them, control
approximately 23% of our outstanding common stock (including exercisable stock
options held by them). These shareholders, if they act together, may be able to
exercise substantial influence
over the outcome of all corporate actions requiring approval of our
shareholders, including the election of directors and approval of significant
corporate transactions, which may result in corporate action with which other
shareholders do not agree. This concentration of ownership may also have the
effect of delaying or preventing a change in control which might be in other
shareholders’ best interest but which might negatively affect the market price
of our common stock.




We
are subject to financial reporting and other requirements for which our
accounting, and other management systems and resources may not be adequately
prepared.




We are
subject to reporting and other obligations under the Securities Exchange Act of
1934, as amended, including the requirements of Section 404 of the
Sarbanes-Oxley Act. Section 404 requires us to conduct an annual management
assessment of the effectiveness of our internal controls over financial
reporting.  Beginning in fiscal 2010, we will be required to obtain a
report by our independent auditors addressing these assessments annually. These
reporting and other obligations will place significant demands on our
management, administrative, operational and accounting resources. We anticipate
that we may need to (i) upgrade our systems, (ii) implement additional financial
and management controls, reporting systems and procedures, (iii) implement an
internal audit function, and (iv) hire additional accounting, internal audit and
finance staff. If we are unable to accomplish these objectives in a timely and
effective manner, our ability to comply with our financial reporting
requirements and other rules that apply to reporting companies could be
impaired. Any failure to maintain effective internal controls could have a
negative impact on our ability to manage our business and on our stock
price.




Risks
Relating to Our Common Stock





We
may fail to qualify for continued listing on the NASDAQ Capital Market which
could make it more difficult for investors to sell their shares.




In May
2007, our common stock was approved for listing on the NASDAQ Capital Market and
our common stock continues to be listed on the NASDAQ Capital Market. There can
be no assurance that trading of our common stock on such market will be
sustained or that we can meet NASDAQ’s continued listing standards. In the event
that our common stock fails to qualify for continued inclusion, our common stock
could thereafter only be quoted on the OTC Bulletin Board which is commonly
referred to as the “pink sheets.” Under such circumstances, shareholders may
find it more difficult to dispose of, or to obtain accurate quotations, for our common
stock, and our common stock would become substantially less attractive to
certain purchasers such as financial institutions, hedge funds and other similar
investors.




15





Our
common stock may be affected by limited trading volume and price fluctuations
which could adversely impact the value of our common stock.




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





We
have not paid dividends in the past and do not expect to pay dividends in the
future. Any return on an investment in our common stock may be limited to the
value of the common stock.




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





Although
we currently meet the NASDAQ Capital Market’s continued listing requirement of a
minimum bid price, we could be at risk of a delisting in the
future.





Under the
rules of the NASDAQ Capital Market, we must maintain a minimum bid price of
$1.00 for our common stock.  If a company's stock trades for 30 consecutive
business days below the $1.00 minimum closing bid price requirement, NASDAQ will
send a deficiency notice advising the company that it has been granted 180
calendar days to regain compliance with the applicable
requirements.




Our stock
price as of December 31, 2009 had a closing price of $1.94 per share. 
However, at times during the first three quarters of 2009, our common stock did
trade below $1.00 per share.  During this period, the NASDAQ Capital
Market had temporarily suspended the minimum bid price
requirement.  We do not believe that NASDAQ will suspend its listing
requirements in the future.  Therefore, if our common stock trades
below $1.00 again, our shares could be delisted from trading on the NASDAQ
Capital Market.




Item
1B.  Unresolved Staff Comments.





Not
applicable.





Item
2. Properties.





Our
executive offices are currently located in Middletown, Rhode Island, where we
lease approximately 42,137 square feet of space, consisting of a 17,137 square
feet building at 55 Hammarlund Way for our administrative, engineering,
information technology and customer care offices and a 25,000 square feet
building at 88 Silva Lane for our sales call center. Our annual rent payments
totaled approximately $527,000 in 2009 and will remain at that level through
February 2010, before increasing to approximately $558,000
through May 2012, and approximately $590,000 through the end of the lease.
Our lease expires on October 1, 2013 with an option to renew for an additional
five-year term. We do not own any real property.





Item
3. Legal Proceedings.





There are
no significant legal proceedings pending, and we are not aware of any
material proceeding contemplated by a governmental authority, to which we
are a party or any of our property is subject.





Item
4. (Removed and Reserved.)





16




PART
II





Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.





Market
Information





Our
common stock was quoted on the OTC Bulletin Board from January 12, 2007 through
May 30, 2007 under the symbol TWER.OB. Since May 31, 2007, our common stock has
been listed on the NASDAQ Capital Market under the symbol TWER. Prior to January
12, 2007, there was no active market for our common stock. The following table
sets forth the high and low sales prices as reported on the NASDAQ Capital
Market. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.





FISCAL YEAR 2009
                
                HIGH
                
                
                LOWFirst
      Quarter
                
                $
                1.29
                
                
                $
                0.68Second
      Quarter
                
                $
                0.99
                
                
                $
                0.67Third
      Quarter
                
                $
                2.00
                
                
                $
                0.84Fourth
      Quarter
                
                $
                2.00
                
                
                $
                1.32





FISCAL YEAR 2008
                
                HIGH
                
                
                LOWFirst
      Quarter
                
                $
                3.65
                
                
                $
                1.01Second
      Quarter
                
                $
                1.59
                
                
                $
                1.07Third
      Quarter
                
                $
                1.84
                
                
                $
                0.87Fourth
      Quarter
                
                $
                1.10
                
                
                $
                0.53





The last
reported sales price of our common stock on the NASDAQ Capital Market on
December 31, 2009 was $1.94 and on March 15, 2010, the last reported sales price
was $1.68. According to the records of our transfer agent, as of March 15, 2010,
there were approximately 56 holders of record of our common
stock.





Dividend
Policy





We have
never declared or paid cash dividends on our common stock, and we do not intend
to pay any cash dividends on our common stock in the foreseeable future. Rather,
we expect to retain future earnings (if any) to fund the operation and expansion
of our business and for general corporate purposes.





Securities
Authorized for Issuance Under Equity Compensation Plans





As of
December 31, 2009, securities issued and securities available for future
issuance under our 2008 Non-Employee Directors Compensation Plan, our 2007
Equity Compensation Plan and our 2007 Incentive Stock Plan were as
follows:





Equity
Compensation Plan Information





Number of securities to be
                                  issued upon exercise of
                                  outstanding options, warrants
                                  and rights
                                
                                
                                Weighted average exercise
                                  price of outstanding
                                  options, warrants and rights
                                
                                
                                Number of securities remaining
                                  available for future issuance
                                  under equity compensation plansEquity
      compensation plans approved by security holders
                                
                                
                                3,738,638
                                
                                
                                $
                                1.69
                                
                                
                                
                                2,036,101Equity
      compensation plans not approved by security holders
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Total
                                
                                
                                3,738,638
                                
                                
                                $
                                1.69
                                
                                
                                
                                2,036,101




17




Recent
Sales of Unregistered Securities





None.





Item
6.  Selected Financial Data.





Not
applicable.





Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.





Overview




We
provide broadband services to commercial customers and deliver access over a
wireless network transmitting over both regulated and unregulated radio
spectrum.   Our service supports bandwidth on demand, wireless
redundancy, virtual private networks (“VPNs”), disaster recovery, bundled data
and video services. We provide service to approximately 1,900 business customers
in New York City, Boston, Chicago, Los Angeles, San Francisco, Seattle, Miami,
Dallas-Fort Worth, Philadelphia, Providence and Newport, Rhode
Island.




Characteristics
of our Revenues and Expenses




We offer
our services under agreements having terms of one, two or three years. Pursuant
to these agreements, we bill customers on a monthly basis, in advance, for each
month of service. Payments received in advance of services performed are
recorded as deferred revenues and recognized as revenue ratably over the service
period.




Costs of
revenues consists of expenses that are directly related to providing services to
our customers, including Core Network expenses (tower and roof rent expense and
utilities, bandwidth costs, Points of Presence (“PoP”) maintenance and other)
and Customer Network expenses (customer maintenance, non-installation fees and
other customer specific expenses).  We collectively refer to Core Network
and Customer Network as our “Network,” and Core Network costs and Customer
Network costs as “Network Costs.”  When we first enter a new market, or
expand in an existing market, we are required to incur up-front costs in order
to be able to provide wireless broadband services to commercial customers. 
We refer to these activities as establishing a “Network
Presence.”  These costs include building PoPs which are Company
Locations where we install a substantial amount of equipment in order to connect
numerous customers to the Internet.  The costs to build PoPs are
capitalized and expensed over a five year period.  In addition to building
PoPs, we also enter tower and roof rental agreements, secure bandwidth and incur
other Network Costs.  Once we have established a Network Presence in a new
market or expanded our Network Presence in an existing market, we are capable of
servicing a significant number of customers through that Network Presence. 
The variable cost to add new customers is relatively modest, especially compared
to the upfront cost of establishing or expanding our Network Presence.  As
a result, our gross margins in a market normally increase over time as we add
new customers in that market.  However, we may experience variability in
gross margins during periods in which we are expanding our Network Presence in a
market.





Sales and
marketing expenses primarily consist of the salaries, benefits, travel and other
costs of our sales and marketing teams, as well as marketing initiatives and
business development expenses.





Customer
support services includes salaries and related payroll costs associated with our
customer support services, customer care, and installation and operations
staff.





General
and administrative expenses include costs attributable to corporate overhead and
the overall support of our operations.  Salaries and other related
payroll costs for executive management, finance, administration and information
systems personnel are included
in this category.  Other costs include rent, utilities and other
facility costs, accounting, legal and other professional services, and other
general operating expenses.





Market
Information





We
operate in one segment which is the business of wireless broadband
services.   Although we provide services in multiple markets,
these operations have been aggregated into one reportable segment based on the
similar economic characteristics among all markets, including the nature of the
services provided and the type of customers purchasing such
services.  While we operate in only one
business segment, we recognize that providing information on the revenues and
costs of operating in each market can provide useful information to investors
regarding our operating performance.




18





As of
December 31, 2009, we operated in ten markets across the United States including
New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle,
Dallas-Fort Worth, Philadelphia and Providence.  The markets were
launched at different times, and as a result, may have different operating
metrics based on their stage of maturation.  We incur significant
up-front costs in order to establish a Network Presence in a new market. 
These costs include building PoPs and Network Costs.  Other material costs
include hiring and training sales and marketing personnel who will be dedicated
to securing customers in that market.  Once we have established a
Network Presence in a new market, we are capable of servicing a significant
number of customers.  The rate of customer additions varies from
market to market, and we are unable to predict how many customers will be added
in a market during any specific period.  We believe that providing
operating information regarding each of our markets provides useful information
to shareholders in understanding the leveraging potential of our business model,
the operating performance of our mature markets, and the long-term potential for
our newer markets.  Set forth below is a summary of our operating
performance on a per-market basis, and a description of how each category is
determined.





Revenues: Revenues are
allocated based on which market each customer is located in.





Costs of Revenues: Includes
payroll, Core Network costs and Customer Network costs that can be specifically
allocated to a specific market. Costs that can not be allocated to a specific
market are classified as Centralized Costs.





Operating Costs: Costs which
can be specifically allocated to a market include direct sales and marketing
personnel, certain
direct marketing expenses, certain customer support payroll expenses and third
party commissions.





Centralized Costs: Represents
costs incurred to support activities across all of our markets that are not
allocable to a specific market.  This principally consists of payroll
costs for customer care representatives, customer support engineers, sales
support and installations personnel.  These individuals service
customers across all markets rather than being dedicated to any specific
market.





Corporate expenses: Includes
costs attributable to corporate overhead and the overall support of our
operations.  Salaries and related payroll costs for executive
management, finance, administration and information systems personnel are
included in this category.  Other costs include office rent, utilities
and other facilities costs, professional services and other general operating
expenses.





Market EBITDA:Represents a
market’s earnings before interest, taxes, depreciation, amortization,
stock-based compensation, and other income (expense).  We believe this
metric provides useful information regarding the cash flow being generated in a
market.





Year
ended December 31, 2009





Market
              
              Revenues
              
              Cost of
                Revenues
              
              Gross
                Margin
              
              Operating
                Costs
              
              
              Market
                EBITDANew
      York
              
              $
              5,217,784
              
              
              $
              929,245
              
              
              $
              4,288,539
              
              
              $
              1,247,292
              
              
              $
              3,041,247Boston
              
              
              3,982,954
              
              
              
              656,243
              
              
              
              3,326,711
              
              
              
              734,876
              
              
              
              2,591,835Los
      Angeles
              
              
              1,930,581
              
              
              
              340,334
              
              
              
              1,590,247
              
              
              
              1,042,984
              
              
              
              547,263San
      Francisco
              
              
              984,556
              
              
              
              217,722
              
              
              
              766,834
              
              
              
              414,438
              
              
              
              352,396Providence/Newport
              
              
              529,642
              
              
              
              150,535
              
              
              
              379,107
              
              
              
              200,180
              
              
              
              178,927Chicago
              
              
              951,277
              
              
              
              391,047
              
              
              
              560,230
              
              
              
              460,528
              
              
              
              99,702Miami
              
              
              589,608
              
              
              
              258,941
              
              
              
              330,667
              
              
              
              381,528
              
              
              
              (50,861
              )Seattle
              
              
              430,776
              
              
              
              233,014
              
              
              
              197,762
              
              
              
              258,759
              
              
              
              (60,997
              )Dallas-Fort
      Worth
              
              
              298,257
              
              
              
              261,310
              
              
              
              36,947
              
              
              
              403,672
              
              
              
              (366,725
              )Total
              
              $
              14,915,435
              
              
              $
              3,438,391
              
              
              $
              11,477,044
              
              
              $
              5,144,257
              
              
              $
              6,332,787Reconciliation
      of Non-GAAP Financial Measure to GAAP Financial
    MeasureMarket
      EBITDA
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              6,332,787Centralized
      costs
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,786,123
              )Corporate
      expenses
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,140,130
              )Depreciation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,035,267
              )Stock-based
      compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (802,956
              )Other
      income (expense)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,193,561
              )Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (8,625,250
              )





19


We launched our broadband services in
Philadelphia, Pennsylvania in December 2009.  Beginning in 2010, we
will report operating results for Philadelphia on a market basis.





Year
Ended December 31, 2009 Compared to Year Ended December
31, 2008





Revenues.    Revenues
for the year ended December 31, 2009 totaled $14,915,435 compared to
$10,656,081 for the year ended December 31, 2008, representing an increase
of $4,259,354, or 40%. This increase was driven by a 43% increase in our
customer base during 2009.  The effect of the increase in our customer
base was mitigated by a decrease of 14% in average revenue per user (“ARPU”)
during the 2009 period as compared to the 2008 period.





Sequential
growth for the year ended December 31, 2009 was 40% compared to 55% for the year
ended December 31, 2008. ARPU as of December 31, 2009 totaled $715 compared to
$828 as of December 31, 2008, representing a decrease of $113, or 14%. The
decrease relates to new customers purchasing lower ARPU products during the
economic recession. Customer churn, calculated as a percent of revenue lost on a
monthly basis from customers terminating service or reducing their service
level, totaled 1.67% for the year ended December 31, 2009 compared to 1.24% for
the year ended December 31, 2008, representing a 35% increase on a percentage
basis. The higher churn in the 2009 period reflects the effect of the ongoing
economic recession on our commercial customer base.





Cost of Revenues. Cost of
revenues for the year ended December 31, 2009 totaled $3,690,089 compared to
$3,891,433 for the year ended December 31, 2008, representing a decrease of
$201,344, or 5%. Gross margins increased to 75% during 2009 compared to 63%
during 2008. During the year ended 2009, we lowered Core Network and Customer
Network costs by approximately $141,000 and $72,000, respectively, even though
our customer base increased by 43% from December 31, 2008 to December 31, 2009.
Over the past twelve months, we have decreased our use of third party vendors by
hiring field technicians and other employees who can perform the same functions
at a lower effective cost. During the year ended 2009, we have focused on
increasing market penetration in existing markets rather than expanding into new
markets. We have been able to add new customers at low marginal costs which have
positively affected gross margins.





Depreciation.    Depreciation
for the year ended December 31, 2009 totaled $4,035,267 compared to $3,222,716
for the year ended December 31, 2008, representing an increase of $812,551,
or 25%. This increase was primarily related to the continued investment
in our Network which was required to support the growth in our customer base and
expansion in existing markets.  Gross fixed assets at December 31,
2009 totaled $26,338,563 compared to $21,805,582 at December 31, 2008,
representing an increase of $4,532,981, or 21%.





Customer Support
Services.    Customer support services expenses for
the year ended December 31, 2009 totaled $2,132,968 compared to $1,996,920 for
the year ended December 31, 2008, representing an increase of $136,048, or
7%. This increase was primarily related to the costs of additional personnel
hired to support our growing customer base.  Average department
headcount increased by 14% from 35 in 2008 to 40 in 2009.




Sales and Marketing.Sales
and marketing expenses for the year ended December 31, 2009 totaled $5,545,714
compared to $7,536,158 for the year ended December 31, 2008, representing a
decrease of $1,990,444, or 26%. Approximately $1,392,000 of the decrease related
to lower payroll costs as sales and marketing personnel averaged 82 during the
2009 period compared to 123 for the same period in 2008. In addition,
commissions and bonuses decreased by approximately $519,000 and advertising
expenses decreased by approximately $79,000.





General and
Administrative.    General and administrative
expenses for the year ended December 31, 2009 totaled $6,943,086 compared to
$7,456,168 for the year ended December 31, 2008, representing a decrease of
$513,082, or 7%.  This decrease was principally attributable to
decreases in (i) professional services fees of approximately $225,000, (ii)
stock-based compensation of approximately $96,000, (iii) payroll costs of
approximately $79,000 and (iv) taxes of approximately $78,000.





Interest
Income.Interest income for the year ended December 31,
2009 totaled $26,605 compared to $578,373 for the year ended December 31, 2008,
representing a decrease of $551,768, or 95%.  In March 2008, we
transferred our cash balances into four separate U.S. Treasury based money
market funds.  These funds have lower yields but are higher quality
instruments than the funds in which we previously invested.  Average
cash balances decreased from approximately $30.5 million in 2008 to
approximately $19.4 million during 2009.  In addition, annual interest
yields decreased from 1.84% to 0.11% year over year.




20





Interest
Expense.    Interest expense for the year ended
December 31, 2009 totaled $740,409 compared to $509,593 for the year ended
December 31, 2008, representing an increase of $230,816, or
45%.  Additional non-cash interest expense of approximately $314,000
was recognized in 2009 in connection with the adoption of a new accounting
pronouncement.  This increase was offset by approximately
$73,000 of non-cash interest expense that was recognized when a portion of our
debt was converted into equity in January 2008.




Net
Loss.    Net loss for the year ended December 31,
2009 totaled $8,625,250 compared to $13,377,419 for the year ended December
31, 2008, representing a decrease of $4,752,169, or
36%.   This decrease related to an increase in revenues of
$4,259,354, or 40%, and a decrease in operating expenses of $1,756,271, or 7%,
offset by the negative effect of a decrease in other (expense) income of
$1,263,456.





Liquidity
and Capital Resources




We have
historically met our liquidity and capital requirements primarily through the
public sale and private placement of equity securities and debt financing. Cash
and cash equivalents totaled $14,040,839 and $24,740,268 at December 31, 2009
and December 31, 2008, respectively. The decrease in cash and cash equivalents
related to our operating, investing and financing activities during the year
ended December 31, 2009, each of which is described below.  At
February 28, 2010, we had cash and cash equivalents totaling approximately
$12,700,000.




Net Cash Used in Operating
Activities.    Net cash used in operating activities
for the year ended December 31, 2009 totaled $2,979,757 compared to $7,873,237
for the year ended December 31, 2008, representing a decrease of
$4,893,480, or 62%.  This decrease was directly related to the lower
net loss reported in the 2009 period of $8,625,250, which represented a
reduction of $4,752,169, or 36%, as compared to the 2008 period.




Net Cash Used in Investing
Activities.    Net cash used in investing activities
for the year ended December 31, 2009 totaled $4,944,326 compared to $8,095,870
for the year ended December 31, 2008, representing a decrease of $
3,151,544, or 39%.  The decrease in the 2009 period related to lower
spending on property and equipment which decreased by 37% from $7,683,855 to
$4,848,245.  During the 2008 period, we expanded our corporate office
and spent approximately $915,000 on office equipment, system
software and leasehold improvements as compared to approximately $81,000 in the
2009 period.  Spending on network and base station equipment decreased
by approximately $1,460,000 during the 2009 period as compared to the 2008
period.  Our decision to focus on our existing markets, rather than to
expand into new markets during the ongoing economic recession, has resulted in
lower network and base station equipment spending as the existing markets
already have much of the network and base station equipment required to
operate.  Finally, we purchased an FCC license for $100,000 in 2009
compared with $400,000 in 2008.





Net Cash Used in Financing
Activities.  Net cash used in financing activities for the year
ended December 31, 2009 totaled $2,775,346 compared to $47,490 for the year
ended December 31, 2008, representing an increase of $2,727,856. The
increase is related to the repayment of $2,750,000 of senior convertible
debentures.




Working
Capital.As of December
31, 2009, we had working capital of $11,452,316. Based on our current
operating activities and plans, we believe our existing working capital will
enable us to meet our anticipated cash requirements for at least the next twelve
months.




Senior
Convertible Debentures




In
January 2007, we sold $3,500,000 of senior convertible debentures. These
debentures required quarterly interest payments of 8% per annum and matured on
December 31, 2009.  Holders of the debentures received five-year
warrants to purchase an aggregate of 636,364 shares of common stock at an
exercise price of $4.00 per share and five-year warrants to purchase an
aggregate of 636,364 shares of common stock at an exercise price of $6.00 per
share.




In
January 2008, a debenture holder converted $750,000 of debentures into common
stock at a conversion price of $2.75 per share resulting in the issuance of
272,727 shares of common stock.  The carrying value of the debentures
on the date of the conversion was $676,607.  Accordingly, we
recognized the remaining debt discount of $73,393 as non-cash interest expense
in connection with the conversion.
  21





In
December 2009, we repaid our remaining principal amount of
$2,750,000.  For the year ended December 31, 2009, we paid $220,000 of
interest associated with the principal amount.





Acquisition
of Sparkplug Communications, Inc.





On March
14, 2010, we entered into an asset purchase agreement with Sparkplug
Communications Inc. (“the Seller”).  Under the asset purchase
agreement, we agreed to purchase all customer contracts, the network
infrastructure and the related assets of the Seller’s Chicago, Illinois and
Nashville, Tennessee networks.  This transaction is valued at $1.6
million of which approximately $1.2 million will be paid in cash and $430,000
will be paid through the issuance of common stock.  The acquisition
closing is subject to customary conditions and is expected to close by the end
of the second quarter 2010.





Impact
of Inflation, Changing Prices and Economic Conditions





Pricing
for many technology products and services have historically decreased over time
due to the effect of product and process improvements and enhancements.  In
addition, economic conditions can affect the buying patterns of customers. 
During 2009, the impact of the long economic recession caused many of our
prospective customers to either delay their buying decision or to purchase lower
bandwidth services than normal.  In addition, general pricing levels for
Internet services declined modestly during the year.  We were able to
partially offset the effect of these developments by increasing the number of
total installations in 2009 by approximately 16% as compared to 2008.  We
believe that certain customers may upgrade their bandwidth service when economic
conditions improve and their Internet requirements increase.  The continued
migration of many business activities and functions to the Internet should also
result in increased bandwidth requirements over the long
term.





Critical
Accounting Policies





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
amounts of revenues and expenses. Critical accounting policies are those that
require the application of management’s most difficult, subjective or complex
judgments, often because of the need to make estimates about the effect of
matters that are inherently uncertain and that may change in subsequent periods.
In preparing the financial statements, we utilized available information,
including our past history, industry standards and the current economic
environment, among other factors, in forming our estimates and judgments, giving
appropriate consideration to materiality. Actual results may differ from these
estimates. In addition, other companies may utilize different estimates, which
may impact the comparability of our results of operations to other companies in
our industry. We believe that of our significant accounting policies, the
following may involve a higher degree of judgment and estimation, or are
fundamentally important to our business.




Revenue
Recognition.    We normally enter into contractual
agreements with our customers for periods ranging between one to three
years.  We recognize the total revenue provided under a contract
ratably over the contract period, including any periods under which we have
agreed to provide services at no cost.  Deferred revenues are
recognized as a liability when billings are issued in advance of the date when
revenues are earned.  We apply the revenue recognition principles set
forth under Securities and Exchange Commission’s Staff Accounting Bulletin 104,
(“SAB 104”) which provides for revenue to be recognized when (i) persuasive
evidence of an arrangement exists, (ii) delivery or installation has been
completed, (iii) the customer accepts and verifies receipt, and (iv)
collectability is reasonably assured.




Long-Lived
Assets.  Long-lived assets consist primarily of property and
equipment, and FCC licenses. Long-lived assets are reviewed annually for
impairment or whenever events or circumstances indicate their carrying value may
not be recoverable. Conditions that would result in an impairment charge include
a significant decline in the market value of an asset, a significant change in the
extent or manner in which an asset is used, or a significant adverse change that
would indicate that the carrying amount of an asset or group of assets is not
recoverable. When such events or circumstances arise, an estimate of the future
undiscounted cash flows produced by the asset, or the appropriate grouping of
assets, is compared to the asset’s carrying value to determine if impairment
exists.  If the asset is determined to be impaired, the impairment
loss is measured based on the excess of its carrying value over its fair value.
Assets to be disposed of are reported at the lower of their carrying value or
net realizable value.





Asset Retirement
Obligations.   The Financial Accounting Standards Board’s
(“FASB”) guidance on asset retirement obligations addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated costs.  This guidance requires
the recognition of an asset retirement obligation and an associated asset
retirement cost when there is a legal obligation associated with the retirement
of tangible long-lived assets.  Our network equipment is installed on both buildings
in which we have a leaseagreement (“Company
Locations”) and at customer locations.  In both instances, the installation
and removal of our equipment is not complicated and does not require structural
changes to the building where the equipment is installed.  Costs associated
with the removal of our equipment at company or customer locations are not
material, and accordingly, we have determined that we do not presently have
asset retirement obligations under the FASB’s accounting guidance.




22




Off-Balance Sheet
Arrangements.    We have no off-balance sheet
arrangements, financings, or other relationships with unconsolidated entities
known as ‘‘Special Purposes Entities.’’




Recent
Accounting Pronouncements





In
September 2006, the FASB issued an accounting standard which defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. We adopted this standard on January 1, 2008 for
our financial assets and financial liabilities.  On January 1, 2009,
we adopted the fair value measurement requirements for nonfinancial assets and
nonfinancial liabilities that are not recognized or disclosed at fair value on a
recurring basis.  The adoption of this standard did not have a
material impact on our financial position or results of operations.





In
December 2007, the FASB issued an accounting standard related to accounting for
business combinations and related disclosures. This standard addresses the
recognition and accounting for identifiable assets acquired, liabilities assumed
and noncontrolling
interests in business combinations. The standard also expands disclosure
requirements for business combinations. The standard became effective on January
1, 2009.





In
December 2007, the FASB issued an accounting standard related to accounting and
reporting for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Noncontrolling interests are reported as a
separate component of consolidated stockholders’ equity, and net income
allocable to noncontrolling interests and net income attributable to
stockholders are reported separately in the consolidated statement of
operations. This standard became effective on January 1, 2009 and did not have a
material impact on our financial position or results of operations.





In March
2008, the FASB issued an accounting standard related to disclosures about
derivative instruments and hedging activities. This standard amends and enhances
disclosure requirements to provide a better understanding of how and why a
company uses derivative instruments, how derivative instruments and related
hedged items are accounted for, and their effect on a company’s financial
position, financial performance and cash flows. We adopted this standard on
January 1, 2009 and have included additional disclosures in our consolidated
financial statements.





In April
2008, the FASB issued an accounting standard which provides guidance for
determining the useful life of an intangible asset and the period of expected
cash flows used to measure the fair value of the asset. The adoption of this
standard on January 1, 2009 did not impact our financial position or results of
operations.





In May
2008, the FASB issued an accounting standard that requires the liability and
equity components of convertible debt instruments to be accounted for separately
if the debt can be settled in cash upon conversion. Our debt could not be
settled in cash upon conversion.  This standard became effective
January 1, 2009.  Accordingly, there was no impact on our financial
position or results of operations upon adoption.





In April
2009, the FASB issued an accounting standard which affirmed that there is no
change in the measurement of fair value when the volume and level of activity
for an asset or a liability has significantly decreased.  This
standard also identifies circumstances that
indicate when a transaction is not orderly.  The adoption of this
standard in the second quarter of 2009 had no material impact on our financial
position and results of operations.





In April
2009, the FASB issued an accounting standard which requires disclosures about
the fair value of financial instruments whenever a public company issues
financial information for interim reporting periods. This standard became
effective in the second quarter of 2009 and did not have a material impact on
our financial position and results of operations.





In June
2009, the FASB issued an accounting standard which requires entities to disclose
the date through which subsequent events have been evaluated as well as whether
that date is the date the financial statements were issued or the date the
financial statements were made available to be issued. We adopted this standard
in the second quarter of 2009.  We have evaluated subsequent events
through March 17, 2010 filing of our financial statements with the Securities
and Exchange Commission.




23





In June
2009, the FASB issued the FASB Accounting Standards Codification
(“Codification”). Effective in the third quarter of 2009, the Codification
became the single source for all authoritative generally accepted accounting
principles (“GAAP”) recognized by the FASB and is required to be applied to
financial statements issued for interim and annual periods ending after
September 15, 2009. The Codification does not change GAAP and did not
impact our financial position or results of operations.





In August
2009, the FASB issued an accounting standard to provide clarification on
measuring liabilities at fair value when a quoted price in an active market is
not available.  This standard became effective for us on October 1,
2009 and did not have a significant impact on our financial position or results
of operations.





In
October 2009, the FASB issued an accounting standard that amended the rules on
revenue recognition for multiple-deliverable revenue arrangements.  This
guidance establishes a selling price hierarchy for determining the selling price
of a deliverable, which is based on: (i) vendor-specific objective evidence;
(ii) third-party evidence; or (iii) estimates. This guidance also eliminates the
residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables using the
relative selling price method and also requires expanded disclosures. This
standard is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010.
 Early adoption is permitted. The adoption of this standard is not expected
to have any impact on our financial position and results of
operations.





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





Not
applicable.


24


Item 8. Financial Statements and
Supplementary Data.




TOWERSTREAM
CORPORATION


Index
to Consolidated Financial Statements





PageReport
      of Independent Registered Public Accounting Firm
                      
                      26Consolidated
      Balance Sheets
                      
                      27Consolidated
      Statements of Operations
                      
                      28Consolidated
      Statements of Stockholders’ Equity
                      
                      29Consolidated
      Statements of Cash Flows
                      
                      30Notes
      to Consolidated Financial Statements
                      
                      32




25


Report
of Independent Registered Public Accounting Firm





To the
Audit Committee of the


Board of
Directors and Shareholders of


Towerstream
Corporation





We have
audited the accompanying consolidated balance sheets of Towerstream Corporation
and Subsidiaries (the “Company”) as of December 31, 2009 and December 31, 2008,
and the related consolidated statements of operations, stockholders’ equity and
cash flows for the years then ended.  These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.





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





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Towerstream
Corporation and Subsidiaries as of December 31, 2009 and 2008, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.





As
discussed in Note 2 to the consolidated financial statements, the Company
changed the manner in which it accounts for certain convertible debt and equity
instruments (Note 6) effective January 1, 2009.





/s/
Marcum LLP


New York,
New York


March 17,
2010


26


TOWERSTREAM
CORPORATION


CONSOLIDATED
BALANCE SHEETS





As
      of December 31,2009
                          
                          
                          2008AssetsCurrent
      AssetsCash
      and cash equivalents
                          
                          $
                          14,040,839
                          
                          
                          $
                          24,740,268Accounts
      receivable, net of allowance for doubtful accounts of $88,299
      and $66,649, respectively
                          
                          
                          403,073
                          
                          
                          
                          279,399Prepaid
      expenses and other
                          
                          
                          258,307
                          
                          
                          
                          319,325Total
      Current Assets
                          
                          
                          14,702,219
                          
                          
                          
                          25,338,992Property
      and equipment, net
                          
                          
                          13,634,685
                          
                          
                          
                          12,890,779FCC
      licenses
                          
                          
                          975,000
                          
                          
                          
                          875,000Other
      assets
                          
                          
                          190,803
                          
                          
                          
                          183,063Total
      Assets
                          
                          $
                          29,502,707
                          
                          
                          $
                          39,287,834Liabilities and Stockholders’
      EquityCurrent
      LiabilitiesCurrent
      maturities of capital lease obligations
                          
                          $
                          -
                          
                          
                          $
                          25,346Accounts
      payable
                          
                          
                          1,055,804
                          
                          
                          
                          1,394,476Accrued
      expenses
                          
                          
                          1,086,258
                          
                          
                          
                          861,390Deferred
      revenues
                          
                          
                          1,028,952
                          
                          
                          
                          985,403Short-term
      debt, net of discount of $142,605
                          
                          
                          -
                          
                          
                          
                          2,607,395Deferred
      rent
                          
                          
                          78,889
                          
                          
                          
                          52,554Total
      Current Liabilities
                          
                          
                          3,249,903
                          
                          
                          
                          5,926,564Long-Term
      LiabilitiesDerivative
      liabilities
                          
                          
                          566,451
                          
                          
                          
                          -Deferred
      rent
                          
                          
                          275,182
                          
                          
                          
                          354,071Total
      Long-Term Liabilities
                          
                          
                          841,633
                          
                          
                          
                          354,071Total
      Liabilities
                          
                          
                          4,091,536
                          
                          
                          
                          6,280,635Commitments
      (Note 14)Stockholders'
      EquityPreferred
      stock, par value $0.001; 5,000,000 shares authorized; none
      issued
                          
                          
                          -
                          
                          
                          
                          -Common
      stock, par value $0.001;70,000,000 shares
      authorized; 34,662,229 and 34,587,854 shares issued and outstanding,
      respectively
                          
                          
                          34,662
                          
                          
                          
                          34,588Additional
      paid-in-capital
                          
                          
                          55,127,710
                          
                          
                          
                          54,851,755Accumulated
      deficit
                          
                          
                          (29,751,201
                          )
                          
                          
                          (21,879,144
                          )Total
      Stockholders' Equity
                          
                          
                          25,411,171
                          
                          
                          
                          33,007,199Total
      Liabilities and Stockholders' Equity
                          
                          $
                          29,502,707
                          
                          
                          $
                          39,287,834





The
accompanying notes are an integral part of these consolidated financial
statements.


27


TOWERSTREAM
CORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS





For the Years Ended
                          December 31,2009
                        
                        
                        2008Revenues
                        
                        $
                        14,915,435
                        
                        
                        $
                        10,656,081Operating
      ExpensesCost
      of revenues (exclusive of depreciation)
                        
                        
                        3,690,089
                        
                        
                        
                        3,891,433Depreciation
                        
                        
                        4,035,267
                        
                        
                        
                        3,222,716Customer
      support services
                        
                        
                        2,132,968
                        
                        
                        
                        1,996,920Sales
      and marketing
                        
                        
                        5,545,714
                        
                        
                        
                        7,536,158General
      and administrative
                        
                        
                        6,943,086
                        
                        
                        
                        7,456,168Total
      Operating Expenses
                        
                        
                        22,347,124
                        
                        
                        
                        24,103,395Operating
      Loss
                        
                        
                        (7,431,689
                        )
                        
                        
                        (13,447,314
                        )Other
      (Expense) IncomeInterest
      income
                        
                        
                        26,605
                        
                        
                        
                        578,373Interest
      expense
                        
                        
                        (740,409
                        )
                        
                        
                        (509,593
                        )Loss
      on derivative financial instruments
                        
                        
                        (478,544
                        )
                        
                        
                        -Other,
      net
                        
                        
                        (1,213
                        )
                        
                        
                        1,115Total
      Other (Expense) Income
                        
                        
                        (1,193,561
                        )
                        
                        
                        69,895Net
      Loss
                        
                        $
                        (8,625,250
                        )
                        
                        $
                        (13,377,419
                        )Net
      loss per common share – basic and diluted
                        
                        $
                        (0.25
                        )
                        
                        $
                        (0.39
                        )Weighted
      average common shares outstanding – basic and diluted
                        
                        
                        34,606,798
                        
                        
                        
                        34,543,972




The
accompanying notes are an integral part of these consolidated financial
statements.


28


TOWERSTREAM
CORPORATION


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


For
the Years Ended December 31, 2009 and 2008




Common
      Stock
                          
                          
                          Additional
                          
                          
                          DeferredShares
                          
                          
                          Amount
                          
                          
                          Paid-In-
                            Capital
                          
                          
                          Consulting
                            Costs
                          
                          
                          Accumulated
                            Deficit
                          
                          
                          TotalBalance
      at January 1, 2008
                          
                          
                          34,080,053
                          
                          
                          $
                          34,080
                          
                          
                          $
                          53,223,033
                          
                          
                          $
                          (20,100
                          )
                          
                          $
                          (8,501,725
                          )
                          
                          $
                          44,735,288Conversion
      of long-term debt
                          
                          
                          272,727
                          
                          
                          
                          273
                          
                          
                          
                          749,727
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          750,000Issuance
      of common stock for bonuses
                          
                          
                          31,099
                          
                          
                          
                          31
                          
                          
                          
                          21,116
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          21,147Cashless
      exercise of warrants
                          
                          
                          184,938
                          
                          
                          
                          185
                          
                          
                          
                          (185
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -Cashless
      exercise of options
                          
                          
                          19,037
                          
                          
                          
                          19
                          
                          
                          
                          (19
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -Payment
      for fractional shares upon cashless exercise
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (9
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (9
                          )Stock-based
      compensation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          858,092
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          858,092Amortization
      of deferred consulting costs
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          20,100
                          
                          
                          
                          
                          
                          
                          
                          20,100Net
      loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (13,377,419
                          )
                          
                          
                          (13,377,419
                          )Balance
      at December 31, 2008
                          
                          
                          34,587,854
                          
                          
                          
                          34,588
                          
                          
                          
                          54,851,755
                          
                          
                          
                          -
                          
                          
                          
                          (21,879,144
                          )
                          
                          
                          33,007,199Cumulative
      effect of change in accounting principle - January 1, 2009
      reclassification of equity-linked financial instruments to derivative
      liabilities
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (526,927
                          )
                          
                          
                          
                          
                          
                          
                          753,193
                          
                          
                          
                          226,266Issuance
      of common stock for bonuses
                          
                          
                          32,687
                          
                          
                          
                          32
                          
                          
                          
                          42,493
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          42,525Cashless
      exercise of options
                          
                          
                          41,688
                          
                          
                          
                          42
                          
                          
                          
                          (42
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -Stock-based
      compensation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          760,431
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          760,431Net
      loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (8,625,250
                          )
                          
                          
                          (8,625,250
                          )Balance
      at December 31, 2009
                          
                          
                          34,662,229
                          
                          
                          $
                          34,662
                          
                          
                          $
                          55,127,710
                          
                          
                          $
                          -
                          
                          
                          $
                          (29,751,201
                          )
                          
                          $
                          25,411,171





The
accompanying notes are an integral part of these consolidated financial
statements.


29


TOWERSTREAM
CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS





For
      the Years Ended December 31,2009
                            
                            
                            2008Cash Flows From Operating
      ActivitiesNet
      loss
                            
                            $
                            (8,625,250
                            )
                            
                            $
                            (13,377,419
                            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Provision
      for doubtful accounts
                            
                            
                            78,736
                            
                            
                            
                            65,000Depreciation
                            
                            
                            4,035,267
                            
                            
                            
                            3,222,716Stock-based
      compensation
                            
                            
                            802,956
                            
                            
                            
                            899,339Non-cash
      interest on notes payable
                            
                            
                            -
                            
                            
                            
                            73,393Accretion
      of debt discount
                            
                            
                            456,778
                            
                            
                            
                            141,141Amortization
      of financing costs
                            
                            
                            60,192
                            
                            
                            
                            58,250Loss
      on sale and disposition of property and equipment
                            
                            
                            57,413
                            
                            
                            
                            83,409Deferred
      rent
                            
                            
                            (52,554
                            )
                            
                            
                            133,471Loss
      on derivative financial instruments
                            
                            
                            478,544
                            
                            
                            
                            -Changes
      in operating assets and liabilities:Accounts
      receivable
                            
                            
                            (202,410
                            )
                            
                            
                            (159,778
                            )Prepaid
      expenses and other current assets
                            
                            
                            826
                            
                            
                            
                            477,024Accounts
      payable
                            
                            
                            (338,672
                            )
                            
                            
                            (19,493
                            )Accrued
      expenses
                            
                            
                            224,868
                            
                            
                            
                            175,813Deferred
      revenues
                            
                            
                            43,549
                            
                            
                            
                            353,897Total
      Adjustments
                            
                            
                            5,645,493
                            
                            
                            
                            5,504,182Net
      Cash Used In Operating Activities
                            
                            
                            (2,979,757
                            )
                            
                            
                            (7,873,237
                            )Cash Flows From Investing
      ActivitiesAcquisitions
      of property and equipment
                            
                            
                            (4,848,245
                            )
                            
                            
                            (7,683,855
                            )Proceeds
      from sale of property and equipment
                            
                            
                            11,659
                            
                            
                            
                            5,700Acquisition
      of FCC license
                            
                            
                            (100,000
                            )
                            
                            
                            (400,000
                            )Change
      in security deposits
                            
                            
                            (7,740
                            )
                            
                            
                            (17,715
                            )Net
      Cash Used In Investing Activities
                            
                            
                            (4,944,326
                            )
                            
                            
                            (8,095,870
                            )Cash Flows From Financing
      ActivitiesRepayment
      of capital leases
                            
                            
                            (25,346
                            )
                            
                            
                            (47,481
                            )Repayment
      of short-term debt
                            
                            
                            (2,750,000
                            )
                            
                            
                            -Payment
      to warrant holders for fractional shares upon cashless
      exercise
                            
                            
                            -
                            
                            
                            
                            (9
                            )Net
      Cash Used In Financing Activities
                            
                            
                            (2,775,346
                            )
                            
                            
                            (47,490
                            )Net
      Decrease In Cash and Cash Equivalents
                            
                            
                            (10,699,429
                            )
                            
                            
                            (16,016,597
                            )Cash
      and Cash Equivalents – Beginning
                            
                            
                            24,740,268
                            
                            
                            
                            40,756,865Cash
      and Cash Equivalents – Ending
                            
                            $
                            14,040,839
                            
                            
                            $
                            24,740,268





The
accompanying notes are an integral part of these consolidated financial
statements.


30





TOWERSTREAM
CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS – CONTINUED





For the Years Ended December
      31,2009
                  
                  
                  2008Supplemental Disclosures of Cash Flow
      InformationCash
      paid during the periods for:Interest
                  
                  $
                  277,382
                  
                  
                  $
                  172,427Income
      taxes
                  
                  $
                  12,562
                  
                  
                  $
                  11,491Non-cash
      investing and financing activities:Conversion
      of long-term debt into shares of common stock
                  
                  $
                  -
                  
                  
                  $
                  750,000




The
accompanying notes are an integral part of these consolidated financial
statements.


31





TOWERSTREAM
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Note
1.    Organization and Nature of Business




Towerstream
Corporation (referred to as ‘‘Towerstream’’ or the ‘‘Company’’) was formed on
December 17, 1999, and was incorporated in Delaware.  The
Company provides broadband services to commercial customers and delivers access
over a wireless network transmitting over both regulated and unregulated radio
spectrum.   The Company’s service supports bandwidth on demand,
wireless redundancy, virtual private networks (“VPNs”), disaster recovery,
bundled data and video services. The Company provides service to business
customers in New York City, Boston, Chicago, Los Angeles, San Francisco,
Seattle, Miami, Dallas-Fort Worth, Philadelphia, Providence and Newport, Rhode
Island.




Note
2.    Summary of Significant Accounting
Policies




Basis of
Presentation.    The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for annual financial statements and
with Form 10-K and Article 8 of Regulation S-X of the United States Securities
and Exchange Commission (“SEC”). The 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 consolidated financial
statements contain all the adjustments necessary (consisting only of normal
recurring accruals) to present the financial position of the Company as of
December 31, 2009 and 2008, and the results of operations and cash flows
for the years ended December 31, 2009 and 2008.




Use of
Estimates.    The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the amounts of revenues and expenses. Actual results could
differ from those estimates.





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.




Concentration of Credit
Risk.    Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist of cash
and cash equivalents.  At times, our cash and cash equivalents may be
uninsured or in deposit accounts that exceed the Federal Deposit Insurance
Corporation (“FDIC”) insurance limits.





The
Company also had approximately $13,513,000 invested in four institutional money
market funds.  These funds are protected under the Securities Investor
Protection Corporation (‘‘SIPC’’), a nonprofit membership corporation which
provides limited coverage up to $500,000.




Accounts
Receivable.   Accounts receivable are stated at cost less
an allowance for doubtful accounts. The allowance for doubtful accounts reflects
the Company’s estimate of accounts receivable that will be not
collected.  The allowance is based on the history of past write-offs,
the aging of balances, collections experience and current credit
conditions.  Amounts determined to be uncollectible are written-off
against the allowance for doubtful accounts.  Additions to the
allowance for doubtful accounts, e.g. bad debt expense,


totaled
$78,736 and $65,000 for 2009 and 2008, respectively.  Deductions to
the allowance for doubtful accounts, e.g. customer write-offs, totaled $57,087
and $75,966 for 2009 and 2008, respectively.




Derivative Financial
Instruments.    The Company does not use derivative
instruments to hedge exposures to cash flow, market or foreign currency
risks.  The Company evaluates all of its financial instruments to
determine if such instruments are derivatives or contain features that qualify
as embedded derivatives.  For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with
changes in the fair value reported in the consolidated statements of
operations.  For stock-based derivative financial instruments, the
Company uses the Black-Scholes option pricing model to value the derivative
instruments at inception and on subsequent valuation dates.  The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each
reporting period.  Derivative liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash
settlement of the instrument could be required within 12 months of the balance
sheet date.




32




TOWERSTREAM
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED





Property and
Equipment.Property and equipment are stated at cost and
include equipment, installation costs and materials. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the assets.
Leasehold improvements are amortized over the lesser of the useful lives or the
term of the respective lease. Network, base station and customer premise
equipment are depreciated over estimated useful lives ranging from 5 to 7 years;
furniture, fixtures and office equipment from 5 to 7 years; computer equipment
from 3 to 5 years; and system software over 3 years.





Expenditures
for maintenance and repairs, which do not generally extend the useful life of
the assets, are charged to expense as incurred. Gains or losses on disposal of
property and equipment are reflected in general and administrative expenses in
the statement of operations.




FCC
Licenses.    Federal Communications Commission
(“FCC”) licenses are initially recorded at cost and are considered to be
intangible assets with an indefinite life because the Company is able to
maintain the license indefinitely as long as it complies with certain FCC
requirements.  The Company intends to maintain compliance with such
requirements. The Financial Accounting Standards Board’s (“FASB”) guidance on
goodwill and other intangible assets states that an asset with an indefinite
useful life is not amortized.  However, as further described in the
next paragraph, these assets are reviewed annually for impairment.




Long-Lived
Assets.  Long-lived assets consist primarily of property and
equipment, and FCC licenses. Long-lived assets are reviewed annually for
impairment, or whenever events or circumstances indicate their carrying value
may not be recoverable. Conditions that would result in an impairment charge
include a significant decline in the market value of an asset, a significant
change in the extent or manner in which an asset is used, or a significant
adverse change that would indicate that the carrying amount of an asset or group
of assets is not recoverable. When such events or circumstances arise, an
estimate of the future undiscounted cash flows produced by the asset, or the
appropriate grouping of assets, is compared to the asset’s carrying value to
determine if impairment exists. If the asset is determined to be impaired, the
impairment loss is measured based on the excess of its carrying value over its
fair value. Assets to be disposed of are reported at the lower of their carrying
value or net realizable value.





The
Company has determined that there were no impairments of its property and
equipment or its FCC licenses during the years ended December 31, 2009 and
2008.





The
FASB’s guidance on asset retirement obligations addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated costs.  This guidance requires the
recognition of an asset retirement obligation and an associated asset retirement
cost when there is a legal obligation associated with the retirement of tangible
long-lived assets.  The Company’s network equipment is installed on
both buildings in which the Company has a lease agreement (“Company Locations”)
and at customer locations.  In both instances, the installation and removal
of the Company’s equipment is not complicated and does not require structural
changes to the building where the equipment is installed.  Costs associated
with the removal of the Company’s equipment at company or customer locations are
not material, and accordingly, the Company has determined that it does not
presently have asset retirement obligations under the FASB’s accounting
guidance.





Fair Value of Financial
Instruments.   In January 2008, the Company adopted the
provisions of the FASB’s guidance for fair value measurements which defines fair
value for accounting purposes, establishes a framework for measuring fair value
and expands disclosure requirements regarding fair value
measurements.  Adoption did not have a material impact on the
consolidated financial statements.  Fair value is defined as an exit
price, the amount that would be received upon the sale of an asset or paid upon
the transfer of a liability in an orderly transaction between market
participants at the measurement date.  The degree of judgment utilized
in measuring the fair value of assets and liabilities generally correlates to
the level of pricing observability.  Financial assets and liabilities
with readily available, actively quoted prices or for which fair value can be
measured from actively quoted prices in active markets generally have more
pricing observability and require less judgment in measuring fair
value.  Conversely, financial assets and liabilities that are rarely
traded or not quoted have less price observability and are generally measured at
fair value using valuation models that require more judgment.  These
valuation techniques involve some level of management estimation and judgment,
the degree of which is dependent on the price transparency of the asset,
liability or market and the nature of the asset or liability.  The
Company has categorized its financial assets and liabilities measured at fair
value into a three-level hierarchy in accordance with the FASB’s
guidance.  See Note 13 for a further discussion regarding the
Company’s measurement of financial assets and liabilities at fair
value.




33




TOWERSTREAM
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED





Income
Taxes.    Income taxes are accounted for under the
asset and liability method.  Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and operating loss and tax credit
carryforwards.  Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in operations in the period
enacted.  A valuation allowance is provided when it is more likely
than not that a portion or all of a deferred tax asset will not be
realized.  The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income and the reversal of
deferred tax liabilities during the period in which related temporary
differences become deductible. The benefit of tax positions taken or expected to
be taken in the Company’s income tax returns are recognized in the consolidated
financial statements if such positions are more likely than not of being
sustained.





Segment
Information.The FASB has established standards for
reporting information on operating segments of an enterprise in interim and
annual financial statements.  The Company operates in one segment
which is the business of broadband services.  The Company’s chief
operating decision-maker reviews the Company’s operating results on an aggregate
basis and manages the Company’s operations as a single operating
segment.





Revenue
Recognition.    The Company normally enters into
contractual agreements with its customers for periods ranging between one to
three years.  The Company recognizes the total revenue provided under
a contract ratably over the contract period, including any periods under which
the Company has agreed to provide services at no cost.  The Company
applies the revenue recognition principles set forth under SEC Staff Accounting
Bulletin 104, (“SAB 104”) which provides for revenue to be recognized when (i)
persuasive evidence of an arrangement exists, (ii) delivery or installation has
been completed, (iii) the customer accepts and verifies receipt, and (iv)
collectability is reasonably assured.





Deferred
Revenues.     Customers are billed monthly in
advance.  Deferred revenues are recognized for that portion of monthly
charges not yet earned as of the end of the reporting
period.  Deferred revenues are also recognized for certain customers
who pay for their services in advance.




Advertising
Costs.The Company charges advertising costs to expense
as incurred. Advertising costs for the years ended December 31, 2009 and 2008
were approximately $789,000 and $868,000, respectively, and are included in
sales and marketing expenses in the statements of operations.





Stock-Based
Compensation.    The Company accounts for stock-based
awards issued to employees in accordance with FASB guidance.  Such
awards primarily consist of options to purchase shares of common stock. The fair
value of stock-based awards is determined on the grant date using a valuation
model.  The fair value is recognized as compensation expense, net of
estimated forfeitures, on a straight line basis over the service period, which
is normally the vesting period.




Basic and Diluted Net Loss Per
Share.  Basic and diluted net loss per share has been
calculated by dividing net loss by the weighted average number of common shares
outstanding during the period.  All potentially dilutive common shares
have been excluded since their inclusion would be anti-dilutive.




The
following common stock equivalents were excluded from the computation of diluted
net loss per common share because they were anti-dilutive.  The
exercise of these common stock equivalents would dilute earnings per shares if
the Company becomes profitable in the future.  The exercise of the
outstanding stock options and warrants could generate proceeds up to
approximately $26,297,000.


Years
      Ended December 31,2009
                
                
                2008Stock
      Options
                
                
                3,738,638
                
                
                
                3,335,793Warrants
                
                
                4,332,310
                
                
                
                4,332,310Convertible
      debt
                
                
                -
                
                
                
                1,000,001Total
                
                
                8,070,948
                
                
                
                8,668,104




34





TOWERSTREAM
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED





Reclassifications.    Certain
accounts in the prior year consolidated financial statements have been
reclassified for comparative purposes to conform to the presentation in the
current year consolidated financial statements.  These
reclassifications have no effect on the previously reported net
loss.





Recent Accounting
Pronouncements.In September 2006, the FASB issued
an accounting standard which defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. The
Company adopted this standard on January 1, 2008 for its financial assets and
financial liabilities.  On January 1, 2009, the Company adopted the
fair value measurement requirements for nonfinancial assets and nonfinancial
liabilities that are not recognized or disclosed at fair value on a recurring
basis.  The adoption of this standard did not have a material impact
on the Company’s financial position or results of operations.  Refer
to Note 13 for additional discussion on fair value measurements.





In
December 2007, the FASB issued an accounting standard related to accounting for
business combinations and related disclosures. This standard addresses the
recognition and accounting for identifiable assets acquired, liabilities assumed
and noncontrolling interests in business combinations. The standard also expands
disclosure requirements for business combinations. The standard became effective
on January 1, 2009.





In
December 2007, the FASB issued an accounting standard related to accounting and
reporting for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Noncontrolling interests are reported as a
separate component of consolidated stockholders’ equity, and net income
allocable to noncontrolling interests and net income attributable to
stockholders are reported separately in the consolidated statement of
operations. This standard became effective on January 1, 2009 and did not have a
material impact on the Company’s financial position or results of
operations.





In March
2008, the FASB issued an accounting standard related to disclosures about
derivative instruments and hedging activities. This standard amends and enhances
disclosure requirements to provide a better understanding of how and why a
company uses
derivative instruments, how derivative instruments and related hedged items are
accounted for, and their effect on a company’s financial position, financial
performance and cash flows. The Company adopted this standard on January 1, 2009
and has included additional disclosures in its consolidated financial
statements.





In April
2008, the FASB issued an accounting standard which provides guidance for
determining the useful life of an intangible asset and the period of expected
cash flows used to measure the fair value of the asset. The adoption of this
standard on January 1, 2009 did not impact the Company’s financial position or
results of operations.





In May
2008, the FASB issued an accounting standard that requires the liability and
equity components of convertible debt instruments to be accounted for separately
if the debt can be settled in cash upon conversion.  The Company’s
debt could not be settled in cash upon conversion.  This standard
became effective January 1, 2009.  Accordingly, there was no impact on
the Company’s financial position or results of operations upon
adoption.





In April
2009, the FASB issued an accounting standard which affirmed that there is no
change in the measurement of fair value when the volume and level of activity
for an asset or a liability has significantly decreased.  This
standard also identifies circumstances that indicate when a transaction is not
orderly.   The adoption of this standard in the second quarter of
2009 had no material impact on the Company’s financial position and results of
operations.





In April
2009, the FASB issued an accounting standard which requires disclosures about
the fair value of financial instruments whenever a public company issues
financial information for interim reporting periods. This standard became
effective in the second quarter of 2009 and did not have a material impact on
the Company’s financial position and results of operations.





In June
2009, the FASB issued an accounting standard which requires entities to disclose
the date through which subsequent events have been evaluated as well as whether
that date is the date the financial statements were issued or the date the
financial statements were made available to be issued.  The Company
adopted this standard in the second quarter of 2009.  The Company has
evaluated subsequent events through the March 17, 2010 filing of its financial
statements with the SEC.





In June
2009, the FASB issued the FASB Accounting Standards Codification
(“Codification”). Effective in the third quarter of 2009, the Codification
became the single source for all authoritative generally accepted accounting
principles (“GAAP”) recognized by the
FASB and is required to be applied to financial statements issued for interim
and annual periods ending after September 15, 2009. The Codification does
not change GAAP and did not impact the Company’s financial position or results
of operations.


35




TOWERSTREAM
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED





In August
2009, the FASB issued an accounting standard to provide clarification on
measuring liabilities at fair value when a quoted price in an active market is
not available.  This standard became effective for the Company on
October 1, 2009 and did not have a significant impact on the Company’s financial
position or results of operations.





In
October 2009, the FASB issued an accounting standard that amended the rules on
revenue recognition for multiple-deliverable revenue arrangements.  This
guidance establishes a selling price hierarchy for determining the selling price
of a deliverable, which is based on: (i) vendor-specific objective evidence;
(ii) third-party evidence; or (iii) estimates. This guidance also eliminates the
residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables using the
relative selling price method and also requires expanded disclosures. This
standard is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010.
 Early adoption is permitted. The adoption of this standard is not expected
to have any impact on the Company’s financial position and results of
operations.





Note
3.    Property and Equipment, net




The Company’s property and equipment,
net is comprised of:





December
      31,2009
                  
                  
                  2008Network
      and base station equipment
                  
                  $
                  13,282,567
                  
                  
                  $
                  11,075,631Customer
      premise equipment
                  
                  
                  9,324,444
                  
                  
                  
                  7,079,096Furniture,
      fixtures and equipment
                  
                  
                  1,525,980
                  
                  
                  
                  1,525,980Computer
      equipment
                  
                  
                  610,847
                  
                  
                  
                  559,645System
      software
                  
                  
                  819,305
                  
                  
                  
                  789,810Leasehold
      improvements
                  
                  
                  775,420
                  
                  
                  
                  775,42026,338,563
                  
                  
                  
                  21,805,582Less:
      accumulated depreciation
                  
                  
                  12,703,878
                  
                  
                  
                  8,914,803$
                  13,634,685
                  
                  
                  $
                  12,890,779





Depreciation
expense for the years ended December 31, 2009 and 2008 was $4,035,267 and
$3,222,716, respectively. The Company sold or wrote-off property and equipment
with $315,264 of cost and $246,192 of accumulated depreciation for the year
ended December 31, 2009.  The Company sold or wrote-off property and
equipment with $187,485 of cost and $98,375 of accumulated depreciation for the
year ended December 31, 2008.




Property
held under capital leases included within the Company’s property and equipment
consists of the following:





December
      31,2009
                  
                  
                  2008Network
      and base station equipment
                  
                  $
                  168,441
                  
                  
                  $
                  168,441Less:
      accumulated depreciation
                  
                  
                  130,515
                  
                  
                  
                  106,099$
                  37,926
                  
                  
                  $
                  62,342





The
Company wrote-off property and equipment under capital leases with $26,261 of
cost and $25,386 of accumulated deprecation during the year ended December 31,
2008.




36




TOWERSTREAM
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED





Note
4.  Accrued Expenses





Accrued
expenses consist of the following:





December
      31,2009
                  
                  
                  2008Payroll
      and related
                  
                  $
                  430,360
                  
                  
                  $
                  510,608Penalties
                  
                  
                  95,726
                  
                  
                  
                  149,976Interest
                  
                  
                  -
                  
                  
                  
                  55,000Rent
                  
                  
                  8,900
                  
                  
                  
                  50,149Marketing
                  
                  
                  79,026
                  
                  
                  
                  -Property
      and equipment
                  
                  
                  140,566
                  
                  
                  
                  -Professional
      services
                  
                  
                  157,151
                  
                  
                  
                  17,953Other
                  
                  
                  174,529
                  
                  
                  
                  77,704Total
                  
                  $
                  1,086,258
                  
                  
                  $
                  861,390





Note
5.    Debt




In
January 2007, the Company issued $3,500,000 of 8% senior convertible
debentures (the ‘‘Debentures’’). The Debentures matured on
December 31, 2009 and were convertible, in whole or in part, into
shares of common stock at an initial conversion price of $2.75 per
share.  In addition, holders of the Debentures received warrants to
purchase an aggregate of 636,364 shares of common stock at an exercise price of
$4.00 per share and warrants to purchase an aggregate of 636,364 shares of
common stock at an exercise price of $6.00 per share. These warrants are
exercisable until January 2012 and were calculated using the Black-Scholes
option pricing model. The proceeds were allocated between the warrants
($526,927) and the Debentures ($2,973,073) based on their relative fair
values.  The initial, discounted carrying value of the Debentures of
$2,973,073 was accreted to the maturity value over the term of the
Debentures.  The amount of accretion recorded in each period was
recognized as non-cash interest expense. Interest expense totaled $676,778
during 2009 and included $220,000 associated with the 8% coupon and $456,778
associated with the accretion of the discount.  Interest expense
totaled $361,689 during 2008 and included $220,548 associated with the 8% coupon
and $141,141 associated with the accretion of the discount.





In
January 2008, a Debenture holder converted $750,000 of Debentures into common
stock at a conversion price of $2.75 per share resulting in the issuance of
272,727 shares of common stock.  The carrying value of the Debentures
on the date of conversion was $676,607.  Accordingly, the Company
recognized the remaining debt discount of $73,393 as non-cash interest expense
in connection with the conversion.




On
December 31, 2009, the maturity date, the Company paid $2,750,000 to the holder
of all outstanding Debentures.





In
connection with the Debentures, the Company incurred placement agent fees
totaling approximately $140,000 and issued placement agent warrants to purchase
up to 63,636 shares of common stock at an exercise price of $4.50 per share. The
warrants are exercisable for five years and were valued at $34,750 using the
Black-Scholes pricing model.  These financing costs were amortized
ratably through December 31, 2009.


Note
6.    Derivative Liabilities





In June
2008, the FASB issued an accounting standard related to the accounting for
derivative financial instruments indexed to a company’s own
stock.  Under this standard, instruments which do not have fixed
settlement provisions are deemed to be derivative instruments. The conversion
feature of the Company’s Debentures, and the warrants issued with the
Debentures, do not have fixed settlement provisions because their conversion and
exercise prices, respectively, may be lowered if the Company issues securities
at lower prices in the future.  The Company was required to include
the reset provisions in order to protect the Debenture holders from the
potential dilution associated with future financings.  In accordance
with this standard, the conversion feature of the Debentures was separated from
the host contract, the Debenture, and recognized as an embedded derivative
instrument.  Both the conversion feature
of the Debenture and the warrants have been re-characterized as derivative
liabilities. The fair value of these liabilities are re-measured at the end of
every reporting period with the change in value reported in the statement of
operations.


37




TOWERSTREAM
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED





The
derivative liabilities were valued using the Black-Scholes option pricing model
and the following assumptions:





December
      31,
                  2009
                
                
                January
      1,
                  2009
                
                
                January
      18,
                  2007Debenture
      conversionfeature:Risk-free
      interest rate
                
                
                0
                %
                
                
                0.4
                %
                
                
                4.7
                %Expected
      volatility
                
                
                0
                %
                
                
                74
                %
                
                
                60
                %Expected
      life (in years)
                
                
                0
                
                
                
                1
                
                
                
                3Expected
      dividendyield
                
                
                -
                
                
                
                -
                
                
                
                -Warrants:Risk-free
      interest rate
                
                
                1.1
                %
                
                
                1.0
                %
                
                
                4.7
                %Expected
      volatility
                
                
                86
                %
                
                
                74
                %
                
                
                60
                %Expected
      life (in years)
                
                
                2
                
                
                
                3
                
                
                
                3Expected
      dividendyield
                
                
                -
                
                
                
                -
                
                
                
                -Fair
      value:Debenture
      conversionfeature
                
                $
                -
                
                
                $
                11,838
                
                
                $
                856,025Warrants
                
                $
                566,451
                
                
                $
                76,069
                
                
                $
                620,316





The
risk-free interest rate was based on rates established by the Federal
Reserve.  Effective in the first quarter of 2008, the Company based
expected volatility on the historical volatility for its common
stock.  Previously, the Company’s estimated volatility was based on
the volatility of publicly-traded peers.  The expected life of the
Debentures’ conversion option was based on the maturity of the Debentures and
the expected life of the warrants was based on their full term.  The
expected dividend yield was based upon the fact that the Company has not
historically paid dividends, and does not expect to pay dividends in the
future.





This new
standard was implemented in the first quarter of 2009 and is reported as the
cumulative effect of a change in accounting principle.  The cumulative
effect on the accounting for the conversion feature and the warrants as of
January 1, 2009 was as follows:





Derivative
                          Instrument
                        
                        Additional
                          Paid-In-Capital
                        
                        
                        Accumulated
                          Deficit
                        
                        
                        Derivative
                          Liability
                        
                        
                        DebentureConversion
      feature
                        
                        $
                        -
                        
                        
                        $
                        (277,531
                        )
                        
                        $
                        (11,838
                        )
                        
                        $
                        289,369Warrants
                        
                        $
                        526,927
                        
                        
                        $
                        (475,662
                        )
                        
                        $
                        (76,069
                        )
                        
                        $
                        24,804Total
                        
                        $
                        526,927
                        
                        
                        $
                        (753,193
                        )
                        
                        $
                        (87,907
                        )
                        
                        $
                        314,173





The
warrants were originally recorded at their relative fair value as an increase in
additional paid-in-capital.  Changes in the accumulated deficit
include $635,241 of interest expense associated with the accretion of additional
discount recognized on the Debenture and $1,388,434 in gains resulting from
decreases in the fair value of the derivative liabilities through December 31,
2008.  The derivative liability amounts reflect the fair value of each
derivative instrument as of the January 1, 2009 date of
implementation.  The Debenture amounts represent the additional
discount recorded upon adoption of this new standard.  This discount
was recognized in 2009 as additional interest expense.





On
December 31, 2009, the Company repaid the Debentures.  Therefore, as
of December, 31, 2009, there was no value associated with the debenture
conversion feature.




38




TOWERSTREAM
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED





Note
7.    Capital Stock




The Company is authorized to issue
5,000,000 shares of preferred stock at a par value of $0.001.  There
were no issuances of preferred stock as of December 31, 2009 and 2008,
respectively.





The
Company is authorized to issue 70,000,000 shares of common stock at a par value
of $0.001. The holders of common stock are entitled to one vote per
share.  The holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
legally available funds. Upon liquidation, dissolution or winding-up, the
holders of the Company’s common stock are entitled to share ratably in all
assets that are legally available for distribution. The holders of the Company’s
common stock have no preemptive, subscription, redemption or conversion rights.
The rights, preferences and privileges of holders of the Company’s common stock
are subject to, and may be adversely affected by, the rights of the holders of
any series of preferred stock, which may be designated solely by action of the
board of directors and issued in the future.





In 2009,
32,687 shares of common stock were issued to executive officers as part of their
quarterly bonuses.  The Company recognized compensation expense
totaling $42,525, which represented the fair value of the shares on the date of
issuance.





During
2009, stock options were exercised by current or former employees to purchase a
total of 144,177 of shares.  These options were exercised on a
cashless basis resulting in the issuance of 41,688 shares.  Under a
cashless exercise, the holder uses a portion of the shares that would otherwise
be issuable upon exercise, rather than cash, as consideration for the
exercise.  The amount of net shares issuable in connection with a
cashless exercise will vary based on the exercise price of the option or warrant
compared to the current market price of the Company’s common stock on the date
of exercise.





During
2008, two former employees exercised options to purchase a total of 185,705
shares.  The options were exercised on a cashless exercise basis
resulting in the issuance of 19,037 shares.  Also in 2008, two former
employees exercised warrants to purchase a total of 251,717
shares.  The warrants were exercised on a cashless exercise basis
resulting in the issuance of 184,938 shares.





In 2008,
31,099 shares of common stock were issued to executive officers as part of their
quarterly bonuses.  The Company recognized compensation expense
totaling $21,147, which represented the fair value of the shares on the date of
issuance.




Note
8.  Share-Based Compensation





The
Company uses the Black-Scholes valuation model to value options granted to
employees, directors and consultants.  Compensation expense, including
the effect of forfeitures, is recognized over the period of service, generally
the vesting period.  Stock-based compensation for the amortization of
stock options granted under the Company’s stock option plans totaled $760,431
and $858,092 for the years ended December 31, 2009 and 2008,
respectively.  Stock-based compensation for the amortization of
stock-based consulting fees totaled $20,100 for the year ended December 31,
2008.  Stock-based compensation is included in general and
administrative expenses in the accompanying consolidated statements of
operations.




The
unamortized amount of stock options expense was $677,556 as of December
31, 2009 which will be recognized over a weighted-average period of 1.57
years. There were no unamortized stock-based consulting fees as of December 31,
2009.





The fair
values of stock option grants were calculated on the dates of grant using the
Black-Scholes option valuation model and the following weighted average
assumptions:





Years
      Ended December 31,2009
                
                
                2008Risk-free
      interest rate
                
                
                0.2%
      - 2.9
                %
                
                
                1.7%
      - 3.4
                %Expected
      volatility
                
                
                79%
      - 88
                %
                
                
                74%
      - 98
                %Expected
      life (in years)
                
                
                0.1
      - 6.8
                
                
                
                5 -
      6.5Expected
      dividend yield
                
                
                0
                %
                
                
                0
                %




39




TOWERSTREAM
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED





The
risk-free interest rate is based on rates established by the Federal Reserve.
The Company’s expected volatility was based upon the historical volatility for
its common stock.  The expected life of the Company’s options was
determined using the simplified method as a result of its historical
data.  The dividend yield is based upon the fact that the Company has
not historically paid dividends, and does not expect to pay dividends in the
future.





The
Company recorded additional stock-based compensation related to the issuance of
common stock to executive officers as a part of their bonus programs, which
totaled $42,525 and $21,147 for the years ended December 31, 2009 and 2008,
respectively.  Total shares issued to executive officers were 32,687
and 31,099 for the years ended December 31, 2009 and 2008,
respectively.





Note
9.   Employee Benefit Plan




The
Company has established a 401(k) retirement plan (“401(k) plan”) which covers
all eligible employees who have attained the age of twenty-one and have
completed 30 days of employment with the Company. The Company can elect to match
up to a certain amount of employees’ contributions to the 401(k)
plan.  No employer contributions were made during the years ended
December 31, 2009 and 2008.





Note
10.   Income Taxes





The
provision for income taxes using the statutory Federal tax rate as compared to
the Company’s effective tax rate is summarized as follows:





For
      the Years Ended December 31,2009
                
                
                2008Federal
      statutory rate
                
                
                (34.0
                )%
                
                
                (34.0
                )%State
      taxes
                
                
                (6.0
                )%
                
                
                (6.0
                )%Permanent
      differences
                
                
                3.9
                %
                
                
                0.0
                %Valuation
      allowance
                
                
                36.1
                %
                
                
                40.0
                %Effective
      tax rate
                
                
                0.0
                %
                
                
                0.0
                %





The
Company files income tax returns for Towerstream Corporation and its
subsidiaries in the United States with the Internal Revenue Service and with
various state jurisdictions.  As of December 31, 2009, the tax returns for
Towerstream Corporation for the years 2006 through 2009 remain open to
examination by the Internal Revenue Service and various state
authorities.





Deferred
tax assets (liabilities) consist of the following:





For
      the Years Ended December 31,2009
                
                
                2008Net
      operating loss carryforward
                
                $
                11,134,911
                
                
                $
                7,939,891Stock-based
      compensation
                
                
                894,420
                
                
                
                608,559Allowance
      for doubtful accounts
                
                
                35,320
                
                
                
                26,660Other
                
                
                16,195
                
                
                
                16,764Deferred
      tax assets
                
                
                12,080,846
                
                
                
                8,591,874Depreciation
                
                
                (1,301,223
                )
                
                
                (947,372
                )FCC
      licenses
                
                
                (54,556
                )
                
                
                (28,778
                )Deferred
      tax liabilities
                
                
                (1,355,779
                )
                
                
                (976,150
                )Net
      deferred tax assets
                
                
                10,725,067
                
                
                
                7,615,724Valuation
      allowance
                
                
                (10,725,067
                )
                
                
                (7,615,724
                )Net
                
                $
                -
                
                
                $
                -




40




TOWERSTREAM
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED




Accounting
for Uncertainty in Income Taxes





Effective
January 1, 2007, the Company adopted the FASB’s guidance on accounting for
uncertainty in income taxes.  In accordance with this guidance,
interest costs and related penalties related to unrecognized tax benefits are
required to be calculated, if applicable.  No interest and penalties
were recorded during the years ended December 31, 2009 and 2008,
respectively.  As of December 31, 2009 and 2008, no liability for
unrecognized tax benefits was required to be recorded.





NOL
Limitations





The
Company’s utilization of NOL carryforwards is subject to an annual limitation
due to ownership changes that have occurred previously or that could occur in
the future as provided in Section 382 of the Internal Revenue Code of 1986, as
well as similar state and foreign provisions.  In general, an
ownership change, as defined by Section 382, results from transactions
increasing the ownership of certain stockholders or public group in the stock of
a corporation by more than fifty percentage points over a three-year period.
Since its formation, the Company has raised capital through the issuance of
capital stock and various convertible instruments which, combined with the
purchasing shareholders’ subsequent disposition of these shares, has resulted in
an ownership change as defined by Section 382, and also could result in an
ownership change in the future upon subsequent disposition.





The
annual NOL limitation is determined by first multiplying the value of the
Company’s stock at the time of ownership change by the applicable long-term tax
exempt rate, and could then be subject to additional adjustments, as required.
Any limitation may result in expiration of a portion of the NOL carryforwards
before utilization.





The
Company has not utilized any of its NOL carryforwards as it has never reported
taxable income.  The Company has applied a full valuation allowance
against deferred tax assets related to its NOL carryforwards.  Federal
NOLs will begin expiring in 2027.  State NOLs will begin expiring in
2012.





Valuation
Allowance





In
assessing the realizability of deferred tax assets, the
Company has considered 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. In making this determination, under the applicable financial
reporting standards, the Company is allowed to consider the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies. A full valuation allowance has been recorded for the
deferred tax asset balance as of December 31, 2009 and 2008. The change in
valuation allowance was $3,109,343 and $5,043,822, respectively for the years
ended December 31, 2009 and 2008.  A valuation allowance will be
maintained until sufficient positive evidence exists to support the reversal of
any portion or all of the valuation allowance, net of appropriate
reserves.





Note
11.    Stock Option Plans




In
January 2007 the Company adopted the 2007 Equity Compensation Plan (the ‘‘2007
Plan’’).  The 2007 Plan provides for the issuance of options, stock
appreciation rights, restricted stock, restricted stock units, bonus shares and
dividend equivalents to officers and other employees, consultants and directors
of the Company.  The total number of shares of common stock issuable
under the 2007 Plan is 2,403,922. A total of 2,315,402 stock options or common
stock has been issued under the 2007 Plan as of December 31, 2009.





In
May 2007, the Board of Directors approved the adoption of the 2007
Incentive Stock Plan which provides for the issuance of up to 2,500,000 shares
of common stock in the form of options or restricted stock (the ‘‘2007 Incentive
Stock Plan’’). The 2007 Incentive Stock Plan was approved by the Company’s
stockholders in May 2007. A total of 1,352,419 stock options or common
stock has been issued under the 2007 Incentive Stock Plan as of December 31,
2009.





Options
granted under both the 2007 Plan and the 2007 Incentive Plan have terms up to
ten years and are exercisable at a price per share not less than the fair market
value of the underlying common stock on the date of grant. The total number of
shares of common stock that remain available for issuance as of December 31,
2009 under the 2007 Plan and the 2007 Incentive Stock Plan combined is 1,236,101
shares.


41




TOWERSTREAM
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED





In August
2008, the Company’s stockholders approved the adoption of the 2008 Non-Employee
Directors Compensation Plan (the “2008 Directors Plan”).  Under the
2008 Directors Plan, an aggregate of 1,000,000 shares have been reserved for
issuance.  As of December 31, 2009, 200,000 shares have been issued
under this plan.  Options granted under the 2008 Directors Plan have
terms of up to five years and are exercisable at a price per share equal to the
fair market value of the underlying common stock on the date of
grant.





Transactions
under the stock option plans during the years ended December 31, 2009 and 2008
were as follows:





Number
      of
                  Options
                
                
                Weighted
                  Average
                  Exercise PriceOutstanding
      as of  January 1, 2008
                
                
                2,328,067
                
                
                $
                2.08Granted
      during 2008
                
                
                1,261,032
                
                
                
                1.26Exercised
                
                
                (185,705
                )
                
                
                1.43Forfeited
      /expired
                
                
                (67,601
                )
                
                
                1.70Outstanding
      as of December 31, 2008
                
                
                3,335,793
                
                
                $
                1.82Granted
      during 2009
                
                
                690,526
                
                
                
                0.86Exercised
                
                
                (144,177
                )
                
                
                1.27Forfeited
      /expired
                
                
                (143,504
                )
                
                
                1.27Outstanding
      as of December 31, 2009
                
                
                3,738,638
                
                
                $
                1.69





The
weighted average fair value of the options granted during 2009 and 2008 were
$0.58 and $0.92, respectively.





The
following table summarizes information concerning outstanding and exercisable
stock options as of December 31, 2009:





Options
      Outstanding
                    
                    
                    Options
      ExercisableRange
      of
                      Exercise
                      Prices
                    
                    Number
      Outstanding
                    
                    
                    Weighted
                      Average
      Remaining Contractual
                      Life
      (years)
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Proceeds
                      Upon
                      Exercise
                    
                    
                    Intrinsic
                      Value
                    
                    
                    Number
      Exercisable
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Weighted
                      Average
      Remaining Contractual
                      Life
      (years)
                    
                    
                    Intrinsic
                      Value$0.68-$0.78
                    
                    
                    1,182,332
                    
                    
                    
                    6.96
                    
                    
                    $
                    0.75
                    
                    
                    $
                    882,799
                    
                    
                    $
                    1,410,925
                    
                    
                    
                    739,000
                    
                    
                    $
                    0.76
                    
                    
                    
                    6.48
                    
                    
                    $
                    875,494$0.93-$1.22
                    
                    
                    570,386
                    
                    
                    
                    6.35
                    
                    
                    
                    1.16
                    
                    
                    
                    662,040
                    
                    
                    
                    444,509
                    
                    
                    
                    550,386
                    
                    
                    
                    1.17
                    
                    
                    
                    6.24
                    
                    
                    
                    424,309$1.32-$1.45
                    
                    
                    1,218,309
                    
                    
                    
                    5.83
                    
                    
                    
                    1.42
                    
                    
                    
                    1,733,848
                    
                    
                    
                    629,671
                    
                    
                    
                    984,975
                    
                    
                    
                    1.43
                    
                    
                    
                    5.20
                    
                    
                    
                    504,504$1.61
                    
                    
                    75,000
                    
                    
                    
                    9.84
                    
                    
                    
                    1.61
                    
                    
                    
                    120,750
                    
                    
                    
                    24,750
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -$2.00-$2.25
                    
                    
                    347,611
                    
                    
                    
                    7.65
                    
                    
                    
                    2.11
                    
                    
                    
                    733,598
                    
                    
                    
                    -
                    
                    
                    
                    212,422
                    
                    
                    
                    2.16
                    
                    
                    
                    7.43
                    
                    
                    
                    -$3.70
                    
                    
                    135,000
                    
                    
                    
                    7.49
                    
                    
                    
                    3.70
                    
                    
                    
                    499,500
                    
                    
                    
                    -
                    
                    
                    
                    90,000
                    
                    
                    
                    3.70
                    
                    
                    
                    7.49
                    
                    
                    
                    -$7.05
                    
                    
                    135,000
                    
                    
                    
                    7.35
                    
                    
                    
                    7.05
                    
                    
                    
                    951,750
                    
                    
                    
                    -
                    
                    
                    
                    90,000
                    
                    
                    
                    7.05
                    
                    
                    
                    7.35
                    
                    
                    
                    -$9.74
                    
                    
                    75,000
                    
                    
                    
                    2.12
                    
                    
                    
                    9.74
                    
                    
                    
                    730,500
                    
                    
                    
                    -
                    
                    
                    
                    75,000
                    
                    
                    
                    9.74
                    
                    
                    
                    2.12
                    
                    
                    
                    -3,738,638
                    
                    
                    
                    6.55
                    
                    
                    $
                    1.69
                    
                    
                    $
                    6,314,785
                    
                    
                    $
                    2,509,855
                    
                    
                    
                    2,741,783
                    
                    
                    $
                    1.74
                    
                    
                    
                    6.22
                    
                    
                    $
                    1,804,307





The
intrinsic value is calculated as the difference between the closing price of the
Company’s common stock at December 31, 2009, which was $1.94 per share, and the
exercise price of the options.





The
number of shares issuable upon the exercise of outstanding options, and the
proceeds upon the exercise of such options, will be lower if an option holder
elects to exercise on a cashless basis.




42




TOWERSTREAM
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED





Note
12.    Stock Warrants




The
Company has issued warrants to purchase shares of common stock which expire at
various dates through June 2012.





Changes
in warrants outstanding for the years ended December 31, 2009 and 2008 were as
follows:





Number
      of
                Warrants
              
              
              Weighted
                Average
                Exercise PriceWarrants
      outstanding as of January 1, 2008
              
              
              4,672,325
              
              
              $
              4.34Exercised
      during 2008
              
              
              (251,717
              )
              
              
              0.75Forfeited/expired
              
              
              (88,298
              )
              
              
              1.27Warrants
      outstanding as of December 31, 2008
              
              
              4,332,310
              
              
              
              4.61Exercised
      during 2009
              
              
              -
              
              
              
              -Forfeited/expired
              
              
              -
              
              
              
              -Warrants
      outstanding as of December 31, 2009
              
              
              4,332,310
              
              
              $
              4.61





The
following table summarizes information concerning outstanding and exercisable
warrants as of December 31, 2009:





Warrants
      Outstanding
                    
                    
                    Warrants
      ExercisableRange
      of Exercise
                      Prices
                    
                    Number
                      Outstanding
                    
                    
                    Weighted
                      Average
                      Remaining
      Contractual
                      Life
      (years)
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Proceeds
                      Upon
                      Exercise
                    
                    
                    Number
                      Exercisable
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Weighted
                      Average
                      Remaining
      Contractual
                      Life
      (years)$4.00
                    
                    
                    936,364
                    
                    
                    
                    2.17
                    
                    
                    $
                    4.00
                    
                    
                    $
                    3,745,456
                    
                    
                    
                    936,364
                    
                    
                    $
                    4.00
                    
                    
                    
                    2.17$4.50
                    
                    
                    2,759,582
                    
                    
                    
                    2.03
                    
                    
                    
                    4.50
                    
                    
                    
                    12,418,119
                    
                    
                    
                    2,759,582
                    
                    
                    
                    4.50
                    
                    
                    
                    2.03$6.00
                    
                    
                    636,364
                    
                    
                    
                    2.03
                    
                    
                    
                    6.00
                    
                    
                    
                    3,818,184
                    
                    
                    
                    636,364
                    
                    
                    
                    6.00
                    
                    
                    
                    2.034,332,310
                    
                    
                    
                    2.06
                    
                    
                    $
                    4.61
                    
                    
                    $
                    19,981,759
                    
                    
                    
                    4,332,310
                    
                    
                    $
                    4.61
                    
                    
                    
                    2.06





There is
no intrinsic value associated with the Company’s warrants outstanding or
exercisable as of December 31, 2009.





The
number of shares issuable upon the exercise of outstanding warrants, and the
proceeds upon the exercise of such warrants, will be lower if a warrant holder
elects to exercise on a cashless basis.





Note
13.    Fair Value Measurement





Valuation
Hierarchy





The
FASB’s accounting standard for fair value measurements establishes a valuation
hierarchy for disclosure of the inputs to valuation used to measure fair
value.  This hierarchy prioritizes the inputs into three broad levels
as follows.  Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or
liabilities.  Level 2 inputs are quoted prices for similar assets and
liabilities in active markets or inputs that are observable for the asset or
liability, either directly or indirectly through market corroboration, for
substantially the full term of the financial instrument.  Level 3
inputs are unobservable inputs based on the Company’s own assumptions used to
measure assets and liabilities at fair value.  A financial asset or
liability’s classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value
measurement.




43




TOWERSTREAM
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED




The
following table provides the assets and liabilities carried at fair value
measured on a recurring basis as of December 31, 2009:





Fair Value Measurements at December 31, 2009Total Carrying
                  Value at December
                  31, 2009
                
                
                Quoted prices
                  in active
                  markets
                  (Level 1)
                
                
                Significant
                  other
                  observable
                  inputs (Level 2)
                
                
                Significant
                  unobservable
                  inputs (Level 3)Cash
      and cash equivalents
                
                $
                14,040,839
                
                
                $
                14,040,839
                
                
                $
                -
                
                
                $
                -Derivative
      liabilities
                
                $
                566,451
                
                
                $
                -
                
                
                $
                -
                
                
                $
                566,451





Cash and
cash equivalents are measured at fair value using quoted market prices and are
classified within Level 1 of the valuation hierarchy.  The carrying
amounts of accounts receivable, accounts payable and accrued liabilities
approximate their fair value due to their short maturities.  The
derivative liabilities are measured at fair value using quoted market prices and
estimated volatility factors, and are classified within Level 3 of the valuation
hierarchy. There were no changes in the valuation techniques during year ended
December 31, 2009.





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





Years
      Ended December 31,2009
                
                
                2008Beginning
      balance
                
                $
                -
                
                
                $
                -Net
      unrealized loss on derivative financial instruments
                
                
                (478,544
                )
                
                
                -Ending
      balance
                
                $
                (478,544
                )
                
                $
                -





The
aggregate fair value of the derivative liabilities measured on January 1, 2009
was $87,907.





Note
14.    Commitments and Contingencies




Lease
Obligations.    The Company has entered into
operating leases related to roof rights, cellular towers, office space, and
equipment leases under various non-cancelable agreements expiring through
March 2019.





As of
December 31, 2009, total future lease commitments were as
follows:





Year
      Ending December 31,2010
                
                $
                2,933,6632011
                
                
                2,602,7352012
                
                
                2,410,0342013
                
                
                1,601,1442014
                
                
                739,192Thereafter
                
                
                1,120,139$
                11,406,907





Rent
expense for the years ended December 31, 2009 and 2008 totaled
approximately $2,614,000 and $2,055,000, respectively.




In March
2007, the Company entered into a lease agreement for its corporate offices (the
“Original Space”). In August 2007, the Company signed a lease amendment
adding approximately 25,000 square feet (the “Additional Space”) and extending
the lease term. The new lease term commenced in October 2007 and terminates
six 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 $527,000 in 2009 and will remain at that level through
February 2010, before increasing to approximately $558,000 through
May 2012, and approximately $590,000 through the end of the
lease.


44




TOWERSTREAM
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED




The
landlord provided the Company with certain incentives as an inducement to enter
the lease agreements.  These incentives included (i) an allowance of
$163,330 for leasehold improvements on the Original Space, (ii) an allowance of
$200,000 for leasehold improvements on the Additional Space, and (iii) an
initial six-month rent-free period on half of the Additional
Space.  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 over
the term of the lease.   The economic value of the rent-free
period is being amortized ratably over the term of the lease.




Other Commitments and
Contingencies.  One of the purchase agreements related to FCC
licenses includes a contingent payment of $275,000, depending on the status of
the license with the FCC, and whether the Company has obtained approval to
broadcast terrestrially in the 3650 to 3700 MHz band.  The contingent
payment includes the issuance of common stock with a value of $275,000 (due in
May 2011).





Note
15.    Subsequent Events





On March
14, 2010, the Company entered into an asset purchase agreement with Sparkplug
Communications Inc. (“the Seller”).  Under the asset purchase
agreement, the Company agreed to purchase all customer contracts, the network
infrastructure and the related assets of the Seller’s Chicago, Illinois and
Nashville, Tennessee networks.  This transaction is valued at $1.6
million of which approximately $1.2 million will be paid in cash and $430,000
will be paid through the issuance of common stock.  The acquisition
closing is subject to customary conditions and is expected to close by the end
of the second quarter 2010.


45




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





None.





Item
9A(T). Controls and Procedures.




Controls and
Procedures




We
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the issuer’s management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. Based upon
our evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures are effective, as of
December 31, 2009, in ensuring that material information that we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms.




Changes in Internal Control
over Financial Reporting




There
were no changes in our internal control over financial reporting during the
fourth quarter of the year ended December 31, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.




Management’s Annual Report
on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a
process designed by, or under the supervision of, a company’s principal
executive and principal financial officers and effected by a company’s board of
directors, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes
those policies and procedures that:




·
              pertain to the maintenance of
      records that, in reasonable detail, accurately and fairly reflect the
      transactions and dispositions of our
  assets;
 
 ·
              provide reasonable assurance that
      transactions are recorded as necessary to permit preparation of financial
      statements in accordance with generally accepted accounting principles,
      and that our receipts and expenditures are being made only in accordance
      with authorizations of our management and
      directors; and
 
 ·
              provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use
      or disposition of our assets that could have a material effect on the
      financial statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.




Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2009. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control — Integrated
Framework.





Based on
our assessment, our management has concluded that, as of December 31, 2009,
our internal control over financial reporting is effective based on those
criteria.


46




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





Item
9B. Other Information.





None.


47




PART
III





Item
10. Directors, Executive Officers and Corporate Governance.





The
information required by this item will be set forth in the proxy statement for
our 2010 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission not later then 120 days after the end of the fiscal year
covered by this report on Form 10-K, and is incorporated by reference from our
proxy statement.





Item
11. Executive Compensation.





The
information required by this item will be set forth in the proxy statement for
our 2010 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission not later then 120 days after the end of the fiscal year
covered by this report on Form 10-K, and is incorporated by reference from our
proxy statement.





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





The
information required by this item will be set forth in the proxy statement for
our 2010 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission not later then 120 days after the end of the fiscal year
covered by this report on Form 10-K, and is incorporated by reference from our
proxy statement.




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





The
information required by this item will be set forth in the proxy statement for
our 2010 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission not later then 120 days after the end of the fiscal year
covered by this report on Form 10-K, and is incorporated by reference from our
proxy statement.





Item
14. Principal Accountant Fees and Services.





The
information required by this item will be set forth in the proxy statement for
our 2010 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission not later then 120 days after the end of the fiscal year
covered by this report on Form 10-K, and is incorporated by reference from our
proxy statement.





48




PART
IV





Item
15. Exhibits and Financial Statement Schedules.




Exhibit No.
                
                Description2.1
                
                Agreement
      of Merger and Plan of Reorganization, dated January 12, 2007, by
      and among University Girls Calendar, Ltd., Towerstream Acquisition, Inc.
      and Towerstream Corporation (Incorporated by reference to Exhibit 2.1 to
      the Current Report on Form 8-K of Towerstream Corporation filed with
      the Securities and Exchange Commission on
      January 19, 2007).3.1
                
                Certificate
      of Incorporation of University Girls Calendar, Ltd. (Incorporated by
      reference to Exhibit 3.1 to the Current Report on Form 8-K of University
      Girls Calendar, Ltd. filed with the Securities and Exchange Commission on
      January 5, 2007).3.2
                
                Certificate
      of Amendment to Certificate of Incorporation of University Girls Calendar,
      Ltd., changing the Company’s name to Towerstream Corporation (Incorporated
      by reference to Exhibit 3.3 to the Current Report on Form 8-K of
      Towerstream Corporation filed with the Securities and Exchange Commission
      on January 19, 2007).3.3
                
                By-Laws
      of Towerstream Corporation (Incorporated by reference to Exhibit 3.2 to
      the Current Report on Form 8-K of Towerstream Corporation filed with the
      Securities and Exchange Commission on
      January 19, 2007).3.4
                
                Amendment
      No. 1 to the By-Laws of Towerstream Corporation (Incorporated by reference
      to Exhibit 3.1 to the Current Report on Form 8-K of Towerstream
      Corporation filed with the Securities and Exchange Commission on August
      30, 2007).10.1*
                
                Towerstream
      Corporation 2007 Equity Compensation Plan (Incorporated by reference to
      Exhibit 4.1 to the Current Report on Form 8-K of Towerstream Corporation
      filed with the Securities and Exchange Commission on
      January 19, 2007).10.2*
                
                Form
      of 2007 Equity Compensation Plan Incentive Stock Option Agreement
      (Incorporated by reference to Exhibit 10.18 to the Current Report on Form
      8-K of Towerstream Corporation filed with the Securities and Exchange
      Commission on January 19, 2007).10.3*
                
                Form
      of 2007 Equity Compensation Plan Non-Qualified Stock Option Agreement
      (Incorporated by reference to Exhibit 10.19 to the Current Report on Form
      8-K of Towerstream Corporation filed with the Securities and Exchange
      Commission on January 19, 2007).10.4
                
                Form
      of Directors and Officers Indemnification Agreement (Incorporated by
      reference to Exhibit 10.17 to the Current Report on Form 8-K of
      Towerstream Corporation filed with the Securities and Exchange Commission
      on January 19, 2007).10.5*
                
                Towerstream
      Corporation 2007 Incentive Stock Plan (incorporated by reference to
      Exhibit 10.12 to the Registration Statement on Form SB-2 (File No.
      333-142032) of Towerstream Corporation initially filed with the Securities
      and Exchange Commission on April 11, 2007).10.6
                
                Form
      of Placement Agent Agreement for June 2007 Offering (Incorporated by
      reference to Exhibit 10.10 to the Registration Statement on Form SB-2
      (333-142032) of Towerstream Corporation filed with the Securities and
      Exchange Commission on April 11, 2007).10.7
                
                Form
      of Subscription Agreement (Incorporated by reference to Exhibit 10.11 to
      the Registration Statement on Form SB-2 (333-142032) of Towerstream
      Corporation filed with the Securities and Exchange Commission on April 11,
      2007).10.8**
                
                Employment
      Agreement, dated December 21, 2007, between Towerstream Corporation and
      Jeffrey M. Thompson (Incorporated by reference to Exhibit 10.1 to the
      Current Report on Form 8-K of Towerstream Corporation filed with the
      Securities and Exchange Commission on December 31,
  2007).10.9
                
                Office
      Lease Agreement dated March 21, 2007 between Tech 2, 3, & 4 LLC
      (Landlord) and Towerstream Corporation (Tenant).10.10
                
                First
      Amendment to Office Lease dated August 8, 2007, amending Office Lease
      Agreement dated March, 21 2007.10.11*
                
                2008
      Non-Employee Directors Compensation Plan.21.1
                
                List
      of Subsidiaries.23.1
                
                Consent
      of Marcum LLP.31.1
                
                Section
      302 Certification of Principal Executive Officer.31.2
                
                Section
      302 Certification of Principal Financial Officer.32.1
                
                Section
      906 Certification of Principal Executive Officer.32.2
                
                Section
      906 Certification of Principal Financial
  Officer.





**
Management contract


49




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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.




TOWERSTREAM
      CORPORATIONDate: March
      17, 2010
                      By:
                      /s/
      Jeffrey M. ThompsonJeffrey
      M. Thompson
                        President
      and Chief Executive
Officer




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





Name
                  
                  Capacity
                  
                  Date/s/
      Jeffrey M. Thompson
                  
                  Director
      and Chief Executive Officer
                  
                  March
      17, 2010Jeffrey
      M. Thompson
                  
                  (President
      and Principal Executive Officer)/s/
      Joseph P. Hernon
                  
                  Chief
      Financial Officer
                  
                  March
      17, 2010Joseph
      P. Hernon
                  
                  (Principal
      Financial Officer andPrincipal
      Accounting Officer)/s/ Philip
    Urso
                  
                  Director
      - Chairman of the Board of Directors
                  
                  March
      17, 2010Philip
      Urso/s/
      Howard L. Haronian, M.D.
                  
                  Director
                  
                  March
      17, 2010Howard
      L. Haronian, M.D./s/
      William J. Bush
                  
                  Director
                  
                  March
      17, 2010William
      J. Bush/s/
      Paul Koehler
                  
                  Director
                  
                  March
      17, 2010Paul
      Koehler




50





EXHIBIT
INDEX




Exhibit No.
                
                Description2.1
                
                Agreement
      of Merger and Plan of Reorganization, dated January 12, 2007, by
      and among University Girls Calendar, Ltd., Towerstream Acquisition, Inc.
      and Towerstream Corporation (Incorporated by reference to Exhibit 2.1 to
      the Current Report on Form 8-K of Towerstream Corporation filed with
      the Securities and Exchange Commission on
      January 19, 2007).3.1
                
                Certificate
      of Incorporation of University Girls Calendar, Ltd. (Incorporated by
      reference to Exhibit 3.1 to the Current Report on Form 8-K of University
      Girls Calendar, Ltd. filed with the Securities and Exchange Commission on
      January 5, 2007).3.2
                
                Certificate
      of Amendment to Certificate of Incorporation of University Girls Calendar,
      Ltd., changing the Company’s name to Towerstream Corporation (Incorporated
      by reference to Exhibit 3.3 to the Current Report on Form 8-K of
      Towerstream Corporation filed with the Securities and Exchange Commission
      on January 19, 2007).3.3
                
                By-Laws
      of Towerstream Corporation (Incorporated by reference to Exhibit 3.2 to
      the Current Report on Form 8-K of Towerstream Corporation filed with the
      Securities and Exchange Commission on
      January 19, 2007).3.4
                
                Amendment
      No. 1 to the By-Laws of Towerstream Corporation (Incorporated by reference
      to Exhibit 3.1 to the Current Report on Form 8-K of Towerstream
      Corporation filed with the Securities and Exchange Commission on August
      30, 2007).10.1*
                
                Towerstream
      Corporation 2007 Equity Compensation Plan (Incorporated by reference to
      Exhibit 4.1 to the Current Report on Form 8-K of Towerstream Corporation
      filed with the Securities and Exchange Commission on
      January 19, 2007).10.2*
                
                Form
      of 2007 Equity Compensation Plan Incentive Stock Option Agreement
      (Incorporated by reference to Exhibit 10.18 to the Current Report on Form
      8-K of Towerstream Corporation filed with the Securities and Exchange
      Commission on January 19, 2007).10.3*
                
                Form
      of 2007 Equity Compensation Plan Non-Qualified Stock Option Agreement
      (Incorporated by reference to Exhibit 10.19 to the Current Report on Form
      8-K of Towerstream Corporation filed with the Securities and Exchange
      Commission on January 19, 2007).10.4
                
                Form
      of Directors and Officers Indemnification Agreement (Incorporated by
      reference to Exhibit 10.17 to the Current Report on Form 8-K of
      Towerstream Corporation filed with the Securities and Exchange Commission
      on January 19, 2007).10.5*
                
                Towerstream
      Corporation 2007 Incentive Stock Plan (incorporated by reference to
      Exhibit 10.12 to the Registration Statement on Form SB-2 (File No.
      333-142032) of Towerstream Corporation initially filed with the Securities
      and Exchange Commission on April 11, 2007).10.6
                
                Form
      of Placement Agent Agreement for June 2007 Offering (Incorporated by
      reference to Exhibit 10.10 to the Registration Statement on Form SB-2
      (333-142032) of Towerstream Corporation filed with the Securities and
      Exchange Commission on April 11, 2007).10.7
                
                Form
      of Subscription Agreement (Incorporated by reference to Exhibit 10.11 to
      the Registration Statement on Form SB-2 (333-142032) of Towerstream
      Corporation filed with the Securities and Exchange Commission on April 11,
      2007).10.8**
                
                Employment
      Agreement, dated December 21, 2007, between Towerstream Corporation and
      Jeffrey M. Thompson (Incorporated by reference to Exhibit 10.1 to the
      Current Report on Form 8-K of Towerstream Corporation filed with the
      Securities and Exchange Commission on December 31,
  2007).10.9
                
                Office
      Lease Agreement dated March 21, 2007 between Tech 2, 3, & 4 LLC
      (Landlord) and Towerstream Corporation (Tenant).10.10
                
                First
      Amendment to Office Lease dated August 8, 2007, amending Office Lease
      Agreement dated March, 21 2007.10.11*
                
                2008
      Non-Employee Directors Compensation Plan.21.1
                
                List
      of Subsidiaries.23.1
                
                Consent
      of Marcum LLP.31.1
                
                Section
      302 Certification of Principal Executive Officer.31.2
                
                Section
      302 Certification of Principal Financial Officer.32.1
                
                Section
      906 Certification of Principal Executive Officer.32.2
                
                Section
      906 Certification of Principal Financial
  Officer.







*
Management compensatory plan
 **
Management contract