UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549




FORM
10-K




ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934




FOR
THE YEAR ENDED DECEMBER 31, 2008




COMMISSION
FILE NUMBER 000-27467




ERF
WIRELESS, INC.


(Exact
name of registrant as specified in its charter)






Nevada
            
            000-27467
            
            76-0196431(State
      or other jurisdiction of incorporation)
            
            (Commission
      File Number)
            
            (IRS
      Employer Identification No.)




2911 SOUTH SHORE BOULEVARD,
SUITE 100, LEAGUE CITY, TEXAS 77573


(Address
of principal executive offices) (Zip Code)




Registrant's
telephone number, including area code:  (281)
538-2101




Securities
registered under Section 12(b) of the Exchange Act:




None.




Securities
registered under Section 12(g) of the Exchange Act:




$.001
PAR VALUE COMMON STOCK




Check
whether the issuer is not required to file report pursuant to Section
13


or 15(d)
of the Exchange Act o




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes   ̈  No  x
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.    Yes  ̈ No  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 Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to filing requirements for the
past 90 days. Yes x  No £
 
 Indicate
by check mark that disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   x
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 
 Large
      accelerated filer     ̈
              
              Accelerated
      filer    oNon-accelerated
      filer     ̈ (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   ̈  No  x
  ERF
Wireless, Inc.'s revenue for its most recent fiscal year was
$5,155,000.
  As of
March 04, 2009 the aggregate market value of the shares of common stock held by
non-affiliates (based on the closing price of $0.41 per share for the common
stock as quoted on that date) was approximately $44,358,917
  As of
March 04, 2009, the Company had outstanding 108,192,481 shares of its $.001 par
value common stock.
  DOCUMENTS
INCORPORATED BY REFERENCE
  None.












TABLE
OF CONTENTS





ITEMNUMBER
            CAPTION
            PAGEPART
      IITEM
      1.
            Business
            4ITEM
      1A.
            Risk
      Factors
            12ITEM
      1B.
            Unresolved
      Staff Comments
            18ITEM
      2.
            Properties
            19ITEM
      3.
            Legal
      Proceedings
            19ITEM
      4.
            Submission
      of Matters to a Vote of Security Holders
            19PART
      IIITEM
      5.
            Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities
            20ITEM
      6.
            Selected
      Financial Data
            21ITEM
      7.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            22ITEM
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            31ITEM
      8.
            Financial
      Statements and Supplementary Data
            32ITEM
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            62ITEM
      9A.
            Controls
      and Procedures
            62ITEM
      9B.
            Other
      Information
            63PART
      IIIITEM
      10.
            Directors,
      Executive Officers and Corporate Governance
            64ITEM
      11.
            Executive
      Compensation
            65ITEM
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            68ITEM
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            69ITEM
      14.
            Principal
      Accountant Fees and Services
            70ITEM
      15.
            Exhibits
      and Financial Statement Schedules
            71




2


FORWARD LOOKING STATEMENTS





Except
for the historical information and discussions contained herein, statements
contained in this Annual Report on Form 10-K may constitute forward-looking
statements. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, as discussed
elsewhere in the ERF Wireless, Inc ("Company" or "ERF"), filings with the U.S.
Securities and Exchange Commission ("SEC"). The statements contained in this
document that are not purely historical are forward-looking statements including
without limitation statements regarding our expectations, beliefs, intentions or
strategies regarding our business. This Annual Report on Form 10-K includes
forward-looking statements about our business including, but not limited to, the
level of our expenditures and savings for various expense items and our
liquidity in future periods. We may identify these statements by the use of
words such as "anticipate," "believe," "continue," "could," "estimate,"
"expect," "intend," "may," "might," "plan," "potential," "predict," "project,"
"should," "will," "would" and other similar expressions. All forward-looking
statements included in this document are based on information available to us on
the date hereof, and we assume no obligation to update any such forward-looking
statements, except as may otherwise be required by law. Our actual results could
differ materially from those anticipated in these forward-looking
statements.




3


ITEM
1. BUSINESS





The
Company




ERF
Wireless, Inc. (“Company” or “ERF Wireless”) provides secure, high-capacity
wireless products and services to a broad spectrum of customers in primarily
underserved, rural and suburban parts of the United States.  We
provide our customers with high quality broadband services and basic
communications services to residential, oil and gas, and bank customers in the
areas that otherwise would not be able to receive such
services.   We are also a comprehensive solutions provider to
other enterprise customers, providing them with a wide array of communications
services including high speed broadband, voice over Internet Protocol (VOIP)
telephone and facsimile service, and video security.




Historically,
our revenues have been generated primarily from Internet and construction
services.  Our Internet revenues have resulted from our offering of
broadband and basic communications services to residential and enterprise
customers.  Our construction revenues typically have consisted of
revenues generated from the construction of bank networks and other services
associated with providing wireless products and services to the regional banking
industry.




For the
fiscal year 2009, in addition to our WISP and regional banking business, we
anticipate that the oil and gas industry will become an increasingly important
part of the ERF Wireless business plan.  In January 2009, we entered
into contracts with Schlumberger, pursuant to which Schlumberger will
exclusively resell wireless broadband and WiMAX terrestrial communication
products and services from ERF Wireless in the North American oil and gas
market.  We anticipate investing significant capital to further expand
our offerings to the oil and gas industry, using our wireless and WiMAX
technologies to provide 1.5Mbps data communications to support drilling rig
operations, supporting remote field offices, video surveillance of production
facilities and pipelines, and monitoring of the highly-regulated Health, Safety
and Environment (HSE) for the oil and gas industry.   We believe
that our partnership with Schlumberger, along with our existing and growing
network, will position us to be a provider of choice to the oil and gas
industry.





Our
principal executive offices are located at 2911 South Shore Blvd., Suite 100,
League City, Texas 77573, and our telephone number is (281) 538-2101. We
maintain web sites at www.erfwireless.com
and www.erfwireless.net .
We make available free of charge through our web site our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports, as soon as reasonably practicable after we
electronically file or furnish such material with or to the SEC. You may access
and read our SEC filings through the SEC's web site (:www.sec.gov). This site
contains reports, proxy and information statements and other information
regarding registrants, including us, that file electronically with the
SEC.  All references to "we," "our," or "us" refer to ERF Wireless,
Inc., a Nevada corporation, and our subsidiaries.





The
Company offers its services through its subsidiaries.  Our primary
operating subsidiaries, or business segments, are Enterprise Network Services
(“ENS”), Wireless Bundled Services (“WBS”) and Wireless Messaging Services
(“WMS”).





Wireless
Bundled Services Subsidiary





WBS
provides wireless broadband products and services, including Internet, voice and
data to serve private entities, cities, municipalities and the general public in
rural markets.  As of the year ended December 31, 2008, WBS
contributed 76% of the revenues of the Company and 54% of the losses
attributable to the Company's business segments.




Oil
and Gas Division (O&G)





O&G
provides wireless connectivity to rural oil and gas locations primarily via
Mobile Broadband Trailers (MBT’s). O&G provides wireless broadband products
and services focusing primarily on commercial customers in the oil and gas
sector. The Company provides high speed bandwidth to rural North America to
serve the Oil and Gas sector. All sales from external customers are located
within the United States. The transactions in the O&G segment for the twelve
months December 31, 2008 and 2007 were not material. The O&G division is a
division of WBS.


4


Enterprise Network Services
Subsidiary





ENS
provides turnkey design and implementation service in the area of secure
wireless broadband networks for regional banks.





Wireless
Messaging Services Subsidiary





WMS
provides wireless broadband and fiber-to-the-home system network design and
implementation, manufacture and supply high-power infrastructure equipment to
the paging and mobile industry and own and operate a wide-area messaging service
(paging retail).  WMS contributed 14% of the Company's revenues for
the year ended December 31, 2008, and 4% of the losses attributable to the
Company's business segments.





Our Industries





Oil
and Gas Industry





ERF
Wireless will market its oil and gas products and services through its oil and
gas subsidiary, but will consolidate any revenue into its Wireless Bundled
Services subsidiary.  The demand for oil and gas continues to grow,
and exploration and production consistently moves farther away from civilization
and into more remote environments to meet this need.  As a result,
companies have been forced to change the way in how they operate.  One
approach is to achieve a “digital oilfield.”  In a digital oilfield
process digitization, real time data collection, and intelligent controls are
combined to improve recovery, accelerate production, reduce downtime, and reduce
the number of on-site engineers required to oversee the operation.





At the
heart of a digital oilfield is a reliable, fast, and cost-effective means of
communications.  Oil and gas companies have historically relied on
cellular and satellite communications to transmit data from the wellsite to the
home office.  These technologies, however, can be expensive and often
suffer from high latency (a delay due to the time to send the data to the
satellite and back).  This latency can interrupt the fluency of voice
communications and make machine to machine communications complex and
unreliable.





We plan
to utilize our existing and expanding wireless network to address this need by
offering 1.5Mbps encrypted data communications using wireless and WiMAX
technologies.  We believe this will enable real-time data
collaboration between remote oil field operations.  We believe that
our current network, with minimal equipment deployment, is able to provide
wireless services to certain oil and gas areas in the South Central United
States, including operations in the Permian Basin located in west Texas and
eastern New Mexico, the Barnett Shale Trend in North Texas, and the Cotton
Valley/ Travis Peak Formation (and correlative Hosston Formation) along the Gulf
Coast of Louisiana.





Our
initial strategy is to provide wireless services for Schlumberger as it
contracts with oil and gas operators operating in areas that are either within
our network or that we can immediately expand our network to
cover.  Our long term strategy is to be able to offer ongoing services
to the operator of the well and to the owner of the gathering system or pipeline
as we expand our offerings further downstream to the oil and gas
industry.




Regional
Banking Industry




ENS
provides a turnkey design and implementation service in the area of secure
wireless broadband networks for regional banks. ENS’ focus is on obtaining
design and construction contracts with banks in conjunction with long-term
maintenance and monitoring contracts. All monitoring contracts are managed by
the Company's network operations services division. Additionally, once the
Company has designed and constructed the wireless broadband networks for the
banks, the Company may, through its WBS subsidiary, use the same network under a
revenue sharing agreement with the banks to sell wireless broadband services to
private entities, cities, municipalities and the general public in that
region.




ENS
currently has long term maintenance contracts with five banking networks. For
the twelve months ended December 31, 2008 ENS contributed 10% of the revenues of
the Company and 42% of the losses attributable to the Company's business
segments.


5


Residential
and Enterprise





ERF
Wireless markets its residential and enterprise services through its WBS.
Wireless broadband Internet systems consist of a radio transmitter that sends a
signal on a combination of radio channels to receivers located at or in homes
and businesses.  Wireless broadband Internet networks can be roughly
categorized based upon which wireless technology (e.g., standards or
proprietary) they utilize and whether they utilize licensed or unlicensed
spectrum.





The
wireless broadband sector has begun a new stage of growth in the rural
residential and enterprise markets, fueled primarily by technology improvements
and increased consumer demand.  Rural areas in America, however, have
experienced a lower Internet penetration rate, and substantially less access to
broadband, than the more densely populated urban and suburban
areas.  Only 38% of those living in rural American now have broadband
at home, compared with 31% who said this in 2007, or a growth rate of 23% from
2007 to 2008. By comparison, 57% of urban residents and 60% of suburban
residents have high-speed connections at home.





We
believe the rural and suburban markets are typically avoided or overlooked by
other providers due to technical limitations and the high cost of providing
broadband over terrestrial-based networks in densely populated areas.  Our
wireless broadband Internet services are offered utilizing fixed
point-to-multipoint wireless technology in the licensed and unlicensed
spectrums. We offer these services to both business and residential customers
within our network footprint without the use of terrestrial lines. This allows
our services to cover a rural or suburban geographical area at a fraction of the
cost of terrestrial based broadband provided by cable modems or DSL lines. As a
result of these savings, we are able to offer broadband Internet to communities
and business that would otherwise be ignored by terrestrial based
providers.





Our
current residential and enterprise market is focused in the South Central United
States, where we have developed areas of wireless coverage through acquisitions
and contracts in New Mexico, Texas and Louisiana.  Our existing
network allows us to provide our high capacity wireless broadband offerings to
the oil and gas industry, financial institutions, and our 9,000 residential
customer base.  We plan to continue to expand our wireless broadband
coverage through acquisitions, internal development and partnerships in specific
rural areas.





ERF
Wireless’ Products and Services





Wireless
Services to Oil and Gas Customers





We are
able to provide low latency, high speed connections to both static and mobile
drilling sites.  We believe that our service is specifically designed
to meet the oil and gas industries environmental, operational, and safety
requirements in the land-based oilfield, and the compendium of services that we
provide offers a compelling solution for the mobile oil platform.  Our
wireless service provides a 1.5Mbps or greater VOIP, facsimile and encrypted
data transmission.  These are the types of services that we believe
oil and gas customers demand.





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





As
opposed to the wireless communications service in an airport or home or office
internet, there are few limitations on the amount of data that can be
transferred.  Our data communications is non-contended, which means
that every single individual site can receive the full 1.5Mbps.  In
addition, because our service uses a range of protocols, entire networks of data
can be transported from the wellsite to the home office.  We believe
this will allow companies to reduce the number of personnel located at the
wellsite, while providing fast, reliable, real time drilling and reservoir
performance data to the home office.


6


We
believe our services offered to the oil and gas industry are unique, and through
our exclusive agreements with Schlumberger, we believe we are in a position to
be a provider of choice for high-speed Internet bandwidth for managing drilling
rig operations, supporting remote field offices, and video surveillance for
production facilities and pipelines.





Wireless
Services to Residential and Enterprise





We also
provide wireless broadband products and services, including Internet, voice and
data to serve private entities, cities, municipalities and the general public.
We offer these services primarily in the rural markets which tend to be
underserved by the major telephone and cable companies and where wireless
broadband can offer a distinct cost advantage over other forms of broadband
connectivity.  These services are provided to both commercial and
retail customers throughout the coverage area where the Company owns wireless
broadband networks or operates wireless broadband networks. The Company offers
these services by acquiring established rural wireless broadband
companies.





Serving
the Banking Industry





We
provide a turnkey design and implementation in the area of secure wireless
broadband networks for regional banks located primarily in areas of southern
Louisiana, as well as in areas of central and west Texas.





This
application of wireless broadband technology provides regional financial
institutions, with between ten and one hundred branches, a cost-effective way to
replace all of their recurring T1 and other telephone company costs. The
resulting encrypted wireless broadband network connects all of their branches to
the central bank and can provide up to 300 Mbps of continuous bandwidth as
compared to the typical 1.4 Mbps of a T1 connection from the telephone
company.  In order to satisfy the security concerns of banking
regulators, we have developed a proprietary encryption device (CryptoVueTM),
consisting of hardware and software, as well as an integrated security protocol
and 24x7 monitoring.





Broadband
System Design and Manufacturing





We
provide broadband system design and implementation services, manufacture and
supply high-power infrastructure equipment to the paging and mobile industry,
and own and operate a wide-area messaging service (paging retail).  We
also implement and construct new fiber-to-the-home broadband networks for third
party customers.  The wireless broadband system design and
implementation function is a service that we provide to other outside
organizations.





Day-to-Day
Monitoring Services





We
provide the overall day-to-day operation and 24/7 monitoring to all wireless
broadband networks that we construct, acquire, maintain and administer. In
addition, we may provide monitoring for other third parties. This service
function is conducted from the state-of-the-art network operations center
facility located at the ERF Wireless corporate headquarters in League City,
Texas.





Growth
Strategy





Background





The
market for rural wireless broadband products and services has grown dramatically
and we believe it will continue to grow.  Broadband wireless has been
in use for several years, but only with the advent of industry standards has it
been possible to link the many small systems that have grown up into a much more
robust wide-area network that we believe will accelerate the growth of the
wireless broadband industry.





Wireless
broadband provides a versatile broadband communication medium that we believe is
more economical than a wired solution, is faster to implement and can be
configured for multiple applications. Given the wireless technology gains and
the Federal Communications Commission's ("FCC") adoption of an order to
restructure frequencies within one of the several bands used for wireless
broadband communication, we believe that wireless broadband will become a "third
pipe" as both an alternative and extension to DSL and cable modem services, the
two chief means of delivering high-speed Internet and data service today. In
addition, we believe wireless broadband can replace costly telephone company T1
leased lines for many point to point data and voice applications as are
generally utilized in the banking and healthcare industries.


7


Historically,
the Company’s growth strategy involved expanding its offerings to provide
wireless broadband product to banks and other vertical markets where high
bandwidth and secure communications are needed (such as hospitals, schools and
law enforcement).  Over the past year, however, the oil and gas
industry has become an increasingly important part of our business plan to
further utilize the extensive wireless networks we have built and acquired over
the past four years.  The demand for wireless broadband connectivity,
bandwidth and other wireless services to support oilfield activities has
increased. Today, we believe the oil and gas industry is looking for a way to
move from its traditional low bandwidth, high cost satellite-based connectivity
model to one where true high-speed broadband can be purchased for field
operations at a reasonable cost.  We believe that our wireless
technology and existing network can best serve this need.





Continue
to Acquire Networks





Our
strategy is to focus on the acquisition of WISPs in locations that enhance our
geographic and strategic plans.  We believe that this acquisition
strategy offers two benefits.  First, we are able to acquire
operations that provide immediate revenue.  Secondly, we are able to
leverage the acquired network to provide services to the oil and gas market at
higher rates than we offer to residential users.  Our acquisition
targets are typically capital constrained with underutilized network
capacity.  While there is no assurance that we will make additional
acquisitions, we believe that there are WISPs that currently meet our
acquisition criteria.  As of the date of this Annual Report, we have
not entered into any arrangements or understandings with any potential
acquisition targets.





Grow
our Relationship with Schlumberger





In
January 2009, we entered into agreements with Schlumberger to exclusively resell
our wireless broadband and WiMAX terrestrial communications products and
services in the North American oil and gas market.  Through this
agreement with Schlumberger, our vision is to develop a premiere oil and gas
sales channel for our wireless broadband.





Our
initial strategy is to provide wireless services for Schlumberger as it
contracts with oil and gas operators operating in areas that are either within
our network or that we can expand our network to cover.  In this
capacity, we plan to undertake the work of installing wireless communications at
each Schlumberger drill site and connecting it to the Internet or through to
private corporate networks.  As Schlumberger moves from site to site,
we intend to provide the support required to relocate and install the wireless
communications at each new drill-site location.





Our long
term strategy is to be able to offer ongoing services to the operator of the
well as well as the owner of the gathering system or pipeline as we expand our
offerings further downstream to the oil and gas industry.  Using our
experience gained through our relationship with Schlumberger, we believe we can
position ourselves to be a backbone of the digital oilfield.  For
example, once the drilling has been completed at a particular site, operators
will be able to use our wireless communications already in place at the site to
monitor production facilities, pipelines, and Health, Safety, and
Environmental.





Provides
wireless broadband and fiber-to-the-home system network design and
implementation, manufacture and supply high-power infrastructure equipment to
the paging and mobile industry and own and operate a wide-area messaging service
(paging retail).  WMS contributed 14% of the Company's revenues for
the year ended December 31, 2008, and 4% of the losses attributable to the
Company's business segments.




Competition





The
Internet services industry is extremely competitive.  We compete for
revenues with multiple companies providing Internet services on a nationwide
basis, discount ISPs and smaller regional ISPs. We also compete with companies
that provide Internet access via narrowband and broadband technologies, such as
Internet access providers, cable companies and telephone companies, most of
which offer the same Internet connectivity services.  While there is
still significant competition, we are utilizing a strategy of focusing on
marketing to underserved geographic areas (i.e. those areas were there is less
competition or technically inferior services available). We believe competition
in these areas is generally from locally owned wireless broadband operators who
lack the operating scale and monitoring systems. These operators generally have
significantly higher prices or inefficient operations.


8


Incumbent
Local Exchange Carrier (ILECs)




We face
competition from ILECs in our markets in Texas and Louisiana.  In
particular, the Company generally faces competition from companies such as
AT&T Inc. and smaller regional or local phone companies. If the market has a
significant population density, the larger ILECs have typically deployed DSL in
the one central office in the market. DSL deployments by smaller regional and
local phone companies vary; however, the Company believes that all providers of
DSL are restricted by DSL's physical distance limitations.




Wireless
Broadband Service Providers




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




Wireless
broadband competition may also come from local governments, universities, and
municipalities that provide "WiFi" networks over unlicensed spectrum. These
services are occasionally characterized as public-private partnerships and may
be partially subsidized. In some cases, they are offered to subscribers at no
cost at all.




In
addition, Sprint Nextel Corporation, which holds 2.5 GHz licenses throughout
much of the United States, has announced plans to invest up to $5 billion in
building out a nationwide WiMAX-based network.  Sprint Nextel
Corporation intends to provide services under the "Xohm" brand. Clearwire
Corporation, who has partnered with Sprint Nextel Corporation, also offers
wireless high speed Internet access utilizing pre-WiMAX-based technology in 46
markets in the United States. In terms of both domestic deployments and
subscribers, Clearwire Corporation is the largest company providing advanced
data services. Both Sprint Nextel Corporation and Clearwire Corporation are
focused on larger population centers, underscoring the significant market
opportunity available to the Company in serving underserved rural
markets.




Satellite




Satellite
providers also offer broadband data services in rural and underserved markets.
Although satellite has the capability to serve a large geographic area, the
service levels can be impaired by the distance the signal travels to and from
the satellite. Communication delays, or latency, can significantly inhibit
satellite providers' ability to offer advanced services, such as VOIP. We
believe our services can be provided to target customers more efficiently and at
more competitive prices than satellite broadband services and as a result, it
does not compete effectively with fixed wireless broadband.




Cellular
and PCS Services




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





Third
Party Products





The
Company also sells third-party licensed products and services into its customer
base such as VOIP phone systems, check and deposit item imaging and bank branch
capture systems, video conferencing systems, video surveillance systems,
satellite systems and other high bandwidth-consuming products and services. This
is a highly competitive market dominated by large, well-funded incumbent
providers. These markets are also characterized by competition that includes
smaller regional telecommunications providers.


9


New
Technology





We face
competition in developing technologies, and risks from potential new
developments in distribution technologies and equipment in Internet access. In
particular, we face competition from developments in the following types of
Internet access distribution technologies or equipment: broadband distribution
technologies used in cable Internet access services; advanced personal
computer-based access services offered through DSL technologies and by local
telecommunications companies; other advanced digital services offered by
wireless companies; television-based interactive services; personal digital
assistants or handheld computers; and enhanced mobile phones. We must attempt to
monitor these developments and to ensure that we either have comparable and
compatible technology or access to distribution technologies developed or owned
by third parties.





Intellectual
Property, Proprietary Rights and Licenses





With
respect to our Internet services, we believe that our success is more dependent
upon technical, marketing and customer service expertise than upon our
proprietary rights.  We do, however, file copyright and trademark
applications as deemed necessary. In addition, we rely on laws protecting trade
secrets, common law rights with respect to copyrights and trademarks, as well as
non-disclosure and other contractual agreements to protect proprietary rights.
There can be no guarantee that our intellectual property and those laws, and the
procedures initiated to protect our business, will prevent misappropriation of
our proprietary software and web site applications. In addition, those
protections may not preclude competitors from developing products with similar
features as those of ERF Wireless.





The
Company has also filed five patent applications on its CryptoVue(TM) technology.
The abstract of the patent application filing included the secure,
triple-controlled system for data over a network, which protects against data
theft or alteration by one or more ("e.g., two") corrupt insiders working
together with outsiders. A combination of dual-control tamper-resistant routers,
physical hardware keys and encryption keys enforces what the Company believes to
be best practice security protocols with thorough auditing. A remote monitoring
center provides a third level of control along with remote auditing and detailed
change-control alerts. The Company can provide no assurance that it will be
successful in obtaining its patents on its intellectual property.





Although
we believe our products and services are unique and do not infringe upon the
proprietary rights of others, there is no assurance that infringement claims
will not be brought against us in the future. Any such claim could result in
costly litigation or have a material adverse effect on our business, operating
results and financial condition.





Governmental
Regulation





Our
wireless Internet access products currently operate in a combination of licensed
and unlicensed spectrums.





We
provide Internet access, in part, using telecommunications services provided by
third-party carriers. Terms, conditions and prices for telecommunications
services are subject to economic regulation by state and federal agencies. As an
Internet access provider, we are not currently subject to direct economic
regulation by the FCC or any state regulatory body, other than the type and
scope of regulation that is applicable to businesses generally. In April 1998,
the FCC reaffirmed that Internet access providers should be classified as
unregulated "information service providers" rather than regulated
"telecommunications providers" under the terms of the 1996 Telecommunications
Act (the "1996 Act").  As a result, we are not subject to federal
regulations applicable to telephone companies and similar carriers merely
because we provide our services using telecommunications services provided by
third-party carriers. To date, no state has attempted to exercise economic
regulation over Internet access providers.


10


Governmental
regulatory approaches and policies to Internet access providers and others that
use the Internet to facilitate data and communication transmissions are
continuing to develop and, in the future, we could be exposed to regulation by
the FCC or other federal agencies or by state regulatory agencies or bodies. In
this regard, the FCC has expressed an intention to consider whether to regulate
providers of voice and fax services that employ the Internet, or IP, switching
as "telecommunications providers," even though Internet access itself would not
be regulated. The FCC is also considering whether providers of Internet-based
telephone services should be required to contribute to the universal service
fund, which subsidizes telephone service for rural and low-income consumers, or
should pay carrier access charges on the same basis as applicable to regulated
telecommunications providers. To the extent that we engage in the provision of
Internet or Internet protocol-based telephony or fax services, we may become
subject to regulations promulgated by the FCC or states with respect to such
activities. We cannot assure you that these regulations, if adopted, would not
adversely affect our ability to offer certain enhanced business services in the
future. Due to the increasing popularity and use of the Internet by broad
segments of the population, it is possible that laws and regulations may be
adopted with respect to the Internet pertaining to content of Web sites,
privacy, pricing, encryption standards, consumer protection, electronic
commerce, taxation, and copyright infringement and other intellectual property
issues. No one is able to predict the effect, if any, that any future regulatory
changes or developments may have on the demand for our Internet access or other
Internet-related services. Changes in the regulatory environment relating to the
Internet access industry, including the enactment of laws or promulgation of
regulations that directly or indirectly affect the costs of telecommunications
access or that increase the likelihood or scope of competition from national or
regional telephone companies, could materially and adversely affect our
business, operating results and financial condition.





Our
future telecommunications business is subject to regulations under both state
and federal telecommunications laws which are fluid and rapidly changing. On the
state level, rules and policies are set by each state's Public Utility
Commission or Public Service Commission (collectively, PUC). At the federal
level, the Federal Communication Commission (FCC), among other agencies,
dictates the rules and policies which govern interstate communications
providers. The FCC is also the main agency in charge of creating rules and
regulations to implement the 1996 Act.  The 1996 Act opened the local
telecommunications markets to competition by mandating the elimination of many
legal, regulatory, economic and operational barriers to competitive entry. These
changes provide us with new opportunities to provide local telephone services on
a more cost-effective basis.





The FCC
has granted direct broadcast satellite (DBS) and multi-channel, multi-point
distribution service (MMDS) operator rights on a national basis similar to the
mandatory access provided to franchise cable operators in some state and local
jurisdictions. The FCC has adopted rules prohibiting homeowners associations,
manufactured housing parks and state and local governments from imposing any
restriction on a property owner that impairs the owner's installation,
maintenance or use of DBS and MMDS antennas one meter or less in diameter or
diagonal measurement. We do not believe our business will be significantly
impacted by these rights.





Certain
wireless broadband services are subject to regulation by the FCC. At the federal
level, the FCC has jurisdiction over wireless transmissions over the
electromagnetic spectrum, all interstate and foreign telecommunications
services, and many aspects of intrastate telecommunications. State and
municipalities also may regulate many aspects of intrastate telecommunications.
Broadband Internet-related regulatory policies are continuing to develop and it
is possible that our services could be subject to additional regulations in the
future. The extent of regulations and their impact on its business and its
ability to compete are currently unknown.





Due to
the increasing popularity and use of the Internet, it is possible that
additional laws, regulations or legal precedent may be adopted with respect to
the Internet, covering issues such as content, privacy, pricing, unsolicited
email, encryption standards, consumer protection, electronic commerce, taxation,
copyright infringement and other intellectual property issues. ERF Wireless
cannot predict the impact, if any, that any future legal or regulatory changes
or developments may have on its business, financial condition and results of
operations. Changes in the legal or regulatory environment relating to the
Internet access industry, including changes that directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition from
regional telephone companies, cable operators or others, could have a material
adverse effect on its business, financial condition and results of
operations.


11


Employees





As of
March 10, 2009, we employ 81 full-time employees and 15 consultants. We have no
collective bargaining agreements with our employees, and believe relationships
are satisfactory.





Customers





The
Company had one customer that represented approximately 11% of gross sales for
the year ended December 31, 2008. During the year ended December 31, 2007, two
different customers that represented 36% and 12% of the Company's gross
sales.





Research
and Development





We
provide internal research and development for our patent pending CryptoVue
technology. Otherwise, we rely on the providers of the products we sell to
upgrade their products through research and development. Consequently, we do not
perform material research and development and we have not incurred any material
research and development costs during the two previous fiscal years and do not
anticipate incurring any such costs in the current fiscal year.





ITEM 1A.  RISK FACTORS





Risks
Related to Our Business





The
following factors affect our business and the industry in which we operate. The
risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known or which we currently
consider immaterial may also have an adverse effect on our business. If any of
the matters discussed in the following risk factors were to occur, our business,
financial condition, results of operations, cash flows, or prospects could be
materially adversely affected.





A
prolonged economic recession or depression will have an adverse effect on our
operating results.





Continued
adverse economic conditions will impact both business and residential customers
that utilize our wireless services and products.  It should be
expected that adverse economic conditions will negatively impact our results of
operations.





We
have a limited operating history with significant losses and expect losses to
continue for the foreseeable future.





We have
incurred annual operating losses since our inception. As a result, at December
31, 2008, we had an accumulated deficit of $26,856,000. Our gross revenues for
the year ended December 31, 2008 were $5,155,000, with a loss from operations of
$7,619,000. As we pursue our business plan, we expect our operating expenses to
increase, especially in the areas of sales, marketing and acquisitions. As a
result of these expected cost increases, we may incur losses from operations in
2009.





We
have a limited cash and liquidity position and need to raise additional funds to
fund operations.





As of
December 31, 2008, we had cash and cash equivalents balances of $348,000 and
negative working capital of $2,366,000.  As of December 31, 2008, we
had long-term indebtedness of approximately (i) $2.2 million on our credit
facility, (ii) $1.6 million of capital leases, and (iii) $625,000 of outstanding
notes.  The Company has a $6.5 million unsecured revolving credit
facility, bearing interest at an annum rate of 12%, which matures in March 2011,
and as of December 31, 2008, there was approximately $4,317,000 available under
that facility. Additionally, we have available project and equipment financing
of up to $13,761,000. We believe our cash and available credit facilities afford
us adequate liquidity for 2009, although we will likely need to raise additional
capital during this period to fund our anticipated growth for our oil and gas
wireless business. We have historically financed our operations through private
equity and debt financings. We do not have any commitments for equity funding at
this time, and equity funding may not be available to us on favorable terms, if
at all. As such there is no assurance that we can raise equity capital from
external sources when such need arises, the failure of which could cause us to
curtail operations.


12


We
may not be successful in acquiring other existing wireless companies, which
could negatively affect our offerings and sales.





Our
business plan is dependent on acquiring existing companies that expand our
business, augment our market coverage, enhance our technical capabilities,
provide us with valuable customer contacts or otherwise offer growth
opportunities, and we may not be able to make such acquisitions. These
acquisitions are important to ensure that our products, services and
technologies are compatible with third-party products and technologies, to
enable us to sell or license our services and products to potential new
customers and into potential new markets, and to enable us to continue with our
existing customers. There can be no assurance that we will identify the best
acquisitions for our business or enter into acquisitions of other companies on
acceptable terms or at all. The failure to make strategic acquisitions could
have a material adverse effect on our business or financial results. If we
cannot make significant strategic acquisitions as our target markets and
technology evolve, the sales opportunities for our services and products could
deteriorate.





A
default of the terms of our significant debt obligations may subject us to the
risk of foreclosure on certain of our assets.





As of
December 31, 2008, certain operating assets, inventory, furniture and accounts
receivable are pledged as collateral on $3,624, 000 of outstanding notes and
capital leases. The occurrence of an event of default under any of our
obligations might subject us to foreclosure by the lenders to the extent
necessary to repay any amounts due. If a foreclosure were to happen, it would
have a material adverse effect on our financial condition.





The
Company's revenue and operating results may fluctuate significantly from quarter
to quarter, and fluctuations in operating results could cause its stock price to
decline.





The
Company's revenue and operating results may vary significantly from quarter to
quarter due to a number of factors. In future quarters, operating results may be
below the expectations of investors, and the price of our common stock may
decline. Factors that could cause quarterly fluctuations include:





·
            The
      ability to raise the necessary capital to execute mergers, acquisitions
      and asset purchases, as needed to implement the Company's strategic
      plan;




·
            The
      ability to keep current customers and secure new
  customers;




·
            The
      ability to acquire existing rural wireless broadband networks throughout
      North America and the ability to secure customers in the rural regions in
      which the Company acquires these wireless broadband networks;
      and




·
            The
      ability to secure new regional banking network customers for both the
      construction and design of new broadband networks and for the maintenance
      and monitoring of these broadband
networks.




Accordingly,
the failure to obtain significant future revenue, lower than expected revenue in
the future, increased losses in the future, and decreased working capital could
adversely affect our stock price and liquidity.





During
2008, the majority of our revenue was generated from short-term
agreements.





For the
year ended December 31, 2008, the majority of our revenues resulted from
short-term, terminable at will, arrangements. Our one customer that provided in
excess of 10% of our revenues in 2008 is subject to a terminable at will
arrangement, and it is expected that this customer will not be providing in
excess of 10% of our revenues in 2009. There is no assurance that our customers
will continue to conduct business with us in the future, the failure of which
could have a material adverse effect on our business
operations.


13


We
compete with many companies that are larger and better capitalized than
us.





We face
competition from many entities with significantly greater financial resources,
well-established brand names and larger customer bases. We may become subject to
price competition for our services as companies seek to enter our industry or
current competitors attempt to gain market share. We expect competition to
intensify in the future and expect significant competition from traditional and
new telecommunications companies including, local, long distance, cable modem,
Internet, digital subscriber line, microwave, mobile and satellite data
providers. If we are unable to make or keep our products competitively priced
and attain a larger market share in the markets in which our products compete,
our levels of sales and our ability to achieve profitability may
suffer.





We
utilize the unlicensed spectrum, which is subject to intense competition, low
barriers of entry and potential interference from multiple competing
users.





We
presently utilize unlicensed spectrum in connection with our broadband service
offerings. While unlicensed spectrum is regulated by the FCC, it is available to
multiple simultaneous users and may be subject to interference, which may reduce
the quality of the service provided to subscribers. The availability of
unlicensed spectrum is limited, and others do not need to obtain permits or
licenses to utilize the same unlicensed spectrum used by the Company currently
or which it may in the future utilize.  Accordingly, utilization of
unlicensed spectrum could threaten our ability to reliably deliver
services.





The
licensing of additional spectrum in our markets by the FCC could introduce
additional competition.





The FCC
regulates the spectrum bands in which the companies and their competitors
operate. The FCC can make additional spectrum available for use or change the
way existing spectrum is used, which may result in additional competitors
entering our markets and providing services that may directly compete with our
offerings. In particular, in January 2008, the FCC offered several blocks of
spectrum in the 700 MHz frequency range as part of Auction 73. This frequency
range has been determined to be suitable for offering data, voice and video
services particularly in sparsely populated rural areas. As a result, the
licensing and eventual build out of this spectrum may bring additional
competition to the Company’s principal markets.





A
system failure could delay or interrupt our ability to provide products or
services and could increase our costs and reduce our revenues.





Our
operations are dependant upon our ability to support a highly complex network
infrastructure. Many of our customers are particularly dependent on an
uninterrupted supply of services. Any damage or failure that causes
interruptions in our operations could result in loss of these customers. To
date, we have not experienced any significant interruptions or delays which have
affected our ability to provide services to our clients and we believe that we
have satisfactory back-up systems in place. Because our headquarters and
infrastructure are located in the Texas Gulf Coast area, there is likelihood
that our operations may be affected by hurricanes or tropical storms, tornados,
or flooding.  The occurrence of a natural disaster, operational
disruption or other unanticipated problem could cause interruptions in the
services we provide and significantly impair our ability to generate revenue and
achieve profitability.





Our
industry changes rapidly due to evolving technology standards and our future
success will depend on our ability to continue to meet the sophisticated needs
of our customers.





Our
future success will depend on our ability to address the increasingly
sophisticated needs of our customers. We will have to develop and introduce
enhancements to our existing services and products on a timely basis to keep
pace with technological developments, evolving industry standards and changing
customer requirements. We expect that we will have to respond quickly to rapid
technological change, changing customer needs, frequent new service and product
introductions and evolving industry standards that may render existing products
and services obsolete. As a result, our position in existing markets or
potential markets could be eroded rapidly by new services or product advances.
The life cycles of products utilizing our services are difficult to estimate.
Our growth and future financial performance will depend in part upon our ability
to enhance existing services and applications, develop and introduce new
applications that keep pace with technological advances, meet changing customer
requirements and respond to competitive products. We expect that our wireless
service will continue to require substantial investments. We may not have
sufficient resources to make the necessary investments. Any of these events
could have a material adverse effect on our business, quarterly and annual
operating results and financial condition.


14


An
inability to overcome competition from alternative communication systems could
adversely affect our results of operations.





We
already face, and may increasingly encounter, competition from competing
wireless technologies that are constantly improving.  In addition, our
technology competes with other high-speed solutions, such as wired DSL, cable
networks, fiber optic cable and satellite technologies.  Our service
competes with alternative communications systems on the basis of reliability,
price and functionality. For example, the performance and coverage area of our
wireless systems are dependent on certain factors that are outside of our
control, including features of the environment in which the systems are
deployed, such as the amount of clutter (natural terrain features and man-made
obstructions) and the radio frequency available. Depending on specific customer
needs, these obstacles may make our technology less competitive in comparison
with other technologies and make other technologies less expensive or more
suitable. Our business may also compete in the future with products and services
based on other wireless technologies and other technologies that have yet to be
developed.





We may not be able to successfully
upgrade our existing network infrastructure.





If the
number of subscribers using our network and the complexity of its services
increase, it will require more infrastructure, network and customer service
resources to maintain the quality of its services. We may experience quality
deficiencies, cost overruns and delays in implementing network improvements and
expansion, in maintenance and upgrade projects, including slower than
anticipated technology migrations. If we do not implement necessary developments
and network upgrades successfully, or if it experiences inefficiencies,
operational failures, or unforeseen costs during implementation, we may lose
customers or incur additional liabilities.





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




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





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, and 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.




Certain
wireless broadband services are subject to regulation by the FCC. At the federal
level, the FCC has jurisdiction over wireless transmissions over the
electromagnetic spectrum, all interstate and foreign telecommunications
services, and many aspects of intrastate telecommunications. Wireless
broadband services may become subject to greater state or federal regulation in
the future. The scope of the regulations that may apply and the impact of such
regulations on our competitive position are presently unknown and could be
detrimental to their business and prospects.


15


Much of
the law related to the liability of Internet service providers remains
unsettled. For example, many jurisdictions have adopted laws related to
unsolicited commercial email or “spam” in the last several years. Other legal
issues, such as the sharing of copyrighted information, transborder data flow,
universal service, and liability for software viruses could become subjects of
additional legislation and legal development. We cannot predict the impact of
these changes on them. Regulatory changes could have a material adverse effect
on our business, financial condition or results of operations.





We
depend upon our intellectual property and our failure to protect existing
intellectual property or secure and enforce such rights for new proprietary
technology could adversely affect our future growth and success.





The
Company has filed trademark and patent applications to protect intellectual
property rights for technology that it develops. The Company's future success
also may depend upon its ability to obtain additional licenses for other
intellectual properties. The Company may not be successful in acquiring
additional intellectual property rights with significant commercial value on
acceptable terms. Even if the Company is successful in acquiring such rights, it
can provide no assurance that it will be successful in adapting or deploying
them as to the timing or cost of such development efforts or as to the
commercial success of the resulting products or services.





Our
competitors may develop non-infringing products or technologies that adversely
affect our future growth and revenues.





It is
possible that our competitors will produce proprietary technologies similar to
ours without infringing on our intellectual property rights. We also rely on
unpatented proprietary technologies. It is possible that others will
independently develop the same or similar technologies or otherwise obtain
access to the unpatented technologies upon which we rely for future growth and
revenues. Failure to meaningfully protect our trade secrets, know-how or other
proprietary information could adversely affect our future growth and
revenues.





We
may incur significant litigation expenses protecting our intellectual property
or defending our use of intellectual property, which may have a material adverse
effect on our cash flow.





Significant
litigation regarding intellectual property exists in our industry. Competitors
and other third parties may infringe on our intellectual property rights.
Alternatively, competitors may allege that we have infringed on their
intellectual property rights, resulting in significant litigation expenses. Any
claims, even those made by third parties who are without merit,
could:





·
            be
      expensive and time consuming to defend, resulting in the diversion of
      management's attention and
resources;




·
            require
      us to cease making, licensing or using products or systems that
      incorporate the challenged intellectual property;
  or




·
            require
      us to spend significant time and money to redesign, re-engineer or
      re-brand our products or systems if
feasible.




If
the wireless broadband market does not evolve as we anticipate, our business may
be adversely affected.





If we
fail to properly assess and address the broadband wireless market or if our
services fail to achieve market acceptance for any reason, our business and
quarterly and annual operating results would be materially adversely affected.
Since the market for our products is still evolving, it is difficult to assess
the competitive environment or the size of the market that may develop. In
addition, technologies, customer requirements and industry standards may change
rapidly. If we cannot improve or augment our services and products as rapidly as
existing technologies, customer requirements and industry standards evolve, our
products or services could become obsolete. The introduction of new or
technologically superior products by competitors could also make our services
less competitive or obsolete. As a result of any of these factors, our position
in existing markets or potential markets could be eroded.


16


Future
acquisitions could prove difficult to integrate, disrupt our business, dilute
stockholder value and strain our resources.





As part
of our business strategy, we intend to acquire companies and technologies that
we believe could complement or expand our business, augment our market coverage,
enhance our technical capabilities, provide us with valuable customer contacts
or otherwise offer growth opportunities. If we fail to achieve the anticipated
benefits of any acquisitions we complete, our business, operating results,
financial condition and prospects may be impaired. Acquisitions and investments
involve numerous risks, including:





·
            difficulties
      in integrating operations, technologies, services, accounting and
      personnel;




·
            inability
      to manage our growth;




·
            difficulties
      in supporting and transitioning customers of our acquired companies to our
      technology platforms and business
processes;




·
            ability
      to maintain sufficient internal
controls;




·
            diversion
      of financial and management resources from existing
      operations;




·
            difficulties
      in obtaining regulatory approval for technologies and products of acquired
      companies;




·
            potential
      loss of key employees;




·
            if
      we finance acquisitions by issuing convertible debt or equity securities,
      our existing stockholders may be diluted, which dilution could adversely
      affect the market price of our
stock;




·
            inability
      to generate sufficient revenues to offset acquisition or investment costs;
      and




·
            potential
      write-offs of acquired assets.




Acquisitions
also frequently result in recording of goodwill and other intangible assets,
which are subject to potential impairments in the future that could harm our
operating results. It is also possible that at some point in the future we may
decide to enter new markets, thus subjecting ourselves to new risks associated
with those markets.





Risks
Related to Our Securities





There
is currently a limited market for our securities, and any trading market that
exists in our securities may be highly illiquid and may not reflect the
underlying value of our net assets or business prospects.




Although
our common stock is traded on the OTC Bulletin Board, there is currently a
limited market for our securities and there can be no assurance that an improved
market will ever develop.  Investors are cautioned not to rely on the
possibility that an active trading market may develop.





The
market price of our common stock is very volatile and the value of your
investment may be subject to sudden decreases.





The
trading price for our common stock has been, and we expect it to continue to be,
volatile. For example, the closing bid price of our stock has fluctuated between
$.29 per share and $.66 per share since January 1, 2009. The price at which our
common stock trades depends upon a number of factors, including our historical
and anticipated operating results and general market and economic conditions,
which are beyond our control. Factors such as fluctuations in our financial and
operating results, technological innovations or new commercial products and
services by us or our competitors, could also cause the market price of our
common stock to fluctuate substantially. In addition, the stock market has, from
time to time, experienced extreme price and volume fluctuations. These broad
market fluctuations may lower the market price of our common stock. Moreover,
during periods of stock market price volatility, share prices of many companies
have often fluctuated in a manner not necessarily related to their operating
performance. Accordingly, our common stock may be subject to greater price
volatility than the stock market as a whole.


17


As
our share price is volatile, we may be or become the target of securities
litigation, which is costly and time-consuming to defend.




In the
past, following periods of market volatility in the price of a company’s
securities or the reporting of unfavorable news, security holders have often
instituted class action litigation. If the market value of our securities
experience adverse fluctuations and we become involved in this type of
litigation, regardless of the outcome, we could incur substantial legal costs
and our management’s attention could be diverted from the operation of our
business, causing our business to suffer.





Our
“blank check” preferred stock could be issued to prevent a business combination
not desired by management or our current majority shareholders.





Our
articles of incorporation authorize the issuance of “blank check” preferred
stock with such designations, rights and preferences as may be determined by our
board of directors without shareholder approval. Our preferred stock could be
utilized as a method of discouraging, delaying, or preventing a change in our
control and as a method of preventing shareholders from receiving a premium for
their shares in connection with a change of control.




Future
sales of our common stock in the public market could lower our stock
price.




We may
sell additional shares of common stock in subsequent public or private
offerings. We may also issue additional shares of common stock to finance future
acquisitions. We cannot predict the size of future issuances of our common stock
or the effect, if any, that future issuances and sales of shares of our common
stock will have on the market price of our common stock. Sales of substantial
amounts of our common stock (including shares issued in connection with an
acquisition), or the perception that such sales could occur, may adversely
affect prevailing market prices for our common stock.





A
significant number of shares of common stock may be issued during the next 12
months. The issuance of these shares will have a dilutive effect on our common
stock and may lower our stock price.





We have
reserved for issuance the following as of December 31, 2008:





·
            12,019,000
      shares of common stock are eligible to be issued pursuant to the Company's
      option plans;




·
            4,165,000
      shares of common stock underlying outstanding common stock purchase
      warrants at prices between $3.57 and $5.00 per
  share;




·
            565,000
      shares of common stock issuable upon conversion of bonds based upon the
      market price on December 31, 2008 and 565,000 shares of common stock
      issuable upon exercise of warrants that will be issued upon conversion of
      such bonds, which warrants would be exercisable at $5.00 per
      share;




·
            15,260,000
      shares of common stock issuable upon conversion of Series A Preferred
      Stock, for an effective purchase price of $0.07 per share of common
      stock.




Accordingly,
the issuance of these shares will have a dilutive effect from both a net
tangible book value per share basis and from a number of shares of common stock
outstanding basis. This overhang could have a depressive effect on our common
stock price.





We
presently do not intend to pay cash dividends on our common stock.





We
currently anticipate that no cash dividends will be paid on the common stock in
the foreseeable future. While our dividend policy will be based on the operating
results and capital needs of the business, it is anticipated that any earnings
will be retained to finance the future expansion of our business.





ITEM
1B.  UNRESOLVED STAFF COMMENTS





Not
applicable.


18


ITEM
2.  PROPERTIES





Our
principal offices are located in League City, Lubbock and Blanco Texas, pursuant
to term leases believed to reflect market rates and terms, including the
following:





Location
              Function
              
              Size
      (square feet)
              
              
              Approximate
                Monthly
      lease paymentLeague
      City, TX
              ERF
      Wireless Inc. Corporate Headquarters
              
              
              24,700
              
              
              $
              20,583Lubbock,
      TX
              WBS
      West Texas Operational Division Headquarters
              
              
              10,000
              
              
              $
              5,000Blanco,
      TX
              WBS
      Central Texas Operational Division Headquarters
              
              
              2,400
              
              
              $
              2,200





Our
interests in our communications sites are comprised of operating leases created
by long-term lease agreements at market rates. A typical tower site consists of
a compound enclosing the tower site, a tower structure, and an equipment shelter
that houses a variety of transmitting, receiving and switching
equipment.





The
Company occupies office and tower facilities under several non-cancelable
operating lease agreements expiring at various dates through September 2018, and
requiring payment of property taxes, insurance, maintenance and utilities.





ITEM
3.  LEGAL PROCEEDINGS





We are
not a party to any material legal proceedings.





ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.




19


PART
II





ITEM
5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES





Market
Price Information





Our
common stock trades on the OTC Electronic Bulletin Board under the symbol ERFW.
The market for our common stock is limited, sporadic, and highly volatile. The
following table sets forth the approximate high and low closing sales prices for
our common stock for the last two fiscal years. The quotations reflect
inter-dealer prices, without retail markups, markdowns, or commissions and may
not represent actual transactions.





High
                
                
                LowYEAR
      2008Quarter
      ended December 31
                
                $
                0.45
                
                
                $
                0.21Quarter
      ended September 30
                
                $
                0.42
                
                
                $
                0.19Quarter
      ended June 30
                
                $
                0.71
                
                
                $
                0.31Quarter
      ended March 31
                
                $
                1.01
                
                
                $
                0.49YEAR
      2007Quarter
      ended December 31
                
                $
                1.67
                
                
                $
                0.75Quarter
      ended September 30
                
                $
                1.52
                
                
                $
                0.30Quarter
      ended June 30
                
                $
                0.44
                
                
                $
                0.09Quarter
      ended March 31
                
                $
                0.22
                
                
                $
                0.09





Stockholders





As of
March 16, 2009, we believe there were approximately 437 holders of record of our
common stock.





Dividends





We have
never declared or paid cash dividends on our common stock. We currently intend
to retain all available funds and any future earnings to fund the development
and growth of our business and do not anticipate declaring or paying any cash
dividends on our common stock in the near future.





Equity
Compensation Plan Information





The
following table sets forth certain information, as of December 31, 2008,
concerning securities authorized for issuance under our plans;





Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      & Rights
                
                
                Weighted
      Averaged Exercise Price of Outstanding Options, Warrants &
      Rights
                
                
                Number
      of Securities Remaining Available for Future Issuance Under Equity
      Compensation Plans (Excluding Securities Reflected in Column
      (a)(a)
                
                
                (b)
                
                
                (c)Equity
      compensation plans approved by security holders:None
                
                
                -
                
                
                
                -
                
                
                
                -Equity
      compensation plans not approved by security holders:2004
      Non-Qualified Stock Compensation Plan
                
                
                150,000
                
                
                $
                1.38
                
                
                
                -2007
      Non-Qualified Stock Compensation Plan
                
                
                225,000
                
                
                $
                0.10
                
                
                
                -2008
      Non-Qualified Stock Compensation Plan
                
                
                125,000
                
                
                $
                0.43
                
                
                
                12,018,541Total
                
                
                500,000
                
                
                $
                0.46
                
                
                
                12,018,541




20


Recent Sales of Unregistered
Securities





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





·
            On
      October 13, 2008, an accredited investor acquired 3,268,351 shares of
      common stock upon conversion of Series A Preferred Stock for an effective
      purchase price of $.07 per share of common
  stock.




·
            On
      October 28, 2008, an accredited investor acquired 29,789 shares of common
      stock upon conversion of shares of Series A Preferred Stock for an
      effective purchase price of $.07 per share of common
  stock.




·
            On
      December 1, 2008, an accredited investor acquired 1,500,010 shares of
      common stock upon conversion of shares of Series A Preferred Stock for an
      effective purchase price of $.07 per share of common
  stock.




·
            On
      December 4, 2008, an accredited investor acquired 1,125,000 shares of
      common stock upon conversion of shares of Series A Preferred Stock for an
      effective purchase price of $.07 per share of common
  stock.




·
            On
      December 4, 2008, an accredited investor acquired 119,679 shares of common
      stock at $0.27 per share




·
            On
      December 23, 2008, an accredited investor acquired 1,030,145 shares of
      common stock at $0.17 per share




·
            On
      December 23, 2008, an accredited investor acquired 144,231 shares of
      common stock at $0.21 per share




·
            On
      December 23, 2008, an accredited investor acquired 2,909,665 shares of
      common stock at $0.16 per share




·
            On
      December 23, 2008, an accredited investor acquired 52,083 shares of common
      stock at $0.19 per share




·
            On
      December 23, 2008, an accredited investor acquired 118,483 shares of
      common stock at $0.21 per share




·
            On
      December 23, 2008, an accredited investor acquired 1,030,145 shares of
      common stock at $0.17 per share




The
issuances referenced above were consummated pursuant to Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder on the basis
that such transactions did not involve a public offering and the offerees were
sophisticated, accredited investors with access to the kind of information that
registration would provide. The recipients of these securities represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and other instruments issued in such
transactions. No sales commissions were paid to register brokers in connection
with any of these issuances listed above.





Equity
Repurchases by Issuer





The
Company did not effect any common stock repurchases during fiscal 2008.





ITEM
6.  SELECTED FINANCIAL DATA





Not
applicable.


21


ITEM
7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS





This
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with the other sections of
this annual report on Form 10-K, including the financial
statements.





Overview





Historically,
our revenues have been generated primarily from Internet and construction
services.  Our Internet revenues result from our offering of broadband and
basic communications services to residential and enterprise customers.  Our
construction revenues result from the construction of bank networks and other
services associated with providing wireless products and services to the
regional banking industry.  During fiscal 2008, approximately 71% of our
revenues were generated from internet services and 17% of our revenues were
generated from construction services. We expect that our internet services will
experience the most growth during fiscal 2009, as we expect to devote
significant capital resources to developing the oil and gas market utilizing
wireless services.





During
the 2008 fiscal year and the first quarter of fiscal 2009, the Company made
significant progress with its strategic business plan as evidenced by the
completion and announcement of numerous agreements. These include:





·
            The
      completion of the acquisition of assets and operations of Crosswind
      Enterprises, Inc., giving the Company access to a large geographic area
      covering multiple counties in the West Texas area and New
      Mexico;




·
            The
      completion of the Centramedia asset acquisition, providing the Company
      access to a large geographic area in the Panhandle area of
      Texas;




·
            The
      entry into two exclusive reseller agreements with Schlumberger to market
      our wireless services and products to the oil and gas
      industry;




·
            The
      decision to management to primarily focus capital and personnel resources
      to deploying wireless services to the oil and gas
  industry;




·
            The
      hiring of Mike Jones as our chief technology officer and Gary Busby as
      senior vice-president of sales and marketing;
  and




·
            The
      Company filed additional patents regarding our
    CryptoVue(TM)




The
Company's revenue is generated primarily from the sale of wireless
communications products and services, including providing reliable
enterprise-class wireless broadband services. The Company recognizes revenue
when persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable, and collectibility is
probable.





The
Company records revenues from its fixed-price, long-term contracts using the
percentage-of-completion method. Revenues are recorded based on construction
costs incurred to date as a percentage of estimated total cost at completion.
The percentage-of-completion, determined by using total costs incurred to date
as a percentage of estimated total costs at completion, reflects the actual
physical completion of the project. This method of revenue recognition is used
because management considers total cost to be the best available measure of
progress on the contracts.





The
Company recognizes product sales generally at the time the product is shipped.
Concurrent with the recognition of revenue, the Company provides for the
estimated cost of product warranties and reduces revenue for estimated product
returns. Sales incentives are generally classified as a reduction of revenue and
are recognized at the later of when revenue is recognized or when the incentive
is offered. Shipping and handling costs are included in cost of goods
sold.





Service
revenue is principally derived from wireless broadband services, including
internet, voice, and data and monitoring service. Subscriber fees are recorded
as revenues in the period during which the service is provided.


22


Results of Operations





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





The
following table sets forth summarized consolidated financial information for the
years ended December 31, 2008 and 2007:




Fiscal
      Year Ended December 31,($
      in thousands)
              
              2008
              
              
              2007
              
              
              $
      Change
              
              
              %
      ChangeTotal
      sales
              
              $
              5,155
              
              
              $
              5,569
              
              
              $
              (414
              )
              
              
              -7%Cost
      of goods sold
              
              
              3,121
              
              
              
              4,133
              
              
              
              (1,012
              )
              
              
              -24%Gross
      profit
              
              
              2,034
              
              
              
              1,436
              
              
              
              598
              
              
              
              42%Percent
      of total sales
              
              
              39%
              
              
              
              26%Operating
      expenses
              
              
              9,653
              
              
              
              7,209
              
              
              
              2,444
              
              
              
              34%Loss
      from operations
              
              
              (7,619
              )
              
              
              (5,773
              )
              
              
              (1,846
              )
              
              
              32%Other
      income/(expense)
              
              
              (543
              )
              
              
              (1,294
              )
              
              
              751
              
              
              
              -58%Net
      loss
              
              
              (8,162
              )
              
              
              (7,067
              )
              
              
              (1,095
              )
              
              
              15%





For the
year ended December 31, 2008, the Company's consolidated operations generated
net sales of $5,155,000 compared to prior-year net sales of $5,569,000 for the
year ended December 31, 2007. The $414,000 decrease in net sales is primarily
attributable to $1,691,000 decrease in WMS prior year sales associated with the
El Dorado Golf and Beach Club of San Jose del Cabo, Mexico, a $743,000 decrease
in banking network installation and services resulting in reduced network
construction revenues in 2008 and offset with an increase of $2,020,000 in
recurring wireless broadband services with the increased growth attributed to
recent WISP acquisitions. For the year ended December 31, 2008, the Company had
a gross profit margin of 39%, compared to a gross profit margin of 26% for the
prior-year period ended December 31, 2007. The $598,000 increased in gross
profit margin percentage is primarily due to net increase sales volume which
attributed to margins as follows; (i) approximately $919,000 increase in gross
margin attributable to the increased wireless customer base and strong margins
as result of recent acquisitions  (ii) offset by approximately
$187,000 decreased in gross margin due to lower sales expectation in our
wireless infrastructure construction, and (iii) by $134,000 decrease in gross
margins for banking network services.





The
Company incurred a net loss of $8,162,000 for the year ended December 31, 2008.
The Company's principal components of the net loss for the year ended December
31, 2008, included approximately $1,776,000 in depreciation and amortization
expenses, $887,000 of interest expense, $306,000 of derivative income,
$1,744,000 of other general and administrative expense, $4,735,000 in employment
expenses and $1,868,000 in professional services.





Sales
Information





Set forth
below is a table presenting summarized sales information for our business
segments for the years ended December 31, 2008 and 2007:





($
      in thousands)
                
                Fiscal
      Year Ended December 31,Business
      Segment
                
                2008
                
                
                %
      of Total
                
                
                2007
                
                
                %
      of Total
                
                
                $
      Change
                
                
                %
      ChangeWireless
      Messaging Services
                
                $
                742
                
                
                
                14%
                
                
                $
                2,433
                
                
                
                44%
                
                
                $
                (1,691
                )
                
                
                -70%Wireless
      Bundled Services
                
                
                3,893
                
                
                
                76%
                
                
                
                1,873
                
                
                
                34%
                
                
                
                2,020
                
                
                
                108%Enterprise
      Network Services
                
                
                520
                
                
                
                10%
                
                
                
                1,263
                
                
                
                22%
                
                
                
                (743
                )
                
                
                -59%Total
      Sales
                
                $
                5,155
                
                
                
                100%
                
                
                $
                5,569
                
                
                
                100%
                
                
                $
                (414
                )
                
                
                -7%




For the
year ended December 31, 2008, net sales decreased to $5,155,000 from $5,569,000
for the year ended December 31, 2007. The overall decrease of 7% was primarily
attributable to decrease sales in WMS of $1,691,000 due to lower than expected
sales in our wireless infrastructure construction, a decrease in sales of ENS of
$743,000 due to a slow down in banking installations and offset with an increase
in sales of WBS of $2,020,000 due to increase recurring wireless broadband
services growth through asset acquisitions.


23


Cost
of Goods Sold





The
following tables set forth summarized cost of goods sold information for the
years ended December 31, 2008 and 2007:




($
      in thousands)
              
              Fiscal
      Year Ended December 31,Business
      Segment
              
              
              2008
              
              %
      of Total
              
              
              2007
              
              %
      of Total
              
              $
      Change
              %
      ChangeWireless
      Messaging Services
              
              $
              440
              
              14%
              
              $
              1,944
              
              47%
              $
              (1,504)
              -77%Wireless
      Bundled Services
              
              
              2,072
              
              66%
              
              
              970
              
              24%
              
              1,102
              114%Enterprise
      Network Services
              
              
              609
              
              20%
              
              
              1,219
              
              29%
              
              (610)
              -50%Total
      Cost of Goods
              
              $
              3,121
              
              100%
              
              $
              4,133
              
              100%
              $
              (1,012)
              -24%




Fiscal
      Year Ended December 31,($
      in thousands)
                
                2008
                
                
                2007
                
                
                $
      Change
                
                
                %
      ChangeProducts
      and integration service
                
                $
                1,511
                
                
                $
                3,100
                
                
                $
                (1,589
                )
                
                
                -51%Rent
      and maintenance
                
                
                391
                
                
                
                214
                
                
                
                177
                
                
                
                83%Salary
      and related costs
                
                
                78
                
                
                
                294
                
                
                
                (216
                )
                
                
                -73%Depreciation
                
                
                900
                
                
                
                275
                
                
                
                625
                
                
                
                227%Other
      costs
                
                
                241
                
                
                
                250
                
                
                
                (9
                )
                
                
                -4%Total
      Operating Expenses
                
                $
                3,121
                
                
                $
                4,133
                
                
                $
                (1,012
                )
                
                
                -24%




For the
year ended December 31, 2008, cost of goods sold decrease by $1,012,000, or 24%,
to $3,121,000 from $4,133,000 as compared to the year ended December 31, 2007.
The decrease of $1,012,000 in cost of goods sold is primarily attributable to a
decrease of cost of goods sold $1,504,000 in WMS due to lower than expected
sales in wireless infrastructure construction, a decrease of cost of goods sold
$610,000 in our ENS due to slow down in banking installations and offset with an
increase of $1,102,000 in cost of goods sold in the WBS due to increase
recurring wireless broadband services growth through asset
acquisitions.





Operations
Expenses





The
following table sets forth summarized operating expense information for the
years ended December 31, 2008 and 2007:




Fiscal
      Year Ended December 31,($
      in thousands)
              
              2008
              
              
              2007
              
              
              $
      Change
              
              
              %
      ChangeEmployment
      expenses
              
              $
              4,735
              
              
              $
              3,457
              
              
              $
              1,278
              
              
              
              37%Professional
      services
              
              
              1,868
              
              
              
              2,020
              
              
              
              (152
              )
              
              
              -8%Rent
      and maintenance
              
              
              405
              
              
              
              283
              
              
              
              122
              
              
              
              43%Research
      and development
              
              
              25
              
              
              
              -
              
              
              
              25
              
              
              
              0%Depreciation
      and amortization
              
              
              876
              
              
              
              385
              
              
              
              491
              
              
              
              128%Other
      general and administrative
              
              
              1,744
              
              
              
              1,064
              
              
              
              680
              
              
              
              64%Total
      operating expenses
              
              $
              9,653
              
              
              $
              7,209
              
              
              $
              2,444
              
              
              
              34%




For the
year ended December 31, 2008, operating expenses increased by 34% to $9,653,000,
as compared to $7,209,000 for the year ended December 31, 2007. The increases
that occurred, as evidenced by the immediately preceding table, are discussed
below:




·
            A
      $1,278,000 increase in employment expense, primarily attributable to
      increased work force to 81 employees from 67 employees from a year ago
      primarily associated with our recent
  acquisitions.




·
            A
      $152,000 decrease in professional services primarily related to a decrease
      in legal expenses;




·
            A
      $122,000 increase in rent and maintenance primarily attributable to growth
      of the company;




·
            A
      $25,000 increase in research and development expense primarily
      attributable to expense in improving efficiencies of VOIP data
      encryption;




·
            A
      $491,000 increase in depreciation and amortization primarily attributable
      to growth of the Company through recent acquisitions;
  and




·
            A
      $680,000 increase in other general and administrative
    expense.


24


Other
(Income) Expense, Net





For the
year ended December 31, 2008, the increase in other expense is primarily
attributable to interest expense, net on debt obligations totaling $887,000 and
offset with a net derivative income of $306,000 as compared to interest expense,
net of $883,000 and derivative expense of $408,000 for the year ended December
31, 2007. The derivative expense represents the net unrealized (non-cash) charge
during the year ended December 31, 2008 and 2007, in the fair value of our
derivative instrument liabilities related to warrants and embedded derivatives
in our debt instruments that have been bifurcated and accounted for
separately.





Net
Loss





For the
year ended December 31, 2008, our net loss was $8,162,000 compared to a loss of
$7,067,000 for the year ended December 31, 2007. The increase in the loss for
the year ended December 31, 2008, as compared to the year ended December 31,
2007 is primarily attributable to increase in employment, depreciation and
amortization and general and administrative.





Year
Ended December 31, 2007, Compared to Year Ended December 31, 2006





The
following table sets forth summarized consolidated financial information for the
years ended December 31, 2007 and 2006:




Fiscal
      Year Ended December 31,($
      in thousands)
                  
                  2007
                  
                  
                  2006
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeTotal
      sales
                  
                  $
                  5,569
                  
                  
                  $
                  1,716
                  
                  
                  $
                  3,853
                  
                  
                  
                  225%Cost
      of goods sold
                  
                  
                  4,133
                  
                  
                  
                  1,264
                  
                  
                  
                  2,869
                  
                  
                  
                  227%Gross
      profit
                  
                  
                  1,436
                  
                  
                  
                  452
                  
                  
                  
                  984
                  
                  
                  
                  218%Percent
      of total sales
                  
                  
                  26%
                  
                  
                  
                  26%Operating
      expenses
                  
                  
                  7,209
                  
                  
                  
                  5,756
                  
                  
                  
                  1,453
                  
                  
                  
                  25%Loss
      from operations
                  
                  
                  (5,773
                  )
                  
                  
                  (5,304
                  )
                  
                  
                  (469
                  )
                  
                  
                  9%Other
      income/(expense)
                  
                  
                  (1,294
                  )
                  
                  
                  72
                  
                  
                  
                  (1,366
                  )
                  
                  
                  -1897%Net
      loss
                  
                  
                  (7,067
                  )
                  
                  
                  (5,232
                  )
                  
                  
                  (1,835
                  )
                  
                  
                  35%Deemed
      dividend related to beneficialconversion
      feature of preferred stock
                  
                  
                  -
                  
                  
                  
                  (130
                  )
                  
                  
                  130
                  
                  
                  
                  -100%Net
      loss attributable to common shareholders
                  
                  $
                  (7,067
                  )
                  
                  $
                  (5,362
                  )
                  
                  $
                  (1,705
                  )
                  
                  
                  32%




For the
year ended December 31, 2007, the Company's consolidated operations generated
net sales of $5,569,000 compared to prior-year net sales of $1,716,000 for the
year ended December 31, 2006. The increase in net sales is primarily
attributable to the substantial progress made to date on the El Dorado Golf and
Beach Club of San Jose del Cabo, Mexico project, an increase in recurring
wireless services during the year and an increase in banking network services
resulting from nearly completing a installation with a major customer and
additional product and service sales to existing customer base. For the year
ended December 31, 2007, the Company had a gross profit margin of 26%, compared
to a gross profit margin of 26% for the prior-year period ended December 31,
2006. There was no change in gross profit margin percentage as compared to the
prior year.





The
Company incurred a net loss of $7,067,000 for the year ended December 31, 2007.
The Company's principal components of the net loss for the year ended December
31, 2007, included approximately $1,184,000 in depreciation and amortization
expenses, $891,000 of interest expense, $253,000 of derivative expense,
$1,064,000 of other general and administrative expense, $3,457,000 in employment
expenses and $2,020,000 in professional services.


25


Sales
Information





Set forth
below is a table presenting summarized sales information for our business
segments for the years ended December 31, 2007 and 2006:




($ in
      thousands)
                                          
                                          Fiscal
      Year Ended December 31,Business
      Segment
                                          
                                          
                                          2007
                                          
                                          %
      of Total
                                          
                                          
                                          2006
                                          
                                          %
      of Total
                                          
                                          $
      Change
                                          
                                          %
      ChangeWireless
      Messaging Services
                                          
                                          $
                                          2,433
                                          
                                          44%
                                          
                                          $
                                          570
                                          
                                          33%
                                          
                                          $
                                          1,863
                                          
                                          
                                          327%Wireless
      Bundled Services
                                          
                                          
                                          1,873
                                          
                                          34%
                                          
                                          
                                          132
                                          
                                          8%
                                          
                                          
                                          1,741
                                          
                                          
                                          1319%Enterprise
      Network Services
                                          
                                          
                                          1,263
                                          
                                          22%
                                          
                                          
                                          1,014
                                          
                                          59%
                                          
                                          
                                          249
                                          
                                          
                                          25%Total
      Sales
                                          
                                          $
                                          5,569
                                          
                                          100%
                                          
                                          $
                                          1,716
                                          
                                          100%
                                          
                                          $
                                          3,853
                                          
                                          
                                          225%




For the
year ended December 31, 2007, net sales increased to $5,569,000 from $1,716,000
for the year ended December 31, 2006. The overall increase of 225% was primarily
attributable to the substantial progress made to date on the El Dorado Golf and
Beach Club of San Jose del Cabo, Mexico project, an increase in recurring
wireless services and an increase in banking network services resulting from an
ongoing installation with a major customer and additional product and service
sales to existing customer base.




Cost
of Goods Sold




The
following tables set forth summarized cost of goods sold information for the
years ended December 31, 2007 and 2006:




($ in
      thousands)
                
                Fiscal Year  Ended December 31,Business
      Segment
                
                
                2007
                
                %
      of Total
                
                
                2006
                
                %
      of Total
                
                
                $
      Change
                
                %
      ChangeWireless
      Messaging Services
                
                $
                1,944
                
                47%
                
                $
                282
                
                22%
                
                $
                1,662
                
                589%Wireless
      Bundled Services
                
                
                970
                
                24%
                
                
                114
                
                9%
                
                
                856
                
                751%Enterprise
      Network Services
                
                
                1,219
                
                29%
                
                
                868
                
                69%
                
                
                351
                
                40%Total
      Cost of Goods
                
                $
                4,133
                
                100%
                
                $
                1,264
                
                100%
                
                $
                2,869
                
                227%




Fiscal
      Year Ended December 31,($
      in thousands)
              
              2007
              
              
              2006
              
              
              $
      Change
              
              
              %
      ChangeProducts
      and integration service
              
              $
              3,100
              
              
              $
              993
              
              
              $
              2,107
              
              
              
              212%Rent
      and maintenance
              
              
              214
              
              
              
              67
              
              
              
              147
              
              
              
              219%Salary
      and related costs
              
              
              294
              
              
              
              54
              
              
              
              240
              
              
              
              444%Depreciation
              
              
              275
              
              
              
              91
              
              
              
              184
              
              
              
              202%Other
      costs
              
              
              250
              
              
              
              59
              
              
              
              191
              
              
              
              324%Total
      Operating Expenses
              
              $
              4,133
              
              
              $
              1,264
              
              
              $
              2,869
              
              
              
              227%





For the
year ended December 31, 2007, cost of goods sold increased by $2,869,000, or
227%, to $4,133,000 from $1,264,000 as compared to the year ended December 31,
2006. The increase of $2,869,000 in cost of goods sold is primarily attributable
to the associated cost of goods sold for the El Dorado Golf and Beach Club of
San Jose del Cabo, Mexico project, and the additional cost of goods sold
attributable to the increased recurring revenues and of approximately 5,000
customers and an increase in banking network services resulting from nearly
completing a installation with a major customer and additional product and
service sales to existing customer base.


26


Operations
Expenses





The
following table sets forth summarized operating expense information for the
years ended December 31, 2007 and 2006:





Fiscal
      Year Ended December 31,($
      in thousands)
              
              2007
              
              
              2006
              
              
              $
      Change
              
              
              %
      ChangeEmployment
      expenses
              
              $
              3,457
              
              
              $
              2,818
              
              
              $
              639
              
              
              
              23%Professional
      services
              
              
              2,020
              
              
              
              1,574
              
              
              
              446
              
              
              
              28%Rent
      and maintenance
              
              
              283
              
              
              
              288
              
              
              
              (5
              )
              
              
              -2%Depreciation
      and amortization
              
              
              385
              
              
              
              254
              
              
              
              131
              
              
              
              52%Other
      general and administrative
              
              
              1,064
              
              
              
              822
              
              
              
              242
              
              
              
              29%Total
      operating expenses
              
              $
              7,209
              
              
              $
              5,756
              
              
              $
              1,453
              
              
              
              25%





For the
year ended December 31, 2007, operating expenses increased by 25% to $7,209,000,
as compared to $5,756,000 for the year ended December 31, 2006. The increases
that occurred, as evidenced by the immediately preceding table, are discussed
below:





·
            A
      $639,000 increase in employment expense, primarily attributable to
      increased work force;




·
            A
      $446,000 increase in professional
services;





·
            A
      $5,000 decrease in rent and
maintenance;





·
            A
      $131,000 increase in depreciation and amortization;
  and





·
            A
      $242,000 increase in other general and administrative
    expense.





Other
(Income) Expense, Net





For the
year ended December 31, 2007, the increase in other expense is primarily
attributable to interest expense on debt obligations totaling $891,000,
derivative expense of $253,000 and warrant expense of $155,000 as compared to
interest expense of $738,000, derivative income of $929,000 and warrant expense
of $76,000 for the year ended December 31, 2006. The derivative expense
represents the net unrealized (non-cash) charge during the year ended December
31, 2007 and 2006, in the fair value of our derivative instrument liabilities
related to warrants and embedded derivatives in our debt instruments that have
been bifurcated and accounted for separately.





Net
Loss





For the
year ended December 31, 2007, our net loss was $7,067,000 compared to a loss of
$5,232,000 for the year ended December 31, 2006. The increase in the loss for
the year ended December 31, 2007, as compared to the year ended December 31,
2006 is primarily attributable to increase in employment and professional
services.





Net
Loss Applicable to Common Shareholders





For the
year ended December 31, 2007, our net loss was $7,067,000 compared to a loss of
$5,362,000 for year ended December 31, 2006. The Company's Net Loss Applicable
to common shareholders included deemed dividends on the beneficial conversion of
year ended December 31, 2006.


27


Cash
Flows





The
Company's operating activities increased net cash used by operating activities
to $4,048,000 in the year ended December 31, 2008, compared to net cash used of
$2,739,000 in the year ended December 31, 2007. The increase in net cash used by
operating activities was primarily attributable to fund an increase in the
Company's net operating loss $8,162,000, net of $4,624,000 non-cash charges
combined with derivative income $306,000 to equal net non-cash charge of
$4,318,000, combine together with $204,000 of cash used by fluctuations in
working capital requirements consisting of the combination of accounts
receivable, inventory, prepaid expenses, accounts payable, accrued expenses,
cost and profit in excess of billings, deferred liability lease and deferred
revenue.





The
Company's investing activities used net cash of $974,000 in the year ended
December 31, 2008, compared to use of net cash of $729,000 in the year ended
December 31, 2007. The increase in investing activities is primarily growing as
a result wireless capabilities through asset acquisition and expansion of our
infrastructure in Texas, New Mexico and Louisiana.





The
Company's financing activities provided net cash of $3,159,000 in the year ended
December 31, 2008, compared to $5,286,000 of cash provided in year ended
December 31, 2007. The cash provided in the year ended December 31, 2008, was
primarily associated with the proceeds from equity financings and the line of
credit, net.





Liquidity and Capital Resources





General





At
December 31, 2008, the Company's current assets totaled $1,762,000 (including
cash and cash equivalents of $348,000), total current liabilities were
$4,128,000, resulting in negative working capital of $2,366,000. The Company has
funded operations to date primarily through a combination of utilizing cash on
hand, borrowings and raising additional capital through the sale of its
securities. The Company operations for the year ended December 31, 2008, was
primarily funded by proceeds from the Company's line of credit totaling
$2,810,000, sale of restricted common stock, net to accredited investors of
$1,180,000 and convertible debt financing of $50,000.





Current
Debt Facility





At
December 31, 2008, the Company had approximately $4,317,000 available on a $6.5
million unsecured revolving credit facility with Angus Capital Partners, which
matures in March 2011. The terms of the two-year unsecured revolving credit
facility will allow us to draw upon the facility as financing requirements
dictate and provides for quarterly interest payments at an annual 12% rate. The
loan may be prepaid without penalty or repaid at maturity.





Issuance
of Common Stock





During
the fiscal year ended December 31, 2008, we issued to various accredited
investors an aggregate of 6,026,000 shares of restricted common stock for net
consideration of $1,180,000. We relied on Section 4(2) of the Securities Act in
effecting this transaction. During the fiscal year ended December 31, 2008, we
issued 5,273,000 shares of common stock to employees and business consultants,
for aggregate consideration of $1,983,000 of services rendered, pursuant to a
registration statement on form S-8.





Use
of Working Capital





We
believe our cash and available credit facilities afford us adequate liquidity
for the balance of fiscal 2009.  We anticipate that we will need
additional capital in the future to continue to expand our business operations,
which expenditures may include acquisitions and capital
expenditures.  We have historically financed our operations through
private equity and debt financings. We do not have any commitments for equity
funding at this time, and additional funding may not be available to us on
favorable terms, if at all. As such there is no assurance that we can raise
additional capital from external sources, the failure of which could cause us to
curtail operations.


28


Contractual
Obligations





The
following table sets forth contractual obligations as of December 31,
2008:




Payments
      Due by PeriodTotal
              
              
              Less
      than 1 Year
              
              
              1-3
      Years
              
              
              3-5
      Years
              
              
              More
      than 5 YearsContractual
      obligations:Long-term
      debt obligations
              
              $
              4,456
              
              
              $
              1,180
              
              
              $
              3,276
              
              
              $
              -
              
              
              $
              -Capital
      lease obligations
              
              
              3,107
              
              
              
              1,199
              
              
              
              1,641
              
              
              
              256
              
              
              
              11Operating
      lease obligations
              
              
              1,699
              
              
              
              623
              
              
              
              1,034
              
              
              
              19
              
              
              
              23Total
      contractual obligations
              
              $
              9,262
              
              
              $
              3,002
              
              
              $
              5,951
              
              
              $
              275
              
              
              $
              34





The
Company's contractual obligations consist of long-term debt of $4,456,000,
derivative liabilities of $78,000, unamortized debt discount of $10,000, and
interest expense of $821,000 as set forth in Note 11 to the company's financial
statements, Notes Payable and Long-Term Debt, and certain obligations for
operating leases requiring future minimal commitments under non-cancelable
leases set forth in Note 13 - Commitments and Contingencies.





Off-Balance
Sheet Arrangements





As of
December 31, 2008 the Company did not have any significant off-balance-sheet
arrangements other than certain office and tower facility operating leases
requiring minimal commitments under non-cancelable leases disclosed in the table
above.





Critical
Accounting Policies and Estimates




Property
and Equipment




Property
and equipment are stated at cost less accumulated depreciation. Major renewals
and improvements are capitalized; minor replacements, maintenance and repairs
are charged to current operations. Depreciation is computed by applying the
straight-line method over the estimated useful lives which are generally three
to seven years.




Impairment
losses are recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. No impairment losses
have been recorded since inception.





Long-Lived
Assets





We review
our long-lived assets, to include intangible assets subject to amortization, for
recoverability whenever events or changes in circumstances indicate that the
carrying amount of such long-lived asset or group of long-lived assets
(collectively referred to as "the asset") may not be recoverable. Such
circumstances include, but are not limited to:





·
            a
      significant decrease in the market price of the
  asset;




·
            a
      significant change in the extent or manner in which the asset is being
      used;




·
            a
      significant change in the business climate that could affect the value of
      the asset;




·
            a
      current period loss combined with projection of continuing loss associated
      with use of the asset;




·
            a
      current expectation that, more likely than not, the asset will be sold or
      otherwise disposed of before the end of its previously estimated useful
      life;




We
continually evaluate whether such events and circumstances have occurred. When
such events or circumstances exist, the recoverability of the asset's carrying
value shall be determined by estimating the undiscounted future cash flows (cash
inflows less associated cash outflows) that are directly associated with and
that are expected to arise as a direct result of the use and eventual
disposition of the asset. To date, no such impairment has occurred. To the
extent such events or circumstances occur that could affect the recoverability
of our long-lived assets, we may incur charges for impairment in the
future.


29


Derivative
Instruments




In
connection with the sale of debt or equity instruments, the Company may sell
options or warrants to purchase our common stock. In certain circumstances,
these options or warrants may be classified as derivative liabilities, rather
than as equity. Additionally, the debt or equity instruments may contain
embedded derivative instruments, such as embedded derivative features which in
certain circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument
liability.




The
Company's derivative instrument liabilities are re-valued at the end of each
reporting period, with changes in the fair value of the derivative liability
recorded as charges or credits to income in the period in which the changes
occur. For options, warrants and bifurcated embedded derivative features that
are accounted for as derivative instrument liabilities, the Company estimates
fair value using either quoted market prices of financial instruments with
similar characteristics or other valuation techniques. The valuation techniques
require assumptions related to the remaining term of the instruments and
risk-free rates of return, our current common stock price and expected dividend
yield, and the expected volatility of our common stock price over the life of
the option. Because of the limited trading history for our common stock, the
Company estimates the future volatility of its common stock price based on not
only the history of its stock price but also the experience of other entities
considered comparable to the Company.





Recent
Accounting Pronouncements





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





In July
2006, the FASB issued FASB Interpretation ("FIN") No. 48 Accounting for
Uncertainly in Income Taxes - An Interpretation of FASB Statement No. 109. FIN
48 prescribes detailed guidance for the financial statement recognition,
measurement, and disclosure of uncertain tax positions recognized in an
enterprise's financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes. Tax positions must meet a more-likely-than-not recognition
threshold at the effective date to be recognized upon the adoption of FIN 48 and
in subsequent periods. FIN 48 will be effective for fiscal years beginning after
December 15, 2006, and the provisions of FIN 48 will be applied to all positions
upon the adoption of the Interpretation. The cumulative effect of this applying
the provisions of this Interpretation will be reported as an adjustment to the
opening balance of retained earnings for that fiscal year. Management is
currently evaluating the impact of FIN 48 on the financial statements but does
not believe that its adoption will have a material effect on the Companies'
financial position, results of operations, or cash flows.





In
September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Management is currently
evaluating the impact SFAS No. 157 will have on the Company's financial
position, results of operations, and cash flows.


30


In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
statement No. 115." This Statement permits all entities to choose, at specified
election dates, to measure eligible items at fair value (the "fair value
option"). A business entity shall report unrealized gains and losses on items
for which the fair value option has been elected in earnings (or another
performance indicator if the business entity does not report earnings) at each
subsequent reporting date. Upfront costs and fees related to items for which the
fair value option is elected shall be recognized in earnings as incurred and not
deferred. If an entity elects the fair value option for a held-to-maturity or
available-for-sale security in conjunction with the adoption of this Statement,
that security shall be reported as a trading security under Statement 115, but
the accounting for a transfer to the trading category under paragraph 15(b) of
Statement 115 does not apply. Electing the fair value option for an existing
held-to-maturity security will not call into question the intent of an entity to
hold other debt securities to maturity in the future. This statement is
effective as of the first fiscal year that begins after November 15, 2007. The
Company is currently analyzing the effects SFAS 159 will have on the Company's
financial condition and results of operations.





ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





Not
applicable.




31


ITEM
8. FINANCIAL STATEMENTS




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors




ERF
Wireless, Inc.




League
City, Texas




We have
audited the accompanying consolidated balance sheets of ERF Wireless, Inc., as
of December 31, 2008 and 2007, and the related consolidated statements of
operations, shareholders' equity (deficit), and cash flows for each of the two
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 consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ERF Wireless,
Inc. as of December 31, 2008 and 2007, and the results of its operations and its
cash flows for each of the two years then ended in conformity with accounting
principles generally accepted in the United States of America.




/s/
LBB & ASSOCIATES LTD.,
LLP




LBB
& ASSOCIATES LTD., LLP


Houston,
Texas


March 12,
2009


32




ERF
WIRELESS, INC.


CONSOLIDATED
BALANCE SHEETS


December
31, 2008 and 2007


($
in thousands except share data)





December
      31,
              
              
              
              
              
              December
      31,2008
              
              
              
              
              
              2007ASSETSCurrent
      assetsCash
      and cash equivalents
              
              
              
              
              $
              348
              
              
              
              
              
              $
              2,211Accounts
      receivable, net
              
              
              
              
              
              248
              
              
              
              
              
              
              365Accounts
      receivable other
              
              
              
              
              
              52
              
              
              
              
              
              
              114Inventories
              
              
              
              
              
              193
              
              
              
              
              
              
              118Cost
      and profit in excess of billings
              
              
              
              
              
              427
              
              
              
              
              
              
              410Prepaid
      expenses and other current assets
              
              
              
              
              
              494
              
              
              
              
              
              
              523Total
      current assets
              
              
              
              
              
              1,762
              
              
              
              
              
              
              3,741Property
      and equipmentProperty
      and equipment
              
              
              
              
              
              7,751
              
              
              
              
              
              
              3,246Less
      accumulated depreciation
              
              
              
              
              
              (1,649
              )
              
              
              
              
              
              (564
              )Net
      property and equipment
              
              
              
              
              
              6,102
              
              
              
              
              
              
              2,682Goodwill
              
              
              
              
              
              436
              
              
              
              
              
              
              260Intangible
      assets, net
              
              
              
              
              
              1,059
              
              
              
              
              
              
              1,541Other
      assets
              
              
              
              
              
              264
              
              
              
              
              
              
              142Total
      assets
              
              
              
              
              
              $
              9,623
              
              
              
              
              
              
              $
              8,366LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Notes
      payable and current portion of long-term debt
              
              
              
              
              
              $
              702
              
              
              
              
              
              
              $
              513Current
      portion of long-term capital lease payable
              
              
              
              
              
              
              861
              
              
              
              
              
              
              
              403Accounts
      payable
              
              
              
              
              
              $
              981
              
              
              
              
              
              
              $
              1,089Accrued
      expenses
              
              
              
              
              
              
              1,269
              
              
              
              
              
              
              
              929Derivative
      liabilities
              
              
              
              
              
              
              78
              
              
              
              
              
              
              
              403Deferred
      liability and revenue
              
              
              
              
              
              
              237
              
              
              
              
              
              
              
              180Total
      current liabilities
              
              
              
              
              
              
              4,128
              
              
              
              
              
              
              
              3,517Long-term
      debt, net of current portion
              
              
              
              
              
              
              2,844
              
              
              
              
              
              
              
              2,885Capital
      leases, net of current portion
              
              
              
              
              
              
              1,581
              
              
              
              
              
              
              
              1,009Deferred
      liability and revenue
              
              
              
              
              
              
              316
              
              
              
              
              
              
              
              486Total
      liabilities
              
              
              
              
              
              
              8,869
              
              
              
              
              
              
              
              7,897CommitmentsShareholders’
      equity:Preferred
      stock  -  $.001 par valueSeries
      A authorized  25,000,000 sharesIssued
      and outstanding at December 31, 2008 andDecember
      31, 2007, 4,085,514 and 3,311,534, respectively
              
              
              
              
              
              
              4
              
              
              
              
              
              
              
              3Common
      stock  -  $.001 par valueAuthorized
      475,000,000 sharesIssued
      and outstanding at December 31, 2008, andDecember
      31, 2007, 101,884,119 and 61,541,358, respectively
              
              
              
              102
              
              
              
              
              
              
              
              62Additional
      paid in capital
              
              
              
              
              
              
              27,504
              
              
              
              
              
              
              
              19,098Accumulated
      deficit
              
              
              
              
              
              
              (26,856
              )
              
              
              
              
              
              
              (18,694
              )Total
      shareholders’ equity
              
              
              
              
              
              
              754
              
              
              
              
              
              
              
              469Total
      liabilities and shareholders' equity
              
              
              
              
              
              $
              9,623
              
              
              
              
              
              
              $
              8,366




See
accompanying notes to consolidated financial statements.


33


ERF
WIRELESS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007


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





2008
              
              
              2007Sales:Products
              
              $
              772
              
              
              $
              2,116Services
              
              
              4,363
              
              
              
              3,255Other
              
              
              20
              
              
              
              198Total
      sales
              
              
              5,155
              
              
              
              5,569Costs
      of goods sold:Products
      and integration services
              
              
              1,511
              
              
              
              3,100Rent,
      repairs and maintenance
              
              
              391
              
              
              
              214Salary
      and related cost
              
              
              78
              
              
              
              294Depreciation
              
              
              900
              
              
              
              275Other
      cost
              
              
              241
              
              
              
              250Total
      costs of goods sold
              
              
              3,121
              
              
              
              4,133Gross
      profit
              
              
              2,034
              
              
              
              1,436Operating
      expenses:Selling,
      general and administrative
              
              
              8,777
              
              
              
              6,824Depreciation
      and amortization
              
              
              876
              
              
              
              385Total
      operating expenses
              
              
              9,653
              
              
              
              7,209Loss
      from operations
              
              
              (7,619
              )
              
              
              (5,773
              )Other
      income(expenses):Interest
      expense, net
              
              
              (887
              )
              
              
              (883
              )Gain
      (loss) on sale of assets and other income
              
              
              38
              
              
              
              (3
              )Derivative
      income (loss)
              
              
              306
              
              
              
              (408
              )Total
      other income (expense)
              
              
              (543
              )
              
              
              (1,294
              )Net
      loss
              
              $
              (8,162
              )
              
              $
              (7,067
              )Net
      loss per common share:Basic
              
              $
              (0.10
              )
              
              $
              (0.17
              )Diluted
              
              $
              (0.10
              )
              
              $
              (0.17
              )




See
accompanying notes to consolidated financial statements.


34




ERF
WIRELESS, INC.


CONSOLIDATED
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007


($
and shares in thousands)





Common
      Stock
                                      
                                      Preferred
      Stock
                                      
                                      Additional
                                        Paid
      in
                                      
                                      Accumulated
                                      
                                      Total
                                        Shareholders’
                                        EquityShares
                                      
                                      Value
                                      
                                      Shares
                                      
                                      Value
                                      
                                      Capital
                                      
                                      Deficit
                                      
                                      (Deficit)


Total
      shareholders’ deficit
              
              
              24,040
              
              
              $
              24
              
              
              
              3,801
              
              
              $
              4
              
              
              $
              9,065
              
              
              $
              (11,627
              )
              
              $
              (2,534
              )as
      of December 31, 2006Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (7,067
              )
              
              
              (7,067
              )New
      stock issued to shareholders:Conversion
      of preferred stock to common stock
              
              
              9,132
              
              
              
              9
              
              
              
              (489
              )
              
              
              (1
              )
              
              
              (8
              )
              
              
              -
              
              
              
              -For
      services rendered and interest
              
              
              10,151
              
              
              
              10
              
              
              
              -
              
              
              
              -
              
              
              
              2,715
              
              
              
              -
              
              
              
              2,725For
      retirement of debt
              
              
              4,966
              
              
              
              5
              
              
              
              -
              
              
              
              -
              
              
              
              1,004
              
              
              
              -
              
              
              
              1,009Asset
      acquisition
              
              
              1,245
              
              
              
              2
              
              
              
              -
              
              
              
              -
              
              
              
              1,369
              
              
              
              -
              
              
              
              1,371Stock
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              85
              
              
              
              -
              
              
              
              85Warrant
      expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              155
              
              
              
              -
              
              
              
              155Proceeds
      from sale of common stock, net
              
              
              12,007
              
              
              
              12
              
              
              
              -
              
              
              
              -
              
              
              
              4,713
              
              
              
              -
              
              
              
              4,725Total
      shareholders’ equityas
      of December 31, 2007
              
              
              61,541
              
              
              
              62
              
              
              
              3,312
              
              
              
              3
              
              
              
              19,098
              
              
              
              (18,694
              )
              
              
              469Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (8,162
              )
              
              
              (8,162
              )New
      stock issued to shareholders:Conversion
      of preferred stock to common stock
              
              
              22,896
              
              
              
              24
              
              
              
              (1,226
              )
              
              
              (1
              )
              
              
              (23
              )
              
              
              -
              
              
              
              -For
      services rendered and interest
              
              
              5,615
              
              
              
              5
              
              
              
              -
              
              
              
              -
              
              
              
              2,370
              
              
              
              -
              
              
              
              2,375For
      retirement of debt
              
              
              635
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              186
              
              
              
              -
              
              
              
              186Asset
      acquisition
              
              
              5,171
              
              
              
              5
              
              
              
              -
              
              
              
              -
              
              
              
              1,645
              
              
              
              -
              
              
              
              1,650For
      retirement of debt and conversion to convertiblepreferred
      stock
              
              
              -
              
              
              
              -
              
              
              
              2,000
              
              
              
              2
              
              
              
              2,998
              
              
              
              -
              
              
              
              3,000Stock
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              29
              
              
              
              -
              
              
              
              29Warrant
      expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              27
              
              
              
              -
              
              
              
              27Proceeds
      from sale of common stock, net
              
              
              6,026
              
              
              
              6
              
              
              
              -
              
              
              
              -
              
              
              
              1,174
              
              
              
              -
              
              
              
              1,180Total
      shareholders’ equityas
      of December 31,  2008
              
              
              101,884
              
              
              $
              102
              
              
              
              4,086
              
              
              $
              4
              
              
              $
              27,504
              
              
              $
              (26,856
              )
              
              $
              754




See
accompanying notes to consolidated financial statements.


35




ERF WIRELESS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007


($ in thousands)





2008
              
              
              2007Cash
      flows from operating activitiesNet
      loss
              
              $
              (8,162
              )
              
              $
              (7,067
              )Adjustments
      to reconcile net loss to net cashused
      by operating activities:(Gain)
      loss on sale of assets
              
              
              (26
              )
              
              
              3Amortization
      of debt discount
              
              
              31
              
              
              
              326Depreciation
      and amortization
              
              
              1,776
              
              
              
              660Stock
      issued for services rendered and interest
              
              
              2,375
              
              
              
              2,725Derivative
      (income) loss
              
              
              (306
              )
              
              
              408Stock
      based compensation and stock option expense
              
              
              29
              
              
              
              85Bad
      debt expense
              
              
              439
              
              
              
              40Changes
      in:Accounts
      receivable, net
              
              
              (279
              )
              
              
              34Accounts
      receivable other
              
              
              62
              
              
              
              (114
              )Inventories
              
              
              (75
              )
              
              
              22Prepaid
      expenses
              
              
              50
              
              
              
              (340
              )Cost
      and profit in excess of billings
              
              
              (17
              )
              
              
              (341
              )Accounts
      payable
              
              
              (108
              )
              
              
              466Accrued
      expenses
              
              
              337
              
              
              
              594Deferred
      liability and revenue
              
              
              (174
              )
              
              
              (240
              )Total
      adjustment
              
              
              4,114
              
              
              
              4,328Net
      cash used by operating activities
              
              
              (4,048
              )
              
              
              (2,739
              )Cash
      flows from investing activitiesProceeds
      from sale of assets
              
              
              27
              
              
              
              13Purchase
      of property and equipment
              
              
              (558
              )
              
              
              (308
              )Business
      acquisitions, net of cash acquired
              
              
              (321
              )
              
              
              (343
              )(Increase)
      in other assets
              
              
              (122
              )
              
              
              (91
              )Net
      cash used by investing activities
              
              
              (974
              )
              
              
              (729
              )Cash
      flows from financing activitiesNet
      proceeds from line of credit
              
              
              2,810
              
              
              
              403Proceeds
      from financing agreements
              
              
              50
              
              
              
              388Proceeds
      from capitalized lease obligations
              
              
              -
              
              
              
              305Payment
      of debt obligations
              
              
              (314
              )
              
              
              (455
              )Payment
      on capital lease obligations
              
              
              (567
              )
              
              
              (80
              )Proceeds
      from sale of common stock, net
              
              
              1,180
              
              
              
              4,725Net
      cash provided by financing activities
              
              
              3,159
              
              
              
              5,286Net
      (decrease) increase in cash
              
              
              (1,863
              )
              
              
              1,818Cash
      and cash equivalents at the beginning of the period
              
              
              2,211
              
              
              
              393Cash
      and cash equivalents at the end of the period
              
              $
              348
              
              
              $
              2,211Supplemental
      disclosure of cash flow information:Net
      cash paid during the year for:Interest
              
              $
              258
              
              
              $
              44Income
      taxes
              
              $
              -
              
              
              $
              -Supplemental
      non-cash investing and financing activities:Conversion
      of debt through issuance of common stock
              
              $
              186
              
              
              $
              1,009Conversion
      of debt through issuance of Preferred stock
              
              $
              3,000
              
              
              $
              -Issuance
      of shares for asset acquisition
              
              $
              1,650
              
              
              $
              1,371Property
      acquired under capital lease
              
              $
              1,597
              
              
              $
              1,187Note
      payable for acquisition
              
              $
              750
              
              
              $
              600




See
accompanying notes to consolidated financial statements.




36


ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




NOTE
1 - BASIS OF PRESENTATION




Nature
of the Company




ERF
Wireless, Inc. (“Company” or “ERF Wireless”) provides secure, high-capacity
wireless products and services to a broad spectrum of customers in primarily
underserved, rural and suburban parts of the United States.  We
provide our customers with high quality broadband services and basic
communications services to residential, oil and gas, and bank customers in the
areas that otherwise would not be able to receive such
services.   We are also a comprehensive solutions provider to
other enterprise customers, providing them with a wide array of communications
services including high speed broadband, voice over Internet Protocol (VOIP)
telephone and facsimile service, and video security.




Historically,
our revenues have been generated primarily from Internet and construction
services.  Our Internet revenues have resulted from our offering of
broadband and basic communications services to residential and enterprise
customers.  Our construction revenues typically have consisted of
revenues generated from the construction of bank networks and other services
associated with providing wireless products and services to the regional banking
industry.




Our
revenues are principally internet and construction. Our internet revenues are
recorded in our subsidiary, “Wireless Bundled Services, Inc. (WBS)”,
construction of bank networks in our subsidiary, “Enterprise Network Services,
Inc. (ENS)” and other construction in our subsidiary, “Wireless Messaging
Services, Inc. (WMS)”. Please refer to segment footnote 15 for additional
information regarding the Company’s operating divisions.




Basis
of Accounting




The
Company maintains its accounts on the accrual method of accounting in accordance
with accounting principles generally accepted in the United States of America.
The accompanying financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States of
America and the rules of the Securities and Exchange Commission (SEC). In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial position and the
results of operations have been reflected herein.




Principles
of Consolidation




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




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 at the date of the balance sheet. Actual results could differ from
those estimates.




Cash
and Cash Equivalents




Cash and
cash equivalents include cash and all highly liquid financial instruments with
original purchased maturities of three months or less. At various times during
the year, the Company maintained cash balances in excess of FDIC insurable
limits. Management feels this risk is mitigated due to the longstanding
reputation of these banks.




Credit
Risk




In the
normal course of business, the Company extends unsecured credit to the majority
of its customers. The company controls credit risk associated with its
receivables through credit checks, approvals, and monitoring procedures.
Generally, the company requires no collateral from its
customers.


37


ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Leases




We
recognize lease expense on a straight-line basis over the minimum lease terms
which expire at various dates through 2013. These leases are for office and
radio tower facilities and are classified as operating leases. For leases that
contain predetermined, fixed escalations of the minimum rentals, we recognize
the rent expense on a straight-line basis and record the difference between the
rent expense and the rental amount payable in liabilities.




Leasehold
improvements made at the inception of the lease are amortized over the shorter
of the asset life or the initial lease term as described above. Leasehold
improvements made during the lease term are also amortized over the shorter of
the asset life or the remaining lease term.




On
December 15, 2006, the Company entered into an agreement with Southwest Enhanced
Network Services, LP, a wireless broadband company, to assume multiple tower and
office leases in the greater Lubbock, Texas area. As part of the agreement the
Company received $825,000 in cash to offset certain of the future operating
lease costs. The $825,000 is recorded as a deferred leased liability and
recognized as a reduction to rent expense on a straight-line basis over the
lease term as described above. At the end of December 2008 and 2007, this
deferred lease liability balance was $476,000 and $640,000,
respectively.




Assets
Held under Capital Leases




Assets
held under capital leases are recorded at the lower of the net present value of
the minimum lease payments or the fair value of the leased asset at the
inception of the lease.  Amortization expense is computed using the
straight-line method over the shorter of the estimated useful lives of the
assets or the period of the related lease.




Allowance
for Doubtful Accounts




The
Company uses the allowance method to account for uncollectible accounts
receivable. The Company's estimate is based on historical collection experience
and a review of the current status of accounts receivable. The company reviews
its accounts receivable balances by customer for accounts greater than 90 days
old and makes a determination regarding the collectibility of the accounts based
on specific circumstances and the payment history that exists with such
customers. The company also takes into account its prior experience, the
customer's ability to pay and an assessment of the current economic conditions
in determining the net realizable value of its receivables. The company also
reviews its allowances for doubtful accounts in aggregate for adequacy following
this assessment. Accordingly, the company believes that its allowances for
doubtful accounts fairly represent the underlying collectibility risks
associated with its accounts receivable.




Deferred
Revenues




Revenues
that are billed in advance of services being completed are deferred until the
conclusion of the period of the service for which the advance billing relates.
Deferred revenues are included on the balance sheet in current and long-term
liabilities until the service is performed and then recognized in the period in
which the service is completed. The Company's deferred revenues consist of
billings in advance of services being rendered for its wireless broadband,
banking network monitoring and maintenance and wireless messaging customers and,
accordingly, are deferred and recognized monthly as earned. The Company had
deferred revenues in current and long-term liabilities of approximately $77,000
and $26,000 as of December 31, 2008, and December 31, 2007,
respectively.




Advertising
Costs




Advertising
costs are expensed when incurred. For the periods ended December 31, 2008 and
2007, the Company expensed $111,000 and $69,000, respectively.




Stock-Based
Compensation




Stock based compensation expense is
recorded in accordance with SFAS 123R (Revised 2004),Share-Based
Payment, for stock and
stock options awarded in return for services rendered. The expense is measured
at the grant-date fair value of the award and recognized as compensation expense
on a straight-line basis over the service period, which is the vesting period.
The Company estimates forfeitures that it expects will occur and records expense
based upon the number of awards expected to vest.


38


ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Derivative
Instruments




In
connection with the sale of debt or equity instruments, the Company may sell
options or warrants to purchase our common stock. In certain circumstances,
these options or warrants may be classified as derivative liabilities, rather
than as equity. Additionally, the debt or equity instruments may contain
embedded derivative instruments, such as embedded derivative features which in
certain circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument
liability.




The
Company's derivative instrument liabilities are re-valued at the end of each
reporting period, with changes in the fair value of the derivative liability
recorded as charges or credits to income in the period in which the changes
occur. For options, warrants and bifurcated embedded derivative features that
are accounted for as derivative instrument liabilities, the Company estimates
fair value using either quoted market prices of financial instruments with
similar characteristics or other valuation techniques. The valuation techniques
require assumptions related to the remaining term of the instruments and
risk-free rates of return, our current common stock price and expected dividend
yield, and the expected volatility of our common stock price over the life of
the option. Because of the limited trading history for our common stock, the
Company estimates the future volatility of its common stock price based on not
only the history of its stock price but also the experience of other entities
considered comparable to the Company.




Inventories




Inventories
are valued at the lower of cost or market. The cost is determined by using the
average cost method. Inventories consist of the following items as of December
31, 2008 and 2007, in thousands:





December
      31,
              
              
              December
      31,2008
              
              
              2007Raw
      material
              
              $
              113
              
              
              $
              49Finished
      goods
              
              
              80
              
              
              
              69$
              193
              
              
              $
              118




The
Company has pledged substantially all the inventory of Wireless Bundled Services
(WBS) as collateral against outstanding notes.




Property
and Equipment




Property
and equipment are stated at cost less accumulated depreciation. Major renewals
and improvements are capitalized; minor replacements, maintenance and repairs
are charged to current operations. Depreciation is computed by applying the
straight-line method over the estimated useful lives which are generally three
to seven years.




Impairment
losses are recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. No impairment losses
have been recorded since inception.




Goodwill




Goodwill
represents the excess of the cost of companies acquired over the fair value of
their net assets at the dates of acquisition. Under current accounting
pronouncement, the company is required to annually assess the carrying value of
goodwill associated with each of its distinct business units that comprise its
business segments of the company to determine if impairment in value has
occurred.




Intangible
Assets




Intangible
assets are amortized using methods that approximate the benefit provided by the
utilization of the assets. The Company continually evaluates the amortization
period and carrying basis of intangible assets to determine whether subsequent
events and circumstances warrant a revised estimated useful life or impairment
in value. To date, no such impairment has occurred. To the extent such events or
circumstances occur that could affect the recoverability of our Intangibles
assets, we may incur charges for impairment in the future.




39


ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Long-Lived
Assets




We review
our long-lived assets, which include intangible assets subject to amortization,
for recoverability whenever events or changes in circumstances indicate that the
carrying amount of such long-lived asset or group of long-lived assets
(collectively referred to as "the asset") may not be recoverable. Such
circumstances include, but are not limited to:




·
            a
      significant decrease in the market price of the
  asset;




·
            a
      significant change in the extent or manner in which the asset is being
      used;




·
            a
      significant change in the business climate that could affect the value of
      the asset;




·
            a
      current period loss combined with projection of continuing loss associated
      with use of the asset;




·
            a
      current expectation that, more likely than not, the asset will be sold or
      otherwise disposed of before the end of its previously estimated useful
      life.




We
continually evaluate whether such events and circumstances have occurred. When
such events or circumstances exist, the recoverability of the asset's carrying
value shall be determined by estimating the undiscounted future cash flows (cash
inflows less associated cash outflows) that are directly associated with and
that are expected to arise as a direct result of the use and eventual
disposition of the asset. To date, no such impairment has occurred. To the
extent such events or circumstances occur that could affect the recoverability
of our long-lived assets, we may incur charges for impairment in the
future.




Revenue
Recognition




The
Company's revenue is generated primarily from the sale of wireless
communications products and services on a nationwide basis, including providing
enterprise-class wireless broadband services. The Company recognizes revenue
when persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable, and collectibility is
probable.




The
Company records revenues from its fixed-price, long-term contracts using the
percentage-of-completion method. Revenues are recorded based on construction
costs incurred to date as a percentage of estimated total cost at completion.
The percentage-of-completion, determined by using total costs incurred to date
as a percentage of estimated total costs at completion, reflects the actual
physical completion of the project. If the current projected costs on a fixed
fee contract exceed projected revenue, the entire amount of the loss is
recognized in the period such loss is identified.




The
Company recognizes product sales generally at the time the product is shipped.
Concurrent with the recognition of revenue, the Company provides for the
estimated cost of product warranties and reduces revenue for estimated product
returns. Sales incentives are generally classified as a reduction of revenue and
are recognized at the later of when revenue is recognized or when the incentive
is offered. Shipping and handling costs are included in cost of goods
sold.




Service
revenue is principally derived from wireless broadband services, including
internet, voice, and data and monitoring service. Subscriber fees are recorded
as revenues in the period during which the service is provided.




Warranty




The
Company's suppliers generally warrant the products distributed by the Company
and allow returns of defective products, including those that have been returned
to the Company by its customers. The Company does not independently warrant the
products that it distributes, but it does provide warranty services on behalf of
the supplier.




Income
Taxes




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


40


ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Fair
Value of Financial Instruments




The
Company's financial instruments consist of cash and cash equivalents, inventory,
accounts receivable and debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or interest rates that
approximate prevailing market rates unless otherwise disclosed in these
consolidated financial statements.




Beneficial
Conversion




Equity
instruments that contain a beneficial conversion feature are recorded as a
deemed dividend to the holders of the convertible equity instruments. The deemed
dividend associated with the beneficial conversion is calculated as the
difference between the fair value of the underlying common stock less the
proceeds that have been received for the equity instrument limited to the value
received. The beneficial conversion amount is recorded as a deemed dividend or
interest expense and an increase to additional paid-in-capital.




Basic
Loss per Share




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




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




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




Recent
Accounting Pronouncements




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




In July
2006, the FASB issued FASB Interpretation ("FIN") No. 48 Accounting for
Uncertainly in Income Taxes - An Interpretation of FASB Statement No. 109. FIN
48 prescribes detailed guidance for the financial statement recognition,
measurement, and disclosure of uncertain tax positions recognized in an
enterprise's financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes. Tax positions must meet a more-likely-than-not recognition
threshold at the effective date to be recognized upon the adoption of FIN 48 and
in subsequent periods. FIN 48 will be effective for fiscal years beginning after
December 15, 2006, and the provisions of FIN 48 will be applied to all positions
upon the adoption of the Interpretation. The cumulative effect of this applying
the provisions of this Interpretation will be reported as an adjustment to the
opening balance of retained earnings for that fiscal year. Management is
currently evaluating the impact of FIN 48 on the financial statements but does
not believe that its adoption will have a material effect on the Companies'
financial position, results of operations, or cash flows.


41




ERF
WIRELESS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




In
September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Management is currently
evaluating the impact SFAS No. 157 will have on the Company's financial
position, results of operations, and cash flows.




In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
statement No. 115." This Statement permits all entities to choose, at specified
election dates, to measure eligible items at fair value (the "fair value
option"). A business entity shall report unrealized gains and losses on items
for which the fair value option has been elected in earnings (or another
performance indicator if the business entity does not report earnings) at each
subsequent reporting date. Upfront costs and fees related to items for which the
fair value option is elected shall be recognized in earnings as incurred and not
deferred. If an entity elects the fair value option for a held-to-maturity or
available-for-sale security in conjunction with the adoption of this Statement,
that security shall be reported as a trading security under Statement 115, but
the accounting for a transfer to the trading category under paragraph 15(b) of
Statement 115 does not apply. Electing the fair value option for an existing
held-to-maturity security will not call into question the intent of an entity to
hold other debt securities to maturity in the future. This statement is
effective as of the first fiscal year that begins after November 15, 2007. The
Company is currently analyzing the effects SFAS 159 will have on the Company's
financial condition and results of operations.




NOTE
2 - ACCOUNTS RECEIVABLE




Accounts
Receivable consists of the following (in thousands):




December
      31,
              
              
              December
      31,2008
              
              
              2007Accounts
      receivable
              
              $
              731
              
              
              $
              412Allowance
      for doubtful accounts
              
              
              (483
              )
              
              
              (47
              )Accounts
      receivable, net
              
              $
              248
              
              
              $
              365




The
Company has pledged substantially all the accounts receivables of Wireless
Bundled Services (WBS) as collateral against outstanding notes and capital
leases.




NOTE
3 - PROPERTY AND EQUIPMENT:




Components
of property and equipment consist of the following items (in
thousands):


December
      31,
              
              
              December
      31,2008
              
              
              2007Automobiles
              
              $
              201
              
              
              $
              157Operating
      equipment
              
              
              5,393
              
              
              
              2,123Office
      furniture and equipment
              
              
              219
              
              
              
              137Leasehold
      improvements
              
              
              67
              
              
              
              47Computer
      equipment
              
              
              296
              
              
              
              214Building
              
              
              29
              
              
              
              8Land
              
              
              37
              
              
              
              28Construction
      in progress
              
              
              1,509
              
              
              
              532Total
      property and equipment
              
              
              7,751
              
              
              
              3,246Less
      accumulated depreciation
              
              
              (1,649
              )
              
              
              (564
              )Net
      property and equipment
              
              $
              6,102
              
              
              $
              2,682




Depreciation
expense was $1,088,000 and $376,000 for the twelve months ended December 31,
2008 and 2007, respectively.


42


ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Operating
equipment under construction is primarily due to the build out of our wide area
network of BankNet and WiNet constructed by our subsidiary ENS.




The
Company has pledged substantially all the operating equipment and some furniture
and vehicles as collateral against outstanding notes and capital
leases.




NOTE
4 - GOODWILL




At
December 31, 2008 and 2007, goodwill totaled $436,000 and $260,000
respectively.  The goodwill is attributable to the following
acquisitions:




·
            On
      January 11, 2008, the Company acquired assets from Crosswind, Inc. and
      recorded goodwill of $176,000, which is not subject to
      amortization.




·
            On
      October 17, 2007, the Company acquired assets from Momentum Online
      Internet Services, Inc. and recorded goodwill of $225,000, which is not
      subject to amortization.




·
            On
      October 31, 2007, the Company acquired assets from TSTAR, Inc. and
      recorded goodwill of $35,000, which is not subject to
      amortization.





NOTE
5 - INTANGIBLE ASSETS, NET




Intangible
assets consist of the following (in thousands):




December
      31, 2008Gross
                  
                  
                  
                  
                  
                  NetUseful
Life
                  
                  
                  Carrying
                  
                  
                  Accumulated
                  
                  
                  Carrying(in
      years)
                  
                  
                  Amount
                  
                  
                  Amortization
                  
                  
                  AmountCustomer
      relationships
                  
                  
                  3.0
                  
                  
                  $
                  2,028
                  
                  
                  $
                  969
                  
                  
                  $
                  1,059Workforce
      in place
                  
                  
                  3.0
                  
                  
                  
                  125
                  
                  
                  
                  125
                  
                  
                  
                  -Non-compete
      agreement
                  
                  
                  3.0
                  
                  
                  
                  100
                  
                  
                  
                  100
                  
                  
                  
                  -Developed
      technology
                  
                  
                  3.0
                  
                  
                  
                  20
                  
                  
                  
                  20
                  
                  
                  
                  -$
                  2,273
                  
                  
                  $
                  1,214
                  
                  
                  $
                  1,059December
      31, 2007Gross
                  
                  
                  
                  
                  
                  
                  NetUseful
Life
                  
                  
                  Carrying
                  
                  
                  Accumulated
                  
                  
                  Carrying(in
      years)
                  
                  
                  Amount
                  
                  
                  Amortization
                  
                  
                  AmountCustomer
      relationships
                  
                  
                  3.0
                  
                  
                  $
                  1,822
                  
                  
                  $
                  329
                  
                  
                  $
                  1,493Workforce
      in place
                  
                  
                  3.0
                  
                  
                  
                  125
                  
                  
                  
                  101
                  
                  
                  
                  24Non-compete
      agreement
                  
                  
                  3.0
                  
                  
                  
                  100
                  
                  
                  
                  80
                  
                  
                  
                  20Developed
      technology
                  
                  
                  3.0
                  
                  
                  
                  20
                  
                  
                  
                  16
                  
                  
                  
                  4$
                  2,067
                  
                  
                  $
                  526
                  
                  
                  $
                  1,541




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




On
January 11, 2008, the Company acquired from Crosswind, Inc. a customer list
which was valued at $206,000 and is being amortized over three
years.


43


ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


On
October 17, 2007, the Company acquired from Momentum Online Internet Services,
Inc. a customer list which was valued at $700,000 and is being amortized over
three years.




On
October 31, 2007, the Company acquired from TSTAR, Inc. a customer list which
was valued at $826,000 and is being amortized over three years.




Total
amortization of intangibles was $688,000 and $284,000 for the twelve months
ended December 31, 2008 and 2007, respectively. The estimated amortization
expense for the remaining years will be $586,000 for 2009 and $473,000 in
2010.




NOTE
6 - DEBT CONVERSION




The
Company during the fourth quarter 2008 signed a debt conversion agreement to
convert the unsecured revolving credit facility which provides financing for
working capital requirements. The Company issued 2,000,000 shares of its Series
A Preferred Stock for the conversion of $3,000,000 in debt. The Company issued
one share of Series A Convertible Preferred Stock for every One Dollar and Fifty
Cents ($1.50) in claims converted.  As additional consideration for
the conversion, when the number of shares of outstanding common stock equals or
exceeds 120,000 million shares, the Company agreed to amend the Series A
convertible preferred stock designation to increase the voting rights of each
preferred share from 20 votes to 50 votes on all matters in which the common
stock holders and preferred stock holders vote together. The Series A stock was
valued at $3,000,000 and was valued on the date of issuance, thus no gain or
loss was recognize on the debt extinguishment.




NOTE
7 - COMMON STOCK, PREFERRED STOCK AND WARRANTS




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




Common
Stock




As of
December 31, 2008, there were 101,884,119 shares of its $.001 par value common
stock issued and outstanding.




During
the twelve months ended December 31, 2008, the Company issued 11,421,000 shares
of common stock in lieu of cash for services rendered against professional
services and consulting agreements valued at $895,000, interest expense of
$6,000, settlement expense of $311,000, other services of $220,000, notes
payable of $186,000, salary and compensation of $943,000 and acquisition of
assets of $1,650,000. The Company valued the 11,421,000 shares at the closing
market price on the date of issuance of such shares.




During
the fiscal year ended December 31, 2008, we issued to various accredited
investors an aggregate of 6,026,000 shares of restricted common stock for net
consideration of $1,180,000. We relied on Section 4(2) of the Securities Act in
effecting this transaction.


44




ERF
WIRELESS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




During
2008, the Company issued stock in lieu of cash as payment for the following (in
thousands):




December
      31, 2008
              Supplemental
      Non-Cash DisclosureProfessional
      fees
              
              $
              895Settlements
              
              
              311Salary
      and compensation
              
              
              943Other
      services rendered
              
              
              226Total
      for services, interest, liabilities and compensation
              
              $
              2,375Notes
      payable
              
              $
              186Acquisition
              
              $
              1,650December
      31, 2007
              Supplemental
      Non-Cash DisclosureProfessional
      fees
              
              $
              1,376Settlements
              
              
              457Salary
      and compensation
              
              
              657Other
      services rendered
              
              
              235Total
      for services, interest, liabilities and compensation
              
              $
              2,725Notes
      payable
              
              $
              1,009Acquisition
              
              $
              1,371




Preferred
Stock




The
Company has 25,000,000 shares of Series A Preferred Stock authorized of which
4,085,514 shares were issued and outstanding as of December 31, 2008. The Series
A Preferred Stock is convertible at holder's option at one preferred share for
18.676347 shares common stock and has a 2:1 liquidation preference. The holder
of Series A Preferred Stock is required to give a 65-day notice of conversion to
the Company. With respect to the Series A Preferred Stock outstanding at
December 31, 2008, the Company would be required to issue 76,302,477 shares of
its common stock, subject to certain contractually imposed conversion
restrictions as described herein. During the fourth quarter 2005, all of the
Series A Preferred Stock holders entered into a conversion restriction agreement
whereby all Series A Preferred Stock holders, as a group, are prohibited from
converting more than 5% of the total outstanding  Series A Preferred
Stock holdings in any one calendar quarter.




Warrants




The
Company had warrants outstanding to third parties to purchase 4,165,271 shares
of common stock as of December 31, 2008.




Warrants
to purchase 389,999 shares of common stock at a purchase price of $3.57 per
share were issued by the Company in September 2005 and November 2005.
Specifically, the Company issued convertible notes for $1,500,000 to accredited
investors of the Securities Act and issued such warrants to purchase 389,999
shares of common stock at $3.57 per share, subject to adjustment upon issuance
of shares or warrants below market, expiring September 2010.




Warrants
to purchase 3,775,272 shares of Common stock at a purchase price $5.00 per share
were issued by the Company during 2006 thru 2008. As of December 31, 2008, the
Company has attributed $27,000 in warrant expense.


45




ERF
WIRELESS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




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




WarrantsIssued
      & OutstandingExercise
      Price
              
              Expiration
      Date
              
              December
      31,
              
              December
      31,2008
              
              20075.00
              
              Jun-08
              
              
              -
              
              
              141,6707.50
              
              Jun-08
              
              
              -
              
              
              141,6703.57
              
              Sep-10
              
              
              389,999
              
              
              389,9995.00
              
              Oct-11
      thru Sept-13
              
              
              3,775,272
              
              
              3,265,2404,165,271
              
              
              3,938,579




NOTE 8 - INCOME TAXES




The
Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes." Implementation of SFAS 109 did
not have a material cumulative effect on prior periods nor did it result in a
change to the current year's provision.




The
effective tax rate for the Company is reconcilable to statutory tax rates as
follows:





December
      31, 2008
                      
                      December
      31, 2007U.
      S. Federal statutory tax rate
                      %
                      34
                      
                      
                      %
                      34U.S.
      valuation difference
                      
                      (34
                      )
                      
                      
                      (34
                      )Effective
      U. S. tax rate
                      
                      -
                      
                      
                      
                      -Foreign
      tax valuation
                      
                      -
                      
                      
                      
                      -Effective
      tax rate
                      
                      -
                      
                      
                      
                      -




Income
tax expense (benefit) attributable to income from continuing operations differed
from the amounts computed by applying the U.S. Federal income tax of 34% to
pretax income from continuing operations as a result of the following (in
thousands):


December
      31,
                          2008
                        
                        
                        December
      31,
                          2007Computed
      expected tax benefit
                        
                        $
                        (2,775
                        )
                        
                        $
                        (2,403
                        )Increase
      in valuation allowance
                        
                        
                        2,775
                        
                        
                        
                        2,403Income
      tax expense
                        
                        $
                        -
                        
                        
                        $
                        -
 The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2008, and
December 31, 2007, are presented below (in thousands):


December
      31,
                          2008
                        
                        
                        December
      31,
                          2007Deferred
      tax assets:Net
      operating loss carry forwards
                        
                        $
                        (8,377
                        )
                        
                        $
                        (5,602
                        )Less
      valuation allowance
                        
                        
                        8,377
                        
                        
                        
                        5,602Net
      deferred tax assets
                        
                        $
                        -
                        
                        
                        $
                        -
 The Company has determined that
a valuation allowance of $8,377,000 at December 31, 2008, is necessary to reduce
the deferred tax assets to the amount that will more than likely than not be
realized. The change in valuation allowance for 2008 was approximately $2,775,000. As of December 31, 2008,
the Company has a net operating loss carry-forward of $25,971,000, which is
available to offset future federal taxable income, if any, with expiration
beginning 2012 and ending 2027.


46


ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE
9 - EARNINGS PER SHARE




The
following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amount):




For
      the twelve months ended December 31, 2008Income
            
            
            Shares
            
            
            Per-Share(Numerator)
            
            
            (Denominator)
            
            
            AmountNet
      loss
            
            $
            (8,162
            )
            
            
            78,074
            
            
            $
            (0.10
            )Basic
      EPS:loss
      available to common stockholders
            
            
            (8,162
            )
            
            
            78,074
            
            
            
            (0.10
            )Effect
      of dilutive securities
            
            
            -
            
            
            
            
            
            
            
            -Diluted
      EPS:loss
      available to common stockholders
            
            $
            (8,162
            )
            
            
            78,074
            
            
            $
            (0.10
            )and
      assumed conversionsFor
      the twelve months ended December 31, 2007Income
            
            
            Shares
            
            
            Per-Share(Numerator)
            
            
            (Denominator)
            
            
            AmountNet
      loss
            
            $
            (7,067
            )
            
            
            41,308
            
            
            $
            (0.17
            )Basic
      EPS:loss
      available to common stockholders
            
            
            (7,067
            )
            
            
            41,308
            
            
            
            (0.17
            )Effect
      of dilutive securities
            
            
            -
            
            
            
            
            
            
            
            -Diluted
      EPS:loss
      available to common stockholders
            
            $
            (7,067
            )
            
            
            41,308
            
            
            $
            (0.17
            )




For the
years ended December 31, 2008 and 2007, dilutive securities existed. The effect
of the dilutive securities for the year ended December 31, 2008, would have been
99,129,264 shares of common stock comprised of the following; 1,129,032 shares
of common stock assuming all debt instruments were converted, 500,000 shares of
common stock assuming all employee stock options were converted, 4,165,271
shares of common stock assuming all warrants were converted, 15,260,496 shares
of common stock assuming all Series A Preferred Stock (limited to 20% per year
based on  restrictive covenant) were converted and 78,074,465 shares
of weighted average shares of common stock outstanding.




NOTE
10 - MAJOR CUSTOMERS




The
Company had gross sales of approximately $5,155,000 and $5,569,000 for the
twelve months ended December 31, 2008 and 2007, respectively. The Company had
one customer that represented approximately 11% of the gross sales in the twelve
months ended December 31, 2008 and had two customers that represented 36% and
12% of gross sales for the twelve months ended December 31,
2007.


47




ERF
WIRELESS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE
11 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES





Notes
payable, long-term debts and capital leases consist of the following as of
December 31, 2008 (in thousands):





Terms
              Maturity
      Date
              
              Interest
      Rate
              
              
              Gross
      Balance
              
              
              Debt
      Discount
              
              
              Net
      BalanceBancleasing,
      Inc.
              $10,660
      / Month including interest
              October-14
              
              
              11.62%
              
              
              $
              556
              
              
              $
              -
              
              
              $
              556Agility
      Capital Lease
              $91,457
      / Month including interest
              Various
              
              
              18.82%
              
              
              
              1,882
              
              
              
              -
              
              
              
              1,882Balboa
      Lease
              $225
      / Month including interest
              June-10
              
              
              27.74%
              
              
              
              4
              
              
              
              -
              
              
              
              4Liberty
      Finance
              $517
      / Month including interest
              September-09
              
              
              13.97%
              
              
              
              3
              
              
              
              -
              
              
              
              3Chase
      Bank
              $449
      / Month including interest
              November-09
              
              
              5.89%
              
              
              
              5
              
              
              
              -
              
              
              
              5Blanco
      National Bank
              $3,913
      / Month including interest
              August-10
              
              
              9.50%
              
              
              
              65
              
              
              
              -
              
              
              
              65Premium
      Assignment, Insurance notes
              $2,199
      / Month including interest
              September-09
              
              
              8.65%
              
              
              
              16
              
              
              
              -
              
              
              
              16Robert
      McClung, Momentum
              $23,476
      / Quarterly including interest
              October-10
              
              
              7.50%
              
              
              
              173
              
              
              
              -
              
              
              
              173George
      Kemper, TSTAR
              $38,254
      / Quarterly including interest
              April-10
              
              
              7.50%
              
              
              
              220
              
              
              
              -
              
              
              
              220Shane
      Griffths, Crosswind
              $13,911
      / Quarterly including interest
              December-10
              
              
              7.50%
              
              
              
              116
              
              
              
              -
              
              
              
              116Centramedia
              $56,342
      / Quarterly including interest
              December-11
              
              
              7.50%
              
              
              
              600
              
              
              
              -
              
              
              
              600Line
      of credit
              2
      years/ Quarterly interest (See below)
              March-11
              
              
              12.00%
              
              
              
              2,183
              
              
              
              -
              
              
              
              2,183E-bond
      investor notes
              3
      years/ Semiannual interest (See below)
              Various
              
              
              10.00%
              
              
              
              175
              
              
              
              10
              
              
              
              165Total
      debt
              
              
              
              
              
              
              
              $
              5,998
              
              
              $
              10
              
              
              
              5,988Less
      current maturities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,563Less
      debt discount current maturities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (10
              )Long-term
      debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              4,435





The gross
maturities of these debts are $1,573,000, $3,456,000, $633,000, $100,000,
$106,000 and $130,000 for the years ended December 31, 2009, 2010, 2011, 2012
and 2013, and thereafter, respectively.




Notes payable and long-term debts consist of the
following as of December 31, 2007 (in thousands):




Dec.
      31, 2007Terms
              Maturity
      Date
              
              Interest
      Rate
              
              
              Gross
      Balance
              
              
              Debt
      Discount
              
              
              Net
      BalanceBancleasing,
      Inc.
              $5,330
      / Month including interest
              October-14
              
              
              11.62%
              
              
              $
              305
              
              
              $
              -
              
              
              $
              305Agility
      Capital Lease
              $45,343
      / Month including interest
              Various
              
              
              18.82%
              
              
              
              1,099
              
              
              
              -
              
              
              
              1,099Balboa
      Lease
              $225
      / Month including interest
              June-10
              
              
              27.74%
              
              
              
              5
              
              
              
              -
              
              
              
              5Varilease
              $994
      / Month including interest
              March-08
              
              
              20.38%
              
              
              
              3
              
              
              
              -
              
              
              
              3Axis
      Capital, Inc
              $347
      / Month including interest
              August-08
              
              
              8.60%
              
              
              
              3
              
              
              
              -
              
              
              
              3Vangard
      Wireless, Inc.
              $200
      / Month including interest
              December-10
              
              
              6.00%
              
              
              
              6
              
              
              
              -
              
              
              
              6Liberty
      Finance
              $517
      / Month including interest
              September-09
              
              
              13.97%
              
              
              
              10
              
              
              
              -
              
              
              
              10Chase
      Bank
              $449
      / Month including interest
              November-09
              
              
              5.89%
              
              
              
              11
              
              
              
              -
              
              
              
              11Blanco
      National Bank
              $3,913
      / Month including interest
              August-10
              
              
              9.50%
              
              
              
              103
              
              
              
              -
              
              
              
              103Robert
      McClung, Momentum
              $23,476
      / Quarterly including interest
              October-10
              
              
              7.50%
              
              
              
              250
              
              
              
              -
              
              
              
              250George
      Kemper, TSTAR
              $38,254
      / Quarterly including interest
              April-10
              
              
              7.50%
              
              
              
              350
              
              
              
              -
              
              
              
              350Premium
      Assignment, Insurance notes
              $421
      / Month including interest
              September-08
              
              
              9.48%
              
              
              
              15
              
              
              
              -
              
              
              
              15Line
      of credit
              2
      years/ Quarterly interest (See below)
              February-09
              
              
              6.00%
              
              
              
              2,409
              
              
              
              -
              
              
              
              2,409E-bond
      investor notes
              3
      years/ Semiannual interest (See below)
              Various
              
              
              10.00%
              
              
              
              275
              
              
              
              34
              
              
              
              241Total
      debt
              
              
              
              
              
              
              
              $
              4,844
              
              
              $
              34
              
              
              
              4,810Less
      current maturities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              950Less
      debt discount current maturities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (34
              )Long-term
      debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              3,894




48




ERF
WIRELESS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Investor
Notes




The following table summarizes
the convertible debt activity for the period September 6, 2005, to December 31,
2008:





Description
            Investor
      Notes
            Warrant
      Liabilities
            Compound
      Derivative Liability
            Total


Fair
      value issuance at inception
              
              $
              508,018
              
              
              $
              470,702
              
              
              $
              521,281
              
              
              $
              1,500,00109-06-05
      to 09-30-05 change in fair value
              
              
              18,373
              
              
              
              2,389,132
              
              
              
              1,012,547
              
              
              
              3,420,05210-01-05
      to 12-31-05 change in fair value
              
              
              78,258
              
              
              
              (2,160,313
              )
              
              
              (1,090,630
              )
              
              
              (3,172,685
              )01-01-06
      to 03-31-06 change in fair value
              
              
              90,258
              
              
              
              (466,128
              )
              
              
              (276,615
              )
              
              
              (652,485
              )04-01-06
      to 06-30-06 change in fair value
              
              
              104,943
              
              
              
              (149,288
              )
              
              
              32,006
              
              
              
              (12,339
              )07-01-06
      to 09-30-06 change in fair value
              
              
              122,182
              
              
              
              73,005
              
              
              
              32,395
              
              
              
              227,58210-01-06
      to 12-31-06 change in fair value
              
              
              140,846
              
              
              
              (118,744
              )
              
              
              (26,162
              )
              
              
              (4,060
              )01-01-07
      to 03-31-07 change in fair value
              
              
              158,659
              
              
              
              (20,503
              )
              
              
              (2,478
              )
              
              
              135,67804-01-07
      to 06-30-07 change in fair value
              
              
              184,473
              
              
              
              113,377
              
              
              
              (4,843
              )
              
              
              293,00707-01-07
      to 09-30-07 change in fair value
              
              
              93,990
              
              
              
              116,109
              
              
              
              (197,501
              )
              
              
              12,59810-01-07
      to 12-31-07 change in fair value
              
              
              -
              
              
              
              52,413
              
              
              
              -
              
              
              
              52,41301-01-08
      to 03-31-08 change in fair value
              
              
              -
              
              
              
              (113,802
              )
              
              
              -
              
              
              
              (113,802
              )04-01-08
      to 06-30-08 change in fair value
              
              
              -
              
              
              
              (128,524
              )
              
              
              -
              
              
              
              (128,524
              )07-01-08
      to 09-30-08 change in fair value
              
              
              -
              
              
              
              (11,663
              )
              
              
              -
              
              
              
              (11,663
              )10-01-08
      to 12-31-08 change in fair value
              
              
              -
              
              
              
              (17,039
              )
              
              
              -
              
              
              
              (17,039
              )Conversions
      from inception to date
              
              
              (1,500,000
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,500,000
              )Fair
      value at December 31, 2008
              
              $
              -
              
              
              $
              28,734
              
              
              $
              -
              
              
              $
              28,734




For the
year ended December 31, 2008 and 2007, net derivative income was $271,000 and
$254,000, respectively.




A
Black-Scholes methodology was used to value the warrants, with the following
assumptions.




WarrantsAssumptions
                
                3/31/2008
                
                
                6/30/2008
                
                
                9/30/2008
                
                
                12/31/2008Dividend
      yield
                
                
                0.00%
                
                
                
                0.00%
                
                
                
                0.00%
                
                
                
                0.00%Risk-free
      rate for term
                
                
                1.62%
                
                
                
                2.91%
                
                
                
                2.00%
                
                
                
                0.76%Volatility
                
                
                180.00%
                
                
                
                170.00%
                
                
                
                155.00%
                
                
                
                150.00%Maturity
      date
                
                2.43
      years
                
                
                2.18
      years
                
                
                1.93
      years
                
                
                1.68
      yearsWarrantsAssumptions
                
                3/31/2007
                
                
                6/30/2007
                
                
                9/30/2007
                
                
                12/31/2007Dividend
      yield
                
                
                0.00%
                
                
                
                0.00%
                
                
                
                0.00%
                
                
                
                0.00%Risk-free
      rate for term
                
                
                4.51%
                
                
                
                4.89%
                
                
                
                4.03%
                
                
                
                3.07%Volatility
                
                
                140.00%
                
                
                
                200.00%
                
                
                
                177.00%
                
                
                
                180.00%Maturity
      date
                
                3.44
      years
                
                
                3.39
      years
                
                
                2.93
      years
                
                
                2.68
      years




Line
of Credit




During
2008, the Company amended its two-year unsecured revolving credit facility with
certain private investors from $3 million to $6.5 million dollar line of credit.
The terms of the secured revolving credit facility allow the Company to draw
upon the facility as financing requirements dictate and provide for quarterly
interest payments at a 12% rate per annum. The loan was extended from February
28, 2009 to March 31, 2011 and may be prepaid without penalty. At December 31,
2008, the line of credit of $6,500,000 had an available line $4,317,000 leaving
a remaining balance due of $2,183,000.


49




ERF
WIRELESS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




E-Series
Bond Investor Note




The
Company issued to certain accredited investors a principal amount of $1,050,000
of E-series bonds (the "Bonds") between May 2006 and December 2008, of which
$875,000 has been converted to common stock leaving a principal amount of
$175,000 of Bonds outstanding as of December 31, 2008. The Bonds are due and
payable upon maturity, a three-year period from the issuance date. Interest on
the Bonds is payable at the rate of 10% per annum, and is payable semiannually.
The Bondholder may require the Company to convert the Bond (including any unpaid
interest) into shares of common stock at any time only during the first year. If
the Bonds are converted under this option, the Company will issue shares
representing 100% of the Bond principal and unpaid interest calculated through
maturity. The value of the common stock issued under this option will be the
lesser of $1.50 or the 20-day trailing average per share closing price of common
stock preceding the notice of conversion. If the Bond is converted the Company
will issue a warrant to purchase one additional share of common stock at a price
of $5.00 for every share of common stock that has been received from the
conversion of the Bond principal.




At the
Company's discretion at any time after the first year, the Bonds, including the
interest payments calculated through the date of conversion may be repaid in
cash or in shares of our common Stock, which shares will be valued at the
average last sales price of our common stock over the 60-trading-day period
preceding any prepayment date. If the Company elects to issue shares of our
common stock as repayment of the Bond, we will issue shares representing a value
equal to 125% of the Bond principal. If the Company elects choose to issue
shares of our common stock as payment of interest, we will issue shares
representing a value equal to 100% of the interest due.




The Bonds
were determined to include various embedded derivative liabilities. The
derivative liabilities are the conversion feature and the redemption option
(compound embedded derivative liability). At the date of issuance the Bond,
compound embedded derivative liabilities were measured at fair value using
either quoted market prices of financial instruments with similar
characteristics or other valuation techniques. These derivative liabilities will
be marked-to-market each quarter with the change in fair value recorded in the
income statement. The Company uses the effective interest method to record
interest expense and related debt accretion which was $30,749 for the twelve
months ended December 31, 2008, and the estimated debt accretion for 2009 is
$10,333.




The
following table summarizes the convertible debt activity for the period May 31,
2006, to December 31, 2008:





Description
            E-Series
      Bonds
            
            Compound
      Derivative Liability
            
            Total


Fair
      value issuance at inception
              
              $
              916,174
              
              
              $
              133,826
              
              
              $
              1,050,00005-31-06
      to 06-30-06 change in fair value
              
              
              763
              
              
              
              (11,750
              )
              
              
              (10,987
              )07-01-06
      to 09-30-06 change in fair value
              
              
              5,847
              
              
              
              (3,971
              )
              
              
              1,87610-01-06
      to 12-31-06 change in fair value
              
              
              6,648
              
              
              
              (13,213
              )
              
              
              (6,565
              )01-01-07
      to 03-31-07 change in fair value
              
              
              9,065
              
              
              
              5,956
              
              
              
              15,02104-01-07
      to 06-30-07 change in fair value
              
              
              49,060
              
              
              
              (10,668
              )
              
              
              38,39207-01-07
      to 09-30-07 change in fair value
              
              
              2,965
              
              
              
              4,536
              
              
              
              7,50110-01-07
      to 12-31-07 change in fair value
              
              
              25,580
              
              
              
              (1,274
              )
              
              
              24,30601-01-08
      to 03-31-08 change in fair value
              
              
              9,146
              
              
              
              (39,397
              )
              
              
              (30,251
              )04-01-08
      to 06-30-08 change in fair value
              
              
              6,110
              
              
              
              (20,468
              )
              
              
              (14,358
              )07-01-08
      to 09-30-08 change in fair value
              
              
              4,096
              
              
              
              6,706
              
              
              
              10,80210-01-08
      to 12-31-08 change in fair value
              
              
              4,214
              
              
              
              (1,411
              )
              
              
              2,803Conversions
      from inception to date
              
              
              (875,000
              )
              
              
              -
              
              
              
              (875,000
              )Fair
      value at December 31, 2008
              
              $
              164,668
              
              
              $
              48,872
              
              
              $
              213,540





For the
year ended December 31, 2008 and 2007, net derivative income was $61,753 and
$1,450, respectively.


50




ERF
WIRELESS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




Blanco
National Bank




In August
2007, the Company assumed a note from the purchase of certain assets from
Momentum Online Computer Services, Inc., that financed a 9.50% installment note
to a Blanco National bank, secured by operating equipment, inventory and
accounts receivable, payable in monthly installments of $3,913 including
interest and is guaranteed by a shareholder.




Robert
McClung, Momentum Online Computer Services, Inc.




On
October 17, 2007, the Company issued a note to Momentum Online Computer, Inc.,
totaling $250,000 that bear interest at 7.5% and are secured by all of the
capital stock issued and outstanding of a subsidiary of the Company, payable in
twelve quarterly payments of $23,476 plus interest.




George
Kemper, TSTAR Internet, Inc.




On
November 1, 2007, the Company issued a note to TSTAR, Inc., totaling $350,000
bearing interest at 7.5% and are secured by the equipment acquired, payable in
ten quarterly payments of $38,254 plus interest.




Shane
Griffiths, Crosswind, Inc.




On
January 11, 2008, the Company issued a note to Crosswind, Inc., totaling
$150,000 bearing interest at 7.5% and are secured by the equipment acquired,
payable in twelve quarterly payments of $13,911 plus interest.




Centramedia,
Inc.




On
December 31, 2008, the Company issued a note to Centramedia, Inc., totaling
$600,000 bearing interest at 7.5% and are secured by the equipment acquired,
payable in twelve quarterly payments of $56,342 plus interest.




Capital
Leases




Agility Lease Fund, LLCIncluded in property and equipment at December 31, 2008, is $1,850,414
capitalized equipment, net of amortization. The equipment and one of the
Company's bank accounts are the primary collateral securing the financing along
with a guarantee by the Company.




Banc Leasing Inc.,Included in
property and equipment at December 31 2008, is $610,900 capitalized equipment,
net of amortization. The equipment is the primary collateral securing the
financing.




The
following is a schedule by years of future minimum lease payments under capital
leases together with the present value of the net minimum lease payments as of
December 31, 2008(in thousands):


Year
      Ending  December 31,2009
                
                $
                1,1992010
                
                
                1,0162011
                
                
                4922012
                
                
                1342013
                
                
                128Thereafter
                
                
                138Total
      minimum lease payments
                
                
                3,107Less
      amount representing interest
                
                
                (665
                )Present
      value of net minimum lease payments
                
                
                2,442Current
      maturities of capital lease obligations
                
                
                (861
                )Long-term
      portion of capital lease obligations
                
                $
                1,581




51




ERF
WIRELESS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




NOTE
12 - UNCOMPLETED CONTRACTS




Costs,
estimated earnings and billings on uncompleted contracts for the twelve months
ended December 31, 2008 and December 31, 2007 are summarized as follows (in
thousands):




December
      31,
              
              
              December
      31,2008
              
              
              2007Costs
      incurred on uncompleted contracts
              
              $
              2,953
              
              
              $
              2,284Estimated
      profit
              
              
              656
              
              
              
              429Gross
      revenue
              
              
              3,609
              
              
              
              2,713Less:
      billings to date
              
              
              3,182
              
              
              
              2,303Costs
      and profit in excess of billings
              
              $
              427
              
              
              $
              410




Such amounts are included in the
accompanying balance sheets at December 31, 2008 and December 31, 2007 and are
summarized as follows (in thousands):




December
      31,
              
              
              December
      31,2008
              
              
              2007Cost
      and estimated earnings in excess of billings on uncompleted
      contracts
              
              $
              427
              
              
              $
              410Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
              
              
              -
              
              
              
              -$
              427
              
              
              $
              410




NOTE
13 - COMMITMENTS




Leases
and License Agreements




For the
twelve months ended December 31, 2008 and 2007, rental expenses of approximately
$642,000 and $413,000, respectively, were incurred. The Company accounts for
rent expense under leases that provide for escalating rentals over the related
lease term on a straight-line method. The Company occupies office and tower
facilities under several non-cancelable operating lease agreements expiring at
various dates through February 2018, and requiring payment of property taxes,
insurance, maintenance and utilities.




Future
minimum lease payments under non-cancelable operating leases at December 31,
2008 were as follows:





Period
      Ending December 31,
                
                Amount
      ($000)2009
                
                $
                6232010
                
                
                5842011
                
                
                3982012
                
                
                522013
                
                
                12Thereafter
                
                
                31Total
                
                $
                1,700




52




ERF
WIRELESS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




Employment
Agreements




Richard
R. Royall




Mr.
Royall’s employment agreement was executed in March 2008 and expires January
2011. During the term of his employment, Mr. Royall is entitled to the following
compensation: (i) base salary of $200,000 per year (ii) standard benefits that
are available to other Company executive officers and (iii) a stock grant of up
to 3,000,000 shares, 1,000,000 shares will be awarded when the Company achieves
positive EBITDA (as reported in an Exchange Act filing), 1,000,000 shares will
be awarded when the Company closes a $25 million financing and 1,000,000 shares
will be awarded when the Company lists on a national stock
exchange.




R.
Greg Smith




On July
1, 2008, the Company entered into an executive employment agreement with R. Greg
Smith, expiring December 31, 2010.  During the term of his employment, Mr.
Smith is entitled to (i) a base salary of $200,000 per year, (ii) standard
benefits that are available to other executive officers, and (iii) a stock grant
of up to 2,550,000 shares, as follows.  The ERF Wireless incentive targets
up to 1,300,000 shares of common stock: (1) 500,000 shares if the Company
achieves positive EBITDA; (ii) 500,000 shares upon cumulative funding of $25
million; and (3) 300,000 shares upon satisfaction of certain acquisition
thresholds. The ENS incentive targets up to 500,000 shares of common
stock:  (i) 300,000 shares upon achieving 2009 positive EBITDA; and (ii)
200,000 shares upon obtaining 2009 ENS contract values of $1,000,000. The WBS
incentive targets up to 750,000 shares of common stock:  (i) 250,000 shares
upon securing school district contracts within certain thresholds and (ii)
500,000 shares upon obtaining certain gross profit thresholds on these
contracts. In the event Mr. Smith employment agreement is terminated without
cause he is entitled to receive (i) the balance of this unpaid salary through
the term of the agreement, (ii) a one year extension for vesting of stock
grants, (iii) and the grant of an option to purchase 500,000 shares of Company
common stock at an exercise price equal to the lesser of $.50 a share or the
market price on the date of termination, provided that such option terminates on
May 31, 2013.




Mr. Smith
under a previous employment contract which expired in July 2008 received 63,828
shares of our Series A Preferred Stock for total consideration of $31,913.50. As
of December 31, 2007, Mr. Smith converted all of his Series A Convertible
Preferred Stock into 1,196,070 shares of the Company's common
stock.




As of
December 31, 2008 and 2007, Mr. Smith earned options to purchase 0 and 150,000
shares of common stock, respectively, for attainment of certain cumulative
revenue milestones set forth in his employment agreement. These options are at
an exercise price of $0.10 and expire on July 31, 2010. The income statement for
December 31, 2008 and 2007 includes a compensation charge of $0 and $56,793,
respectively, which charge is based on Black-Scholes option pricing
model.




NOTE
14 - RELATED PARTY




In March
2005, the Company entered into an annual professional services agreement with
Synchton Incorporated for financial and business support services. The agreement
requires Synchton to provide one or more consultants for a total of 100 hours
per month. This agreement is automatically renewable on each anniversary date
and can be terminated by the Company prior to the renewal date. The Company is
obligated to pay Synchton $12,000 per month in cash or shares of common stock.
The Company at its discretion may issue up to 50% of the monthly fee in common
stock at the market price on the date of issuance; provided that if Synchton
sells the stock within 30 days of issuance the Company is obligated to pay
Synchton any shortfall between the difference in the market price on the
issuance date and the market price on the sale date. Synchton's President is
Scott A. Cubley. For the period ended December 31, 2008 and 2007, total fees
incurred by the Company under the agreement were $121,000 and $101,000,
respectively.


53




ERF
WIRELESS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




Brian
Cubley, son of our chief executive officer, entered into an employment agreement
that expires December 31, 2010. During the term of his employment, Mr. Cubley is
entitled to the following compensation: (i) base salary of $110,000 per year;
(ii) standard benefits that are available to other Company executive officers;
and (iii) a stock grant of up to 1,925,000 shares as follows: up to 525,000
shares of common stock will be awarded when the Company achieves certain
incremental market capitalization, 1,125,000 shares will be awarded when the
Company attain certain incremental cumulative revenue, and 125,000 shares will
be awarded when the Company achieves certain incremental recurring revenue
streams. In the event Mr. Cubley’s employment agreement is terminated without
cause he is entitled to receive (i) the balance of this unpaid salary through
the term of the agreement, (ii) a one year extension for vesting of stock
grants, (iii) and the grant of an option to purchase of 50,000 shares of Company
common stock at an exercise price equal to the average closing price during the
six month period following the termination. As of December 31, 2008, Brian
Cubley has earned options to purchase a total 250,000 shares of common stock at
an average exercise price of $.52 and expire between July 31, 2009 and July 31,
2011.  During fiscal 2008, Mr. Cubley was paid $115,833 in cash and
shares of common stock for services rendered.




The
Company during the fourth quarter 2008 signed a debt conversion agreement to
convert the unsecured revolving credit facility which provides financing for
working capital requirements. The terms of the secured revolving credit facility
allow the Company to draw upon the $6.5 million facility as financing
requirements dictate and provide for quarterly interest payments at a 12% rate
per annum. The line of credit expires March 31, 2011 and can be prepaid without
penalty. The Company issued 2,000,000 shares of its Series A Preferred Stock for
the conversion of $3,000,000 in debt. Certain family related trusts are
participants in the Angus Capital revolving credit facility. H. Dean Cubley
holds the investment and voting power over certain of these family related
trusts while Scott Cubley and Brian Cubley, the adult sons of H. Dean Cubley,
have the investment and voting power over other of the remaining family
trusts.




NOTE
15 - INDUSTRY SEGMENTS




This
summary reflects the Company's current segments, as described
below.




Wireless
Bundled Services Division (WBS)




WBS
provides wireless broadband products and services to commercial and individual
customers throughout the wireless industry. The company is in the early stages
of building and acquiring a seamless wireless broadband network throughout North
America to serve private entities, cities, municipalities and the general
public. All sales from external customers are located within the United
States.




Wireless
Messaging Services Division (WMS)




WMS
principally provides wireless broadband system design and implementation,
manufactures paging equipment, repair and maintain paging infrastructure
equipment and supplies high-power infrastructure equipment to the wireless
messaging industry and owns and operates a wide-area messaging service. All
sales from external customers are located within the United States as well as
certain international locations.




Enterprise
Network Services (ENS)




ENS
provides product and service to operate an enterprise-class encrypted wireless
banking network business. ENS provides the CryptoVue System consisting of
software, site-based hardware devices and servers to perform network encryption;
contracts for the construction, operation, monitoring and maintenance of fixed
wireless networks for banking customers; trade names, equipment and software,
including the software architecture and design.


54


ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Oil
and Gas Division (O&G)




O&G
provides wireless connectivity to rural oil and gas locations primarily via
Mobile Broadband Trailers (MBT’s). O&G provides wireless broadband products
and services focusing primarily on commercial customers in the oil and gas
sector. The Company provides high speed bandwidth to rural North America to
serve the Oil and Gas sector. All sales from external customers are located
within the United States. The transactions in the O&G segment for the twelve
months December 31, 2008 and 2007 were not material. The O&G division is a
division of WBS.




For
      the twelve months ended December 31, 2008 (in thousands)WMS
              
              
              WBS
              
              
              ENS
              
              
              TotalRevenue
              
              $
              742
              
              
              $
              3,893
              
              
              $
              520
              
              
              $
              5,155Segment
      (loss) income
              
              
              (165
              )
              
              
              (2,031
              )
              
              
              (1,592
              )
              
              
              (3,788
              )Segment
      assets
              
              
              92
              
              
              
              7,081
              
              
              
              1,918
              
              
              
              9,091Capital
      expenditures
              
              
              14
              
              
              
              3,531
              
              
              
              855
              
              
              
              4,400Depreciation
      and amortization
              
              
              15
              
              
              
              1,579
              
              
              
              113
              
              
              
              1,707For
      the twelve months ended December 31, 2007 (in thousands)WMS
              
              
              WBS
              
              
              ENS
              
              
              TotalRevenue
              
              $
              2,432
              
              
              $
              1,873
              
              
              $
              1,264
              
              
              $
              5,569Segment
      loss
              
              
              (75
              )
              
              
              (729
              )
              
              
              (1,368
              )
              
              
              (2,172
              )Segment
      assets
              
              
              223
              
              
              
              4,799
              
              
              
              1,054
              
              
              
              6,076Capital
      expenditures
              
              
              1
              
              
              
              1,847
              
              
              
              389
              
              
              
              2,237Depreciation
      and amortization
              
              
              14
              
              
              
              286
              
              
              
              14
              
              
              
              314





Twelve
      Months EndedReconciliation
      of Segment Loss from Operations to Net Loss
              
              December
      31, 2008
              
              
              December
      31, 2007Total
      segment loss from operations
              
              $
              (3,788
              )
              
              $
              (2,172
              )Total
      corporate overhead including other, net
              
              
              (4,374
              )
              
              
              (4,895
              )Net
      loss
              
              $
              (8,162
              )
              
              $
              (7,067
              )





Reconciliation
      of Segment Assets to Total Assets
              
              December
      31, 2008
              
              
              December
      31, 2007Total
      segment assets
              
              $
              9,091
              
              
              $
              6,076Total
      corporate assets
              
              
              532
              
              
              
              2,290Consolidated  assets
              
              $
              9,623
              
              
              $
              8,366




The
accounting policies of the reportable segments are the same as those described
in the section titled Basis of Accounting. The Company evaluates the performance
of its operating segments based on income before net interest expense, income
taxes, depreciation and amortization expense, accounting changes and
non-recurring items.




At
December 31, 2008 one customer accounts for $272,000 of ENS Division revenues
and one customer accounts for $550,000 of Wireless Messaging Services Division
revenues. One customer accounts for $679,000 of Enterprise Network Services
Division revenues and one customer accounts for $2,033,000 of WMS Division
revenues at December 31, 2007.


55


ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE
16 - EMPLOYEE STOCK OPTIONS




In March
2007 the Board of Directors adopted a Non-Qualified Stock Option Plan under
which an additional 10,000,000 shares were reserved for issuance. In April 2008,
the Board of directors adopted a Non-Qualified Stock Option Plan whereby an
additional 15,000,000 shares were reserved for issuance. There were 95,742
Series A Preferred Stock convertible to 1,788,111 common stock shares granted to
certain officers and employees under employment agreements. As of December 31,
2008, 240,346 common stock shares remain to be converted from Series A preferred
stock. Also the Company has granted to certain officers and employees 500,000
stock options which are currently exercisable. As of December 31, 2008, under
all Non-Qualified Stock Option Plans, 17,981,459 shares were issued and
exercised by certain employees and consultants for services
rendered.




The
weighted average fair value of the individual options granted during the twelve
months ended December 31, 2008, is estimated at $.57 on the date of grant. The
fair values were determined using a Black-Scholes option-pricing model with the
following assumptions:




6/30/2007
              
              
              9/30/2008Assumptions
              
              Options
              
              
              OptionsDividend
      yield
              
              
              0.00%
              
              
              
              0.00%Risk-free
      rate for term
              
              
              4.89%
              
              
              
              2.62%Volatility
              
              
              116.00%
              
              
              
              84.00%Remaining
      life
              
              
              0.83
              
              
              
              2.33




Stock
Plan activity was as follows for the twelve months ended December 31,
2008:




2007
              
              
              2008Plan
              
              
              PlanShares
      Initially Reserved
              
              
              10,000,000
              
              
              
              15,000,000Beginning
      January 01, 2008
              
              
              2,274,753
              
              
              
              15,000,000Issued
              
              
              2,274,753
              
              
              
              2,981,459End
      of Year December 31, 2008
              
              
              -
              
              
              
              12,018,541Exercisable
      December 31, 2008
              
              
              -
              
              
              
              12,018,541




56


ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Option
activity was as follows for the twelve months ended December 31, 2008, and
December 31, 2007:




2008Shares
                  
                  Weighted-Average
      Exercise PriceOutstanding
      at beginning of year
                  3,302,000
                  
                  $
                  2.98Granted
                  125,000
                  
                  
                  0.43Assumed
      through acquisitions
                  -
                  
                  
                  -Exercised
                  -
                  
                  
                  -Forfeited/cancelled
                  (2,927,000)
                  
                  
                  3.28Outstanding
      throughout the period
                  500,000
                  
                  $
                  0.57Exercisable
      at December 31, 2008
                  500,000
                  
                  $
                  0.57   2007Shares
                  
                  
                  Weighted-Average
      Exercise PriceOutstanding
      at beginning of year
                  3,302,000
                  
                  $
                  2.98Granted
                  -
                  
                  
                  -Assumed
      through acquisitions
                  -
                  
                  
                  -Exercised
                  -
                  
                  
                  -Forfeited/cancelled
                  -
                  
                  
                  -Outstanding
      throughout the period
                  3,302,000
                  
                  $
                  2.98Exercisable
      at December 31, 2007
                  375,000
                  
                  $
                  0.61




Information
about options outstanding was as follows at December 31, 2008:




Remaining
              
              
              
              
              
              AverageClass
              
              
              Number
              
              
              Average
      Contractual
              
              
              Number
              
              
              ExerciseExercise
      Price
              
              
              Outstanding
              
              
              Life
      in Years
              
              
              Exercisable
              
              
              Price$
              0.10
              
              
              
              225,000
              
              
              
              0.58
              
              
              
              225,000
              
              
              $
              0.10$
              1.38
              
              
              
              150,000
              
              
              
              0.58
              
              
              
              150,000
              
              
              $
              1.38$
              0.43
              
              
              
              125,000
              
              
              
              2.08
              
              
              
              125,000
              
              
              $
              0.43500,000
              
              
              
              0.88
              
              
              
              500,000
              
              
              $
              0.57




57




ERF
WIRELESS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE
17 – BUSINESS COMBINATIONS





The
following table summarizes significant acquisitions completed during the year
ended December 31, 2008 and 2007 (in thousands):





December
      31, 2008Purchase
              
              
              
              
              
              AmortizablePrice
              
              
              Goodwill
              
              
              IntangiblesCrosswind
              
              $
              650,000
              
              
              $
              176
              
              
              $
              206Centramedia
              
              $
              2,000,000
              
              
              $
              -
              
              
              $
              -





December
      31, 2007Purchase
              
              
              
              
              
              AmortizablePrice
              
              
              Goodwill
              
              
              IntangiblesMomentum
              
              $
              1,200,000
              
              
              $
              225
              
              
              $
              700TSTAR
              
              $
              1,100,000
              
              
              $
              35
              
              
              $
              826




Centramedia,
Inc., Acquisition




Purchase
Price




On
December 31, 2008, the Company completed the purchase of substantially all the
assets from Centramedia, Inc. The assets purchased include substantially all of
the assets associated with the Internet operations of Centramedia including the
current customer base, inventory, equipment, contract rights, vehicles, Internet
address space, general intangibles, certain real property and wireless broadband
equipment infrastructure. The acquisition will increase the Company's footprint
geographically area covering certain cities and counties in the Texas Panhandle,
this will lead to additional synergy with expansion of the WiNet and US-BankNet
System and expand our Oil and Gas coverage. At the time of the transaction,
there were no material relationships between the seller and the Company or any
of its affiliates, or any director or officer of the Company, or any associate
of any such officer or director. The Company paid $2,000,000 in cash, notes and
securities and assumed $61,000 in current liabilities.




The
purchase price allocation is as follows (in thousands):




Cash
              
              $
              1Accounts
      receivable
              
              
              40Property
      and equipment
              
              
              2,020Deferred
      revenue
              
              
              (61
              )Total
      adjusted purchase price
              
              $
              2,000




58




ERF
WIRELESS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Crosswind
Enterprises, Inc., Acquisition




Purchase
Price




On
January 11, 2008, the Company completed the purchase of substantially all assets
from Crosswind Enterprises Inc. Under the asset purchase agreement, the Company
acquired the wireless internet service provider, which includes all of the
current customers, equipment and network infrastructure equipment. The
acquisition will also increase the Company's footprint in west Texas and Eastern
New Mexico. This will lead to additional synergy with expansion of the WiNet and
US-BankNet System and expand our Oil and Gas coverage. At the time of the
transaction, there were no material relationships between the seller and the
Company or any of its affiliates, or any director or officer of the Company, or
any associate of any such officer or director. The Company paid $650,000 in
cash, notes and securities and assumed $3,000 in current liabilities and assumed
$71,000 in note payables.




The
purchase price allocation is as follows (in thousands):




Accounts
      receivable
              
              $
              2Property
      and equipment
              
              
              340Goodwill
              
              
              176Identifiable
      intangible assets
              
              
              206Accounts
      payable and accrued expenses
              
              
              (3
              )Note
      payable
              
              
              (71
              )Total
      adjusted purchase price
              
              $
              650




The
amount allocated to identifiable intangible assets was determined by the
company's management. Other intangibles assets are being amortized over their
useful life in accordance with the guidance contained in the Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standard
No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets".




CrosswindGoodwill
              
              $
              176Non-compete
      agreement
              
              
              50Customer
      relationships
              
              
              156Total
      identifiable intangible assets
              
              $
              382





Momentum
Online Computer Services, Inc., Acquisition




Purchase Price




On
October 18, 2007, the Company completed the purchase of assets from Momentum
Online Computer Services Inc. under the Asset Purchase Agreement dated October
17, 2007. Under the asset purchase agreement, the Company acquired the wireless
internet service provider, which includes all of the current customers and
network infrastructure equipment of and approximately 33 tower locations. The
acquisition will also increase the Company's footprint in Central Texas and will
lead to expansion of the Central Texas WiNet and US-BankNet System reaching 36
regional and community bank charters aggregating 462 branch locations. At the
time of the transaction, there were no material relationships between the seller
and the Company or any of its affiliates, or any director or officer of the
Company, or any associate of any such officer or director. The Company paid
$1,200,000 in cash, notes and securities and assumed $148,000 in current
liabilities and $503,000 in note payables.


59




ERF
WIRELESS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




The
purchase price allocation is as follows (in thousands):





Cash
              
              $
              21Accounts
      receivable
              
              
              54Inventory
              
              
              8Deposits
              
              
              46Property
      and equipment
              
              
              797Goodwill
              
              
              225Identifiable
      intangible assets
              
              
              700Accounts
      payable and accrued expenses
              
              
              (101
              )Deferred
      revenue
              
              
              (47
              )Capital
      leases
              
              
              (376
              )Note
      payable
              
              
              (127
              )Total
      adjusted purchase price
              
              $
              1,200




The
amount allocated to identifiable intangible assets was determined by the
company's management. Other intangibles assets are being amortized over their
useful life in accordance with the guidance contained in the Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standard
No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets".




Goodwill
                      
                      $
                      225Non-compete
      agreement
                      
                      
                      85Customer
      relationships
                      
                      
                      615Total
      identifiable intangible assets
                      
                      $
                      925




TSTAR
Internet, Inc., Acquisition




Purchase
Price




On
October 31, 2007, the Company completed the purchase of assets from TSTAR
Internet Inc. Under the asset purchase agreement, the Company acquired the
wireless internet service provider, which includes all of the current customers,
network infrastructure equipment and tower leases. The acquisition will also
enhance and increase the Company's footprint in central Texas covering the Llano
and Burnet counties. At the time of the transaction, there were no material
relationships between the seller and the Company or any of its affiliates, or
any director or officer of the Company, or any associate of any such officer or
director. The Company paid $1,100,000 in cash, notes and securities and assumed
$17,000 in current liabilities and $10,000 in note payables.




The
purchase price allocation is as follows (in thousands):




Cash
                      
                      $
                      13Property
      and equipment FMV
                      
                      
                      253Goodwill
                      
                      
                      35Identifiable
      intangible assets
                      
                      
                      826Accounts
      payable and accrued expenses
                      
                      
                      (17
                      )Note
      payable
                      
                      
                      (10
                      )Total
      adjusted purchase price
                      
                      $
                      1,100






60


ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


The
amount allocated to identifiable intangible assets was determined by the
company's management. Other intangibles assets are being amortized over their
useful life in accordance with the guidance contained in the Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standard
No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets".


Goodwill
                      
                      $
                      35Non-compete
      agreement
                      
                      
                      90Customer
      relationships
                      
                      
                      736Total
      identifiable intangible assets
                      
                      $
                      861
  Proforma





The
results of operations for Centramedia and Crosswind have been included in the
Company’s consolidated statements since the completion of the acquisitions
during the year ended December 31, 2008. Momentum and TSTAR have been
included in the Company’s consolidated statements of operations since the
completion of the acquisitions during the year ended December 31, 2007. The
following unaudited pro forma financial information presents the combined
results of the Company and the 2008 acquisitions as if the acquisitions had
occurred at the beginning 2008 and 2007 for the respective
acquisitions (in thousands, except per share amounts):





Unaudited
Proforma





Year
      Ended
              
              
              Year
      EndedDecember
      31,
              
              
              December
      31,2008
              
              
              2007Net
      Revenue
              
              $
              6,426
              
              
              $
              7,363Net
      income (loss)
              
              $
              (8,943
              )
              
              $
              (6,995
              )Net
      income (loss) available to common shareholder
              
              $
              (8,943
              )
              
              $
              (6,995
              )Net
      income (loss) per share-basic
              
              $
              (0.11
              )
              
              $
              (0.17
              )Net
      income (loss) per share-diluted
              
              $
              (0.11
              )
              
              $
              (0.17
              )




The above
unaudited pro forma financial information includes adjustments for depreciation
and amortization of identifiable intangible assets.




NOTE
19 - SUBSEQUENT EVENTS




During
the first quarter 2009, through March 13, 2009 the Company issued 1,673,542
shares for services and liabilities, issued 512,317 shares for debt
financing, issued 4,166,041 shares for equity financing and issued
1,529,799 shares for conversion of preferred stock to common
stock.




61


ITEM
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE





None.





ITEM
9A.  CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures




We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Our disclosure controls and procedures were
designed to provide reasonable assurance that the controls and procedures would
meet their objectives.




As
required by SEC Rule 13a-15(b), 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 of the end of
the period covered by this report. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance level.




Management’s
Annual Report on Internal Control over Financial Reporting





Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and
effected by our 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, and includes those policies and
procedures that:




(1) 
Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets;




(2) 
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 authorization of our management and
directors; and





(3) 
Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, use or disposition of our assets that could have a
material effect on the financial statements.




Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk. Management is responsible
for establishing and maintaining adequate internal control over financial
reporting for the Company.




Management
has used the framework set forth in the report entitled Internal Control-Integrated
Frameworkpublished by the Committee of Sponsoring Organizations of the
Treadway Commission, known as COSO, to evaluate the effectiveness of our
internal control over financial reporting. Based on this assessment, management
has concluded that our internal control over financial reporting was effective
as of December 31, 2008.


62


This
Annual Report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Our internal control over financial reporting was not subject to
attestation by our independent registered public accounting firm pursuant to
temporary rules of the SEC that permit us to provide only management’s report in
this Annual Report.




There has
been no change in our internal controls over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.





ITEM 9B.  OTHER
INFORMATION





None.




63


PART
III





ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATEGOVERNANCE





Executive
Officers and Directors





Our
directors and executive officers and their ages as of March 10, 2009, are shown
below.





Name
              Age
              PositionH.
      Dean Cubley
              67
              Chairman
      of the Board of Directors and chief executive officerRichard
      R. Royall
              62
              Director
      and chief financial officerR.
      Greg Smith
              50
              Director
      and executive vice presidentMichael
      R. Jones
              54
              Director
      and chief technical officerBartus
      H. Batson
              66
              Director





Dr. H. Dean Cubley has served
as chairman of ERF Wireless since May 2004 as chief executive officer since
October 2006. Dr. Cubley has served as a director of Eagle Broadband, Inc. from
March 1996 to September 2006 Dr. Cubley has been involved in forming, funding
and opening wireless enterprises for over 30 years.





Richard R. Royall has served
as chief financial officer since March 2008. Mr. Royall is a certified public
accountant and has been engaged in the private practice of accounting since 1972
with concentration of expertise in accounting, mergers, acquisitions and SEC
registrations and filings including implementation of SOX 404
compliance.





Mr. R. Greg Smith has served
as executive vice president of ERF Wireless since July 2008, as chief financial
officer from August 2004 to March 2008, as the chief executive officer from
August 2004 to October 2006, and as a director since August 2004. Mr. Smith's
professional background includes 25 years of executive management
experience.





Mr. Michael R. Jones has
served as a director of ERF Wireless since February 2008.  In March
2009 Mr. Jones became chief technology officer. Mr. Jones’s professional
background includes 30 years of executive management and technology
innovation.  Prior to joining ERF Wireless as Chief Technology
officer, Mr. Jones was an executive with Broadwing for over five years. Mr.
Jones was most recently employed by Level3, after its acquisition of Broadwing,
where he was senior vice president and chief technology officer.  His
extensive successful telecommunications experience includes network design and
development, major systems implementation, and network operations with companies
such as Broadwing, MCI, Qwest and GTE.





Dr. Bartus H. Batson has
served as a director of ERF Wireless since January 2005. Dr. Batson has served
as president, chief executive officer and chairman of X-Analog Communications,
Inc., since March 1992. Dr. Batson has over 40 years of experience in all fields
of telecommunications with a major focus in satellite communications and
wireless systems.





Key
Employees





John
Nagel is currently the managing officer and primary engineer of our oil and gas
wireless operations. These operations are currently in New Mexico, Texas and
Louisiana and is be expanding to international locations. Prior to this
position, Mr. Nagel coordinated our construction and deployment of wireless
infrastructure for our banking customers as well as the internal expansion of
the network operating center and the acquired networks.  Mr. Nagel has
serve as an employee of the Company since May 2004.





Robert
McClung has served a executive officer since October 2007 where he is
responsible for overseeing the operations of WBS. ERF Wireless acquired his
company, Momentum Online Service, in October 2007, where he served as owner
operator for the five years prior to our acquisition.


64


Independence
of Directors





Other
than Dr. Batson, none of the directors are independent as defined by Rule 10A-3
of the Exchange Act. The board has established an audit committee and
compensation committee, both of which are comprised of Dr. Cubley and Dr.
Batson. The board serves as the nomination committee as it believes that the
board, due to the size, can appropriately participate in the nominee
identification and selection process. The board has determined that Dr. Cubley
qualifies as an audit committee financial expert as defined in Item 407 of
Regulation S-K and that he is not independent.





Section
16(A) Beneficial Ownership Reporting Compliance





Section
16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own beneficially more than ten percent of the common
stock of the Company, to file reports of ownership and changes of ownership with
the Securities and Exchange Commission. Based solely on the reports received by
the Company and on written representations from certain reporting persons, the
Company believes that the directors, executive officers, and greater than ten
percent beneficial owners have complied with all applicable filing
requirements.





Code
of Ethics





The
Company has not established a Code of Business Conduct and Ethics. We intend to
adopt a Code of Business Conduct and Ethics this fiscal year and will report the
adoption of a Code of Business Conduct and Ethics on Form 8-K promptly
thereafter.





ITEM
11.  EXECUTIVE COMPENSATION





Compensation
Discussion and Analysis





Objectives
of Our Executive Compensation Program





The
compensation committee of our Board administers our executive compensation
program.  The general philosophy of our executive compensation program
is to align executive compensation with the Company’s business objectives and
the long-term interests of our stockholders. To that end, the compensation
committee believes executive compensation packages provided by the Company to
its executives, including the named executive officers, should include both cash
and stock-based compensation that reward performance as measured against
established goals. In addition, the Company strives to provide compensation that
is competitive with other peer group companies and that will allow us to
attract, motivate, and retain qualified executives with superior talent and
abilities.  Our executive compensation is designed to reward
achievement of the Company’s corporate goals.





The
Role of the Compensation Committee





The
compensation committee has the primary authority to determine the Company’s
compensation philosophy and to establish compensation for the Company’s
executive officers. The compensation committee oversees the Company’s
compensation and benefit plans and policies; administers the Company’s stock
option plans; reviews the compensation components provided to officers,
employees, and consultants; grants equity compensation to our officers,
employees, and consultants; and reviews and makes recommendations to the Board
regarding all forms of compensation to be provided to the members of the
Board.





The
compensation committee generally sets the initial compensation of each
executive. The compensation committee annually reviews and in some cases adjusts
compensation for executives. Although, the chief executive officer provides
recommendations to the compensation committee regarding the compensation of the
other executive officers, the compensation committee has full authority over all
compensation matters relating to executive officers.


65


Elements
of Executive Compensation





Although
the compensation committee has not adopted any formal guidelines for allocating
total compensation between equity compensation and cash compensation, it strives
to maintain a strong link between executive incentives and the creation of
stockholder value.  Executive compensation consists of the following
elements:





Base Salary.Base
salaries for our executives are generally established based on the scope of
their responsibilities, taking into account competitive market compensation paid
by other companies for similar positions and recognizing cost of living
considerations. Prior to making its recommendations and determinations, the
compensation committee reviews each executive’s:




·
            historical
      pay levels;


·
            past
      performance; and


·
            expected
      future contributions.





The
compensation committee does not use any particular indices or formulae to arrive
at each executive’s recommended pay level.





Equity Awards.We
also use long-term incentives primarily in the form of stock grants. Employees
and executive officers generally receive stock grants at the commencement of
employment, the majority of which, if not all, vest upon the attainment of
corporate goals. We believe that stock grants are instrumental in aligning the
long-term interests of the Company’s employees and executive officers with those
of the stockholders.





Executive
Officer Compensation





Summary
Compensation Table





The
following tables set forth certain information regarding our chief executive
officer, chief financial officer, and three of our most highly-compensated
executive officers whose total annual salary and bonus for the fiscal year ended
December 31, 2008 exceeded $100,000.





Name
      and Principal Position
                Year
                Salary
      and
                  Consulting
                  Payments
      ($)
                Bonus
      ($)
                Stock
      Awards ($)
                All
      Other
                  Compensation
      ($)
                Total
      ($)H.
      Dean Cubley,
                2008
                135,000
                --
                --
                15,500
                150,500chief
      executive officer
                2007
                157,995
                --
                --
                --
                157,995Richard
      R. Royall,
                2008
                203,501
                --
                --
                --
                203,501chief
      financial officer
                2007
                --
                --
                --
                --
                --R.
      Greg Smith,
                2008
                190,502
                50,346
                --
                7,500
                248,348executive
      vice president
                2007
                192,775
                --
                --
                --
                192,775Robert
      McClung,
                2008
                150,000
                --
                --
                --
                150,000key
      employee
                2007
                25,000
                --
                --
                --
                25,000John
      Nagel,
                2008
                110,018
                12,705
                --
                --
                122,723key
      employee
                2007
                110,000
                --
                --
                --
                110,000




66


Outstanding Equity Awards at December 31,
2008





The table
below sets forth information with respect to our named executive officers
regarding the value of equity compensation as of December 31, 2008.





Option
      Awards
                
                
                Stock
      AwardsName
                Number
      of Securities Underlying Unexercised Options (#)
    Exercisable
                Number
      of Securities Underlying Unexercised Options (#)
    Unexercisable
                Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options (#)
                Option
      Exercised Price ($)
                Option
      Expiration Date
                Number
      of Shares or Units of Stock That Have Not Vested
                Market
      Value of Shares or Units of Stock That Have Not Vested (3)
                Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      That Have Not Vested
                Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      That Have Not Vested ($)H.
      Dean Cubley
                --
                --
                --
                --
                --
                --
                --
                --
                --Richard
      R. Royall
                --
                --
                --
                --
                --
                3,000,000
      (1)
                930,000
                --
                --R.
      Greg Smith
                250,000
                --
                --
                0.61
                07/31/10
                2,550,000
      (2)
                790,500
                --
                --Robert
      McClung
                --
                --
                --
                --
                --
                --
                --
                --
                --John
      Nagel
                --
                --
                --
                --
                --
                --
                --
                --
                --


_______________


(1) Mr.
Royall is entitled to receive up to 3,000,000 shares of common stock as follows:
(i) 1,000,000 shares will be awarded when the Company achieves positive EBITDA
(as reported in an Exchange Act filing); (ii) 1,000,000 shares will be awarded
when the Company closes a $25 million financing; and (iii) 1,000,000 shares will
be awarded when the Company lists on a national stock exchange.


(2) Mr.
Smith is entitled to receive a stock grant of up to 2,550,000 shares, as
follows.  The ERF Wireless incentive targets up to 1,300,000 shares of
common stock: (1) 500,000 shares if the Company achieves positive EBITDA; (ii)
500,000 shares upon cumulative funding of $25 million; and (3) 300,000 shares
upon satisfaction of certain acquisition thresholds. The ENS incentive targets
up to 500,000 shares of common stock:  (i) 300,000 shares upon achieving
2009 positive EBITDA; and (ii) 200,000 shares upon obtaining 2009 ENS contract
values of $1,000,000. The WBS incentive targets up to 750,000 shares of common
stock:  (i) 250,000 shares upon securing school district contracts within
certain thresholds and (ii) 500,000 shares upon obtaining certain gross profit
thresholds on these contracts.


(3) Based
on closing price of common stock on December 31, 2008.





Employment
and Consulting Agreements





We have
entered into employment and consulting agreements with the following named
executive officers:





Richard Royall. Mr. Royall’s
employment agreement expires January 2011. During the term of his employment,
Mr. Royall is entitled to (i) base salary of $200,000 per year, (ii) standard
benefits that are available to other Company executive officers, and (iii) a
stock grant of up to 3,000,000 shares.







R. Greg Smith.  On
July 1, 2008, the Company entered into an executive employment agreement with R.
Greg Smith, expiring December 31, 2010.  During the term of his employment,
Mr. Smith is entitled to (i) a base salary of $200,000 per year, (ii) standard
benefits that are available to other executive officers, and (iii) a stock grant
of up to 2,550,000 shares, as follows.  The ERF Wireless incentive targets
up to 1,300,000 shares of common stock: (1) 500,000 shares if the Company
achieves positive EBITDA; (ii) 500,000 shares upon cumulative funding of $25
million; and (3) 300,000 shares upon satisfaction of certain acquisition
thresholds. The ENS incentive targets up to 500,000 shares of common
stock:  (i) 300,000 shares upon achieving 2009 positive EBITDA; and (ii)
200,000 shares upon obtaining 2009 ENS contract values of $1,000,000. The WBS
incentive targets up to 750,000 shares of common stock:  (i) 250,000 shares
upon securing school district contracts within certain thresholds and (ii)
500,000 shares upon obtaining certain gross profit thresholds on these
contracts. In the event Mr. Smith employment agreement is terminated without
cause he is entitled to receive (i) the balance of this unpaid salary through
the term of the agreement, (ii) a one year extension for vesting of stock
grants, (iii) and the grant of an option to purchase 500,000 shares of Company
common stock at an exercise price equal to the lesser of $.50 a share or the
market price on the date of termination, provided that such option terminates on
May 31, 2013. Mr. Smith under a previous employment contract which expired in
July 2008 received 63,828 shares of our Series A Preferred Stock for total
consideration of $31,913.50. As of December 31, 2007, Mr. Smith converted all of
his Series A Convertible Preferred Stock into 1,196,070 shares of the Company's
common stock.


67


Director Compensation





Set forth
below is information regarding compensation paid to each director during 2008.
Additionally, we reimburse our directors for travel and lodging expenses in
connection with their attendance at board meetings.





Name
                Fees
      Earned
                  or
      Paid
                  in
      Cash
                  ($)
                Stock
                  Awards
                  ($)
                Option
                  Awards
                  ($)
                Non-Equity
                  Incentive
      Plan Compensation
                  ($)
                Change
      in
                  Pension
      Value
                  and
      Nonqualified
                  DeferredCompensation
      Earnings
                  ($)
                All
      Other Compensation
                  ($)
                Total
                  ($)H.
      Dean Cubley
                15,500
                -
                -
                -
                -
                -
                15,500R.
      Greg Smith
                7,500
                -
                -
                -
                -
                -
                7,500Richard
      R. Royall
                -
                -
                -
                -
                -
                -
                -Bartus
      H. Batson
                11,500
                -
                -
                -
                -
                -
                11,500Michael
      Jones
                -
                -
                -
                -
                -
                -
                -




ITEM
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS





As of
March 4, 2009, 108,192,481 shares of common stock were outstanding and 4,085,514
shares of Series A Preferred Stock were outstanding. The following table sets
forth, as of such date, information with respect to shares beneficially owned
by:




·
            each
      person who is known by us to be the beneficial owner of more than 5% of
      our outstanding shares of common
stock;




·
            each
      of our directors;




·
            each
      of our named executive officers; and all of our directors and executive
      officers as a group.





Beneficial
ownership has been determined in accordance with Rule 13d-3 of the Exchange Act.
Under this rule, shares may be deemed to be beneficially owned by more than one
person (if, for example, persons share the power to vote or the power to dispose
of the shares). In addition, shares are deemed to be beneficially owned by a
person if the person has the right to acquire shares (for example, upon exercise
of an option) within 60 days of the date of this table. In computing the
percentage ownership of any person, the amount of shares includes the amount of
shares beneficially owned by the person by reason of these acquisition rights.
As a result, the percentage of outstanding shares of any person does not
necessarily reflect the person's actual voting power.


68


To our
knowledge, except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them. Unless otherwise indicated, the business address of
the individuals listed is 2911 South Shore Blvd., Suite 100, League City, Texas
77573.




SHARES
      OF
                      COMMON
      STOCK BENEFICIALLY
                      OWNED  (1)
                    
                    SHARES
      OF SERIES
                      A PREFERRED
      STOCK
                      BENEFICIALLY OWNED
                    
                    TOTAL
      PERCENTAGE OF VOTING POWER  (2)NAME
      AND ADDRESS OF
                      BENEFICIAL
      OWNER
                    
                    NUMBER
                    
                    %
                    
                    NUMBER
                    
                    %
                    
                    NUMBER
                    %Frances
      Cubley  (3)
                    
                    10,252,270
                    (4)
                    10.06%
                    
                    3,871,048
                    (5)
                    95%
                    
                    87,673,230
                    47.75%STJV
      Trust
                    
                    6,556,151
                    
                    6.43%
                    
                    2,468,208
                    
                    60%
                    
                    55,920,311
                    30.46%Pauline
      Trust
                    
                    541,783
                    
                    0.53%
                    
                    300,275
                    
                    7%
                    
                    6,547,283
                    3.57%Carson
      Family Trust
                    
                    1,485,174
                    
                    1.46%
                    
                    269,124
                    
                    7%
                    
                    6,867,654
                    3.74%Leopard
      Family Trust
                    
                    560,459
                    
                    0.55%
                    
                    266,304
                    
                    7%
                    
                    5,886,539
                    3.21%Jauquine
      Trust
                    
                    535,171
                    
                    0.53%
                    
                    109,131
                    
                    3%
                    
                    2,717,791
                    1.48%Systom
      Trust
                    
                    573,532
                    
                    0.56%
                    
                    458,006
                    
                    11%
                    
                    9,733,652
                    5.30%R.
      Greg Smith
                    
                    2,064,273
                    (6)
                    2.03%
                    
                    -
                    
                    0%
                    
                    2,064,273
                    1.12%Dr.
      H. Dean Cubley
                    
                    560,300
                    
                    0.55%
                    
                    -
                    
                    0%
                    
                    560,300
                    0.31%Richard
      R. Royall
                    
                    372,186
                    (7)
                    0.37%
                    
                    -
                    
                    0%
                    
                    372,186
                    0.20%Dr
      Bartus H. Batson
                    
                    142,997
                    
                    0.14%
                    
                    -
                    
                    0%
                    
                    142,997
                    0.08%Mike
      Jones
                    
                    184,101
                    
                    0.18%
                    
                    -
                    
                    0%
                    
                    184,101
                    0.10%Robert
      McClung
                    
                    791,607
                    
                    0.78%
                    
                    -
                    
                    0%
                    
                    791,607
                    0.43%John
      Nagel
                    
                    763,663
                    
                    0.75%
                    
                    -
                    
                    0%
                    
                    763,663
                    0.42%All
      Executives Officers and Directors as a group
                    
                    4,879,127
                    
                    4.79%
                    
                    -
                    
                    0%
                    
                    4,879,127
                    2.66%(4
      persons)





(1) This column does not include
the shares of common stock issuable upon conversion of the Series A Preferred
Stock.


(2) This
column includes the Series A Preferred Stock right to 20 votes on all matters in
which the common stockholders and preferred stockholders vote
together.


(3) Dr.
H. Dean Cubley has the sole investment and voting power for STJV Trust, Pauline
Trust, Carson Trust, Leopard Family Trust, Jauquine Trust and Systom Trust (the
"Frances Cubley Trusts").


(4)
Includes 10,252,270 shares owned by the Francis Cubley Trusts.


(5)
Includes 3,871,048 shares of Series A Preferred Stock held by the Francis Cubley
Trusts.


(6)
Includes (i) 1,811,606 shares held by Lariat Financial, Inc., a corporation
controlled by Mr. Smith and (ii) 250,000 exercisable upon an option.


(7)
Includes 372,186 shares owned by Mr. Royall.





ITEM 13.  CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





The
Company has entered into a professional services agreement with Synchton
Incorporated for financial and business support services. The agreement requires
Synchton to provide one or more consultants for a total of 100 hours per month.
This agreement is automatically renewable on each anniversary date and can be
terminated by the Company prior to the renewal date. The Company is obligated to
pay Synchton $12,000 per month in cash or shares of common stock. The Company,
in its discretion, may issue up to 50% of the monthly fee in common stock at the
market price on the date of issuance. Synchton's President is Scott A. Cubley,
the son of our chief executive officer.  For the period ended December
31, 2008 and 2007, total fees incurred by the Company under the agreement were
$121,000 and $101,000, respectively.





Brian
Cubley, son of our chief executive officer, entered into an employment agreement
that expires December 31, 2010. During the term of his employment, Mr. Cubley is
entitled to the following compensation: (i) base salary of $110,000 per year;
(ii) standard benefits that are available to other Company executive officers;
and (iii) a stock grant of up to 1,925,000 shares as follows: up to 525,000
shares of common stock will be awarded when the Company achieves certain
incremental market capitalization, 1,125,000 shares will be awarded when the
Company attain certain incremental cumulative revenue, and 125,000 shares will
be awarded when the Company achieves certain incremental recurring revenue
streams. In the event Mr. Cubley’s employment agreement is terminated without
cause he is entitled to receive (i) the balance of this unpaid salary through
the term of the agreement, (ii) a one year extension for vesting of stock
grants, (iii) and the grant of an option to purchase150,000 shares of Company
common stock at an exercise price equal to the average closing price during the
six month period following the termination. As of December 31, 2008, Brian
Cubley has earned options to purchase a total 250,000 shares of common stock at
an average exercise price of $.52 and expire between July 31, 2009 and July 31,
2011.  During fiscal 2008, Mr. Cubley was paid $115,833 in cash and
shares of common stock for services rendered.


69


The
Company during the fourth quarter 2008 signed a debt conversion agreement to
convert the unsecured revolving credit facility which provides financing for
working capital requirements. The terms of the secured revolving credit facility
allow the Company to draw upon the $6.5 million facility as financing
requirements dictate and provide for quarterly interest payments at a 12% rate
per annum. The line of credit expires March 31, 2011 and can be prepaid without
penalty. The Company issued 2,000,000 shares of its Series A Preferred Stock
(currently convertible into 37,352,694 shares of common stock) for the
conversion of $3,000,000 in debt. As additional consideration for the
conversion, when the number of shares of outstanding common stock equals or
exceeds 120,000 million shares, the Company agreed to amend the Series A
convertible preferred stock designation to increase the voting rights of each
preferred share from 20 votes to 50 votes on all matters in which the common
stock holders and preferred stock holders vote together. Certain Cubley family
related trusts are participants in the Angus Capital revolving credit facility.
H. Dean Cubley holds the investment and voting power over certain of these
family related trusts while Scott Cubley and Brian Cubley, the adult sons of H.
Dean Cubley, have the investment and voting power over the other remaining
family trusts.





ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





General





During
the fiscal years ended December 31, 2008, and December 31, 2007, the aggregate
fees billed by LBB & Associates LTD., LLP, were as follows:





December
      31,
              
              
              December
      31,2008
              
              
              2007Audit
      fees
              
              $
              113,132
              
              
              $
              73,637Audit
      related fees
              
              $
              -
              
              
              $
              -Tax
      fees
              
              $
              -
              
              
              $
              -All
      other fees
              
              $
              -
              
              
              $
              -




Audit
Fees





Consists
of fees billed for professional services rendered for the audit of our annual
consolidated financial statements and review of the quarterly condensed
consolidated financial statements and services that are normally provided by LBB
& Associates LTD., LLP, in connection with statutory and regulatory filings
or engagements.





Audit-Related
Fees





Consists
of fees billed for assurance and related services that are reasonably related to
the performance of the audit or review of our consolidated financial statements
and are not reported under "Audit Fees."





Tax
Fees





Consists
of fees billed for professional services for tax compliance, tax advice and tax
planning.





All
Other Fees





Consists
of fees for products and services other than the services reported
above.




70


ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





Exhibit
      2.1
              Agreement
      and Plan of Merger between Fleetclean Systems, Inc. and ERF Wireless, Inc.
      (1)Exhibit
      2.2
              Articles
      of Merger (1)Exhibit
      3.1
              Articles
      of incorporation of ERF Wireless, Inc. (1)Exhibit
      3.1.1
              Certificate
      of Amendment to Articles of incorporation of ERF Wireless, Inc.
      (1)Exhibit
      3.2
              Bylaws
      of ERF Wireless, Inc. (1)Exhibit
      4.1
              Designation
      of Preferences (1)Exhibit
      4.2
              Amendment
      to Designation of Preferences (7)Exhibit
      4.3
              Amended
      and Restated Designation of Series A Preferred Stock
  (11)Exhibit
      10.1
              Greg
      Smith Amended and Restated Employment Agreement (5)Exhibit
      10.2
              Addendum
      to Debt Conversion and Funding Agreement effective September 30, 2004
      between ERF Wireless, Inc., Eagle R.F. International and Investors.
      (6)Exhibit
      10.3
              Asset
      and Liability Contribution Agreement dated March 31, 2004 between
      Fleetclean Systems, Inc. and Fleetclean Chemicals, Inc.
  (2)Exhibit
      10.4
              Stock
      Purchase Agreement dated May 15, 2004 between Systom Trust Joint Venture
      and Kenneth A. Phillips et. al. (3)Exhibit
      10.5
              Subscription
      Agreement dated May 11, 2004 between Fleetclean Systems, Inc. and Systom
      Trust Joint Venture (3)Exhibit
      10.6
              Acquisition
      Agreement dated May 15, 2004 between Kenneth A. Phillips and Fleetclean
      Systems, Inc. (3)Exhibit
      10.7
              2004
      Non-Qualified Stock Compensation Plan (4)Exhibit
      10.8
              Second
      Addendum to Debt Conversion and Funding Agreement effective July 1, 2005
      between ERF Wireless, Inc., Eagle R.F. International and Investors.
      (8)Exhibit
      10.9
              Form
      of Common Stock Purchase Warrant Agreement, by and between ERF Wireless,
      Inc. and Investor (9)Exhibit
      10.10
              Form
      of Convertible Term Note, by and between the ERF Wireless, Inc. and
      Investor (9)Exhibit
      10.11
              Form
      of Registration Rights Agreement, by and between the ERF Wireless, Inc.,
      and Investor (9)Exhibit
      10.12
              Form
      of Stock Purchase Agreement, by and between ERF Wireless, Inc. and
      Investor.(9)Exhibit
      10.13
              Asset
      Purchase Agreement dated August 8, 2005, by and among ERF Wireless, Inc.,
      a Nevada corporation, ERF Enterprise Network Services, Inc., a Texax
      corporation, and Skyvue USA East Central Texas, Inc., a Texas corporation
      (10)Exhibit
      10.14
              Form
      of Skyvue Note (11)Exhibit
      10.15
              Series
      A Preferred Conversion Restriction Agreement (11)Exhibit
      10.16
              Warrant
      issued in June 2004(11)Exhibit
      10.17
              Employment
      Agreement with John Burns(11)Exhibit
      10.18
              Employment
      Agreement with Arley Burns(12)Exhibit
      10.19
              Amendment
      of Angus Capital (12)Exhibit
      10.20
              Acquisition
      of Net Yeti (13)Exhibit
      10.21
              Acquisition
      of Door (14)Exhibit
      20.1
              List
      of Subsidiaries(11)Exhibit
      23.1
              Consent
      of Auditor (15)Exhibit
      31.1
              Certification
      of Chief Executive officer and Chief Financial officer pursuant to
      Rulesand
      31.2
              13a-14
      (a) and 15d-14 (a), as adopted pursuant to section 302 of the
      Sarbanes-Oxley Act of 2002 (15)Exhibit
      32.1
              Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C.and
      32.2
              Section
      1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      (15)




(1)
            Incorporated
      by reference from the Form 10-QSB for September 30,
  2004;(2)
            Incorporated
      by reference from the Form 10-QSB for June 30, 2004;(3)
            Incorporated
      by reference from the Form 8-K for May 28, 2004;(4)
            Incorporated
      by reference from the Form S-8 filed December 29, 2004;(5)
            Incorporated
      by reference from the Form 10-KSB filed April 15, 2005;(6)
            Incorporated
      by reference from the Form 10-KSB/A - Amendment No. 1 filed on August 29,
      2005;(7)
            Incorporated
      by reference from the Form 10-QSB for March 31, 2005;(8)
            Incorporated
      by reference from the Form 10-QSB/A - Amendment No. 1;(9)
            Incorporated
      by reference from the Form 8-K for September 19, 2005;(10)
            Incorporated
      by reference from the Form 8-K for August 12, 2005;(11)
            Incorporated
      by reference from the Form SB-2 filed on December 12,
  2005.(12)
            Incorporated
      by reference from the Form 10-KSB filed April 17, 2007(13)
            Incorporated
      by reference from the Form 8-K filed on October 20,
  2006.(14)
            Incorporated
      by reference from the Form 8-K filed on December 21,
  2006.(15)
            Filed
      herewith.




71


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Restated Report to be signed on its
behalf by the undersigned, thereunto duly authorized.








ERF WIRELESS,
    INC.By: 
      /s/  H. Dean CubleyName:   H. Dean Cubley
              Title:
      Chief Executive Officer
              Date:  March
      19, 2009




Pursuant
to the requirements of the Securities Exchange Act of 1934, this restated Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.




SIGNATURE
              TITLE
              DATE/s/
      Dr. H. Dean Cubley
              Chairman
      of the Board of Directors
              March
      19, 2009Dr.
      H. Dean Cubley
              Principal
      Executive Officer, and Director/s/
      Richard R. Royall
              Director,
      Chief Financial Officer,
              March
      19, 2009Richard
      R. Royall
              Principal
      Financial Officer andPrincipal
      Accounting Officer/s/
      R. Greg Smith
              Director
              March
      19, 2009R.
      Greg Smith/s/
      Michael R. Jones
              Director
              March
      19, 2009Michael
      R. Jones/s/
      Dr. Bartus H. Batson
              Director
              March
      19, 2009Dr.
      Bartus H. Batson






72