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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-KSB

                 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                      FOR THE YEAR ENDED DECEMBER 31, 2006

                        COMMISSION FILE NUMBER 000-27467

                               ERF WIRELESS, INC.
                               ------------------
               (Exact name of registrant as specified in charter)

                NEVADA                                        76-0196431
                ------                                        ----------
   (State or other jurisdiction of                          I.R.S. Employer
    incorporation or organization)                        Identification No.)

2911 SOUTH SHORE BLVD., SUITE 100 LEAGUE CITY, TEXAS            77573
----------------------------------------------------            ------
      (Address of principal executive offices)                (Zip Code)


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


         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 [ ]

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]

ERF Wireless, Inc.'s revenue for its most recent fiscal year was $1,716,000.

Indicate by check mark whether the registrant is a shell Company (as define in
12b-2 of the Exchange Act). [ ] Yes [X] No

As of March 31, 2007 the aggregate market value of the shares of common stock
held by non-affiliates (based on the closing price of $0.12 per share for the
common stock as quoted on that date) was approximately $3,415,481.

As of March 31, 2007, the Company had outstanding 28,462,341 shares of its $.001
par value common stock.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]



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                                TABLE OF CONTENTS


ITEM NUMBER   CAPTION                                                       PAGE


PART I
------

ITEM 1.       Description of Business                                         4

ITEM 2.       Description of Property                                         14

ITEM 3.       Legal Proceedings                                               14

ITEM 4.       Submission of Matters to a Vote of Security Holders             14


PART II
-------

ITEM 5.       Market for Common Equity, Related Stockholder Matters and
              Small Business Issuer Purchases of Equity Securities            15

ITEM 6.       Management's Discussion and Analysis or Plan of Operations      16

ITEM 7.       Financial Statements                                            28

ITEM 8.       Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure                                        55

ITEM 8A.      Controls and Procedures                                         55

ITEM 8B.      Other Information                                               55


PART III
--------
ITEM 9.       Directors, Executive Officers, Promoters, Control Persons and
              Corporate Governance; Compliance with Section 16(a) of the
              Exchange Act                                                    56

ITEM 10.      Executive Compensation                                          57

ITEM 11.      Security Ownership of Certain Beneficial Owners and Management
              and Related Stockholder Matters                                 59

ITEM 12.      Certain Relationships and Related Transactions                  60

ITEM 13.      Exhibits                                                        61

ITEM 14.      Principal Accountant Fees and Services                          61


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                           FORWARD LOOKING STATEMENTS

Except for the historical information and discussions contained herein,
statements contained in this Annual Report on Form 10-KSB may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. 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 within the meaning of Section 27A of the Securities
Act of 1933 ("Securities Act") and Section 21E of the Securities Exchange Act of
1934 ("Exchange Act"), including without limitation statements regarding our
expectations, beliefs, intentions or strategies regarding our business. This
Annual Report on Form 10-KSB 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.


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ITEM 1.  DESCRIPTION OF BUSINESS

THE COMPANY

The Company provides wireless communications products and services with an
emphasis on providing reliable, high-speed wireless broadband services. The core
focus of the Company is the acquisition and/or construction of strategically
placed wireless broadband networks to provide delivery of reliable, bundled
high-speed wireless broadband services including Internet, data, voice, security
and limited video services for enterprise, commercial, residential and private
entities, as well as cities and unincorporated areas.

The Company has four primary business reporting segments to provide solutions
and services to different segments of the wireless industry. The Company's
revenues to date have been generated through three of the four primary business
reporting segments:

ENTERPRISE NETWORK SERVICES

Enterprise Network Services provides a turnkey design and implementation service
in the area of secure wireless broadband networks for regional banks. The August
2005 acquisition of the assets of Skyvue USA East Central Texas, Inc., a Texas
corporation ("Skyvue"), provided Enterprise Network Services with over three
years of experience on designing, constructing, maintaining and monitoring
enterprise-class wireless broadband networks for the regional banking industry
in several areas of the country.

Enterprise Network Services' 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 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 as part of its Wireless Bundled Services offering.

Enterprise Network Services currently has long term maintenance contracts with
three (3) banking networks. For the twelve months ended December 31, 2006
Enterprise Network Services contributed 59% of the revenues of the Company and
28% of the losses attributable to the Company's business segments.

WIRELESS BUNDLED SERVICES

Wireless Bundled Services was formed to provide wireless broadband products and
services, including Internet, voice, data, security and video services
throughout North America to serve private entities, cities, municipalities and
the general public. Wireless Bundled Services intends to focus on rural markets.
The Company plans to offer these services by acquiring smaller established rural
wireless broadband companies throughout North America.

As of the twelve months ended December 31, 2006, the Wireless Bundled Services
contributed 8% of the revenues of the Company and 6% of the losses attributable
to the Company's business segments. The Company is still in the early stages of
developing the Wireless Bundled Services division. On December 15, 2006, the
Company acquired the assets of Windstream Corporations' Lubbock wireless ISP
operation operated as "The Door"; adding approximately 1,500 customers to this
business segment operation.

WIRELESS MESSAGING SERVICES

Wireless Messaging Services provides wireless broadband system network design
and implementation, manufactures and supplies high-power infrastructure
equipment to the paging and mobile industry and owns and operates a wide-area
messaging service (one- and two-way cellular and paging retail). Wireless
Messaging Services also implements and constructs new wireless broadband
networks for the Company. Wireless Messaging Services also is the subsidiary of
ERF Wireless that conducts all special projects and contract engineering for the
company. Additionally, Wireless Messaging Services manufactures some paging
equipment. The majority of Wireless Messaging Services' contracts are short
term. Wireless Messaging Services contributed 33% of the Company's revenues for
the twelve months ended December 31, 2006, and 13% of the losses attributable to
the Company's business segments.

NETWORK OPERATIONS SERVICES

Network Operations Services Division was created to provide the overall
day-to-day operation and 24/7 monitoring for all wireless broadband networks
that the Wireless Messaging Services or Enterprise Networks Services divisions
construct, acquire, maintain and administer. In addition, the Network Operations
division may provide monitoring for other third parties.

As of the twelve months ended December 31, 2006, the Network Operations
division's revenues and losses were not material. The Company is still in the
early stages of developing the Network Operations division.


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CORPORATE HISTORY

The Company was incorporated in Texas in 1986. In May 2004, Systom Trust Joint
Venture effected a change of control transaction by purchasing from the then
largest shareholder and his family 10,783,492 shares of Company common stock for
$150,000 and acquiring 1,000,000 shares of Series A Preferred Stock from the
Company for $290,700. In September 2004, the Company changed its name to ERF
Wireless, reincorporated in Nevada, and effected a 1-for-75 reverse split.
Thereafter, the Company's common stock began trading under the new ticker symbol
of ERFW on the Nasdaq OTC Electronic Bulletin Board. Unless otherwise reflected
herein, all per share numbers give effect to this reverse split. In September
2004, the Company acquired all of the capital stock of Eagle R. F. International
in exchange for 1,000,000 shares of its common stock; from a legal perspective,
the capital structure of the Company was the surviving entity, while Eagle R.F.
International was the surviving entity for accounting purposes.

GENERAL

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 a web site at www.erfwireless.com. We make available free of charge
through our web site our annual report on Form 10-KSB, quarterly reports on Form
10-QSB, 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 (http: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.

OUR MARKET AND BUSINESS STRATEGY

The market for wireless broadband product and service revenue has grown
dramatically over the past few years and is expected to continue to grow.

Wireless broadband is very well suited for niche market development in that it
provides a truly versatile broadband communication medium that is cheaper than a
wired solution, is faster to implement and can be configured for one or more
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.

Historically, 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
will accelerate the growth of the wireless broadband industry.

The Company's s vision is to develop, own and operate a nationwide fiber,
satellite and encrypted wireless network for the banking industry called US
BankNet. The Company leases fiber for long-haul data transmissions, builds
encrypted wireless infrastructure for the "last mile", and incorporates
satellite failover for redundancy.

The Company's strategic plan is to develop US BankNet in a series of steps.
First, it sells an individual financial institution ("FI") a private encrypted
wireless network ("BranchNet") to replace the FI's wireline data communications
wide area network (WAN) to its branches. Five such networks have already been
completed for FIs in Texas, Louisiana and Missouri, and a sixth is underway. The
Company plans to interconnect individual FI networks into Company-owned
statewide networks to provide them with high-speed access to banking service
providers, disaster recovery centers, correspondent banks, the Internet and the
Federal Reserve. Three of the Company's Louisiana-based FI customers and the
Louisiana State Police are participating in the Company's first statewide
network, Louisiana BankNet, with construction to commence in April 2007. As
statewide networks are completed, the Company plans to aggregate them into
regional networks (i.e. "Southern BankNet") and aggregate the regional networks
into its nationwide network, US BankNet.

In the U.S. there are 2,426 community banks and 431 credit unions that meet the
size criteria of the Company's wireless broadband T1 replacement model. This
market segment of banks and credit unions have between 5 and 19 branches with
the primary target group averaging 12 branches. This represents a large
potential market. There are an additional 492 large banks with 20 or more
branches with an average of 135 branches representing an additional large market
potential. To penetrate this market, the Company is negotiating with a Fortune
50 company to sell and support the Company's products in this segment of the
market. The Company is also in negotiations with selected large core banking
service providers to market and sell the Company's products to their respective
customer bases.


                                       5


<PAGE>

The Company also plans to expand its offering to provide wireless broadband
product and service solutions to other large vertical markets where high
bandwidth and secure communications are needed (such as hospitals, schools, law
enforcement, etc.), especially in areas where it can leverage the excess
capacity in network infrastructure already constructed and paid for by its bank
customers.

The Company has recently acquired several small wireless broadband networks in
key underserved regions. The Company anticipates that it will expand by both
organic growth and acquisition in areas where its banking network subsidiary has
sold BranchNet networks so that the Company can capitalize on the wireless
network infrastructure it constructs for its bank customers. For example, the
Company is negotiating agreements with its bank customers to use the bank's
network backbone on a revenue sharing basis to sell wireless broadband services
to schools, hospitals, businesses, municipal entities and residential customers
in the region covered by that bank's BranchNet network with little or no
additional infrastructure cost to the Company.

ERF WIRELESS'S PRODUCTS AND SERVICES

ENTERPRISE NETWORK SERVICES

Enterprise Network Services provides a turnkey design and implementation in the
area of secure wireless broadband networks for regional banks. The acquisition
of the assets of Skyvue USA provided Enterprise Network Services with experience
in designing, constructing, maintaining and monitoring enterprise-class wireless
broadband networks for the regional banking industry in several areas of the
country.

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.

The Enterprise Network Services wireless network design is strictly for WAN
point-to-point connectivity and is not intended for "within the building"
wireless applications. Once in place, this enterprise-class wireless network not
only replaces all of the data connectivity requirements between locations, but
also has the excess capacity to provide VOIP telephone service, video
surveillance, document imaging and Internet connectivity for all of the
enterprise locations.

In order to satisfy the security concerns of banking regulators, Enterprise
Network Services has developed a unique and proprietary encryption device
(CryptoVueTM), consisting of hardware and software, as well as an integrated
security protocol and 24x7 monitoring.

The wireless broadband radio equipment deployed by Enterprise Network Services
is a special commercially-hardened version of the Motorola Canopy Wireless
Platform configured to form point-to-point and point-to-multipoint network
connections for financial institutions that can be used in wireless backhaul,
bridging and other data applications. The point-to-point configuration can span
distances of up to 35 miles. Distances of greater than 35 miles can be covered
by daisy chaining the units across multiple relay towers.

Enterprise Network Services focuses on obtaining design and construction
contracts with regional banks in conjunction with long-term maintenance and
monitoring contracts. Any monitoring contracts will be managed by our Network
Operations Services Division. Additionally, once the Company has designed and
constructed the wireless broadband networks for the banks, the Company plans to
use the same network under revenue sharing agreement with the banks to sell
wireless broadband services to private entities, cities, municipalities and the
general public in that region as part of its Wireless Bundled Services Division.

WIRELESS BUNDLED SERVICES

Wireless Bundled Services Division was recently formed to provide wireless
broadband products and services, including Internet, voice, data and security
services throughout North America to serve private entities, cities,
municipalities and the general public. These services will be provided to both
commercial and retail customers throughout the coverage area where ERF Wireless
owns wireless broadband networks or operates wireless broadband networks. The
Company plans to offer these services by acquiring smaller established rural
wireless broadband companies or entering into partnership or revenue-sharing
agreements with other wireless broadband network providers throughout North
America.

It is anticipated that Wireless Bundled Services will operate 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.


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WIRELESS MESSAGING SERVICES

Wireless Messaging Services provides wireless broadband system design and
implementation, manufacturers and supplies high-power infrastructure equipment
to the paging and mobile industry and owns and operates a wide-area messaging
service (one- and two-way cellular and paging retail). Wireless Messaging
Services implements and constructs new wireless broadband networks for the
Company. Wireless Messaging Services also manufactures some paging equipment.

The wireless broadband system design and implementation function is a service
that Wireless Messaging Systems provides on a contract basis to other divisions
and subsidiaries of ERF Wireless, as well as other outside organizations.

The manufacturing and supply of high-power wireless infrastructure equipment
under the ERF Wireless brand is accomplished primarily at the ERF Wireless
corporate facility in League City, Texas, although some components are sourced
from offshore locations. The product line consists of a variety of power
amplifiers, transmitters and base stations ranging in power from 50 to 500 watts
and covering all of the major frequency bands of the wireless messaging
industry. In addition, ERF Wireless has developed unique technology that allows
for full hot switching of redundant wireless equipment where such requirements
are necessary.

Although paging has seen a steady decline from its peak in the late 1990s, it
continues to provide a stable communications platform for many B-to-B
applications such as service providers, hospitals, construction workers and
commercial contractors.

More recently, Wireless Messaging Services has developed a triple play voice,
video, and data product that is being provided to residential developments both
in the U.S. as well as internationally.

NETWORK OPERATIONS SERVICES

Network Operations Services Division was created to provide the overall
day-to-day operation and 24/7 monitoring to all wireless broadband networks that
the Wireless Messaging Services or Enterprise Networks Services divisions
construct, acquire, maintain and administer. In addition, the Network Operations
Services Division 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.

The Network Operations Center is typically a support facility to all of the
other divisions and subsidiaries of ERF Wireless, providing the capability to
quickly locate and repair a network problem in any of the wireless broadband
networks that ERF Wireless owns or operates. The Network Operations Center not
only has the capability to determine the source of a network problem, but is
also the ERF Wireless division tasked with the responsibility of dispatching ERF
Wireless Network Operations maintenance technicians or local area subcontractor
technicians when maintenance or service requirements dictate.

COMPETITION

We compete for subscription 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. Like us, other companies offer some of the same Internet connectivity
services to their customers.

The Company competes in the regional banking data network business with
traditional telephone companies. These companies offer limited bandwidth
wireline circuits that cannot compete in terms of cost-effectiveness with the
Company's high-capacity wireless broadband point-to-point circuits. The Company
has not been able to identify any other company providing the same type of
secure wireless broadband capability.

The Company also contemplates that it will sell third-party licensed products
and services into its customer base such as Voice over Internet Protocol 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. As the Company enters these
markets, it will be entering a highly competitive industry dominated by large,
well-funded incumbent providers. The Company is planning to target its customer
base where it is already providing encrypted wireless services. Those markets
are also characterized by competition that includes smaller regional
telecommunications providers.

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 offered 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 keep pace
with these developments and also ensure that we either have comparable and
compatible technology or access to distribution technologies developed or owned
by third parties.


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INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES

Our success depends to a significant degree on our methodologies and software
applications. We have three patents pending and 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 totally preclude competitors from developing products with
similar features as those of ERF Wireless.

Although we believe our products and services are unique and do not infringe
upon the proprietary rights of others, there can be 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.

The Company has filed three 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.

GOVERNMENTAL REGULATION

Our wireless Internet access products currently operate in a combination of
licensed and unlicensed spectrum and we expect that such spectrum will remain
unlicensed.

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 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.

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 Telecommunications Act (the "1996 Act").


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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.

EMPLOYEES

As of March 31, 2007, we employ 46 full-time employees and 9 consultants. We
have no collective bargaining agreements with our employees.

CUSTOMERS

Our Enterprise Network Services subsidiary customers consist of regional banking
networks. Our Wireless Messaging Services Division focuses on a diversified base
of customers and end users consisting of service providers, government agencies,
businesses and other enterprises. Our Wireless Bundled Services Division will
focus mostly on servicing private entities, commercial developments, cities,
municipalities, and the general public in rural areas. Our Network Operations
Services Division's customers will be the customers of both the Enterprise
Network Services and Wireless Bundled Services divisions. The Company had two
customers that represented approximately 34% and 19% of gross sales for the
twelve months ended December 31, 2006. During the year ended December 31, 2005,
two customers represented 11% and 27% of the Company's gross sales.

RESEARCH AND DEVELOPMENT

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.

RISK FACTORS

Any investment in our securities involves a high degree of risk. The most
significant risks and uncertainties associated with our business are described
below; however, they are not the only risks we face. If any of the following
risks actually occur, our business, financial condition, or results or
operations could be materially adversely affected, the trading of our common
stock could decline, and an investor may lose all or part of their investment.

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, 2006, we had an accumulated deficit of 11,627,000. Our gross
revenues for the twelve months ended December 31, 2006, were $1,716,000, with a
loss from operations of $5,232,000 and a net loss applicable to common
shareholders of $5,362,000. As we pursue our business plan, we expect our
operating expenses to increase significantly, especially in the areas of sales
and marketing. As a result of these expected cost increases, we will need to
generate increased revenues to become profitable. We expect continued losses in
fiscal 2007.

WE HAVE A LIMITED CASH AND LIQUIDITY POSITION AND WILL NEED TO RAISE ADDITIONAL
FUNDS TO FUND OPERATIONS

As of December 31, 2006, we had cash and cash equivalents balances of $393,000
and a working capital deficit of $696,000. The Company has a two-year $3 million
unsecured revolving credit facility, and as of December 31, 2006, there was
approximately $1 million available for working capital for operations,
acquisitions and project financing. We believe our cash, anticipated cash flow
from operations and available credit facilities afford us adequate liquidity for
the next 12 months, although we expect to raise additional capital during this
period to fund our anticipated growth for our banking and WISP network
businesses if acceptable terms are available, or to fund unexpected or
unanticipated working capital expenditures. Moreover, we anticipate that we will
need additional capital in the future to continue to expand our business
operations. 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 sell assets or curtail
operations.


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<PAGE>

THE TERMS OF OUR DEBT OBLIGATIONS TO THE INVESTORS IN THE SEPTEMBER 2005
FINANCING SUBJECT US TO THE RISK OF FORECLOSURE OF CERTAIN OF OUR ASSETS

As of December 31, 2006, the remaining principal balance of the September 2005
financing was $874,351. To secure the payment of all obligations owed to the
investors in the 2005 financings, we have granted to the investors a security
interest and lien on certain of our assets. The occurrence of an event of
default under any of our obligations would subject us to foreclosure by the
investors 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. Furthermore, we may not have sufficient funds to repay the investors
when our debt obligations to them become due. We are not required to establish a
sinking fund for the repayment of our debt to the investors. Accordingly, we may
be required to obtain funds to repay the investors either through refinancing or
the issuance of additional equity or debt securities. We may be unable to obtain
the funds needed, if any, to repay the obligations from any one or more of these
other sources on favorable economic terms or at all.

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:

     o   10,000,000 shares of common stock pursuant to the Company's 2004
         Non-Qualified Stock Option Plan, of which options to purchase 2,852,000
         shares are outstanding as of March 31, 2007;
     o   2,033,924 shares of common stock underlying outstanding common
         warrants;
     o   6,484,565 shares of common stock underlying convertible debt;
     o   5,054,152 shares of common stock underlying the E-Series Bond,
         2,527,076 issuable upon conversion and 2,527,076 issuable upon exercise
         of warrants that are issuable upon conversion;
     o   14,196,448 shares of common stock issuable upon conversion of Series A
         Preferred Stock. The maximum common shares converted from Series A
         Preferred shares are contractually restricted to five percent a quarter
         or twenty percent a year of the authorized and issued common shares
         outstanding at December 31, 2006.

The weighted average purchase price per share of common stock upon the issuance
of these derivative securities, as if converted on March 31, 2007, is
approximately (i) $3.21 per share of common stock underling the options, (ii)
3.06 per share of common stock underling the warrants, (iii) $0.1218 per share
of common stock underling the convertible debt, (iv) $0.1385 per share of common
stock underlying the E-Series Bond and $5.00 for the common stock underlying the
warrant issuable upon conversion of the E-Series Bond; and (v) $0.03 per share
of common stock underling the Series A Preferred 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.

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 $3.00 per share and $.12 per share since January 1, 2006. 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.

A LOW MARKET PRICE MAY SEVERELY LIMIT THE POTENTIAL MARKET FOR OUR COMMON STOCK

Our common stock is currently trading at a price below $5.00 per share,
subjecting trading in the stock to certain SEC rules requiring additional
disclosures by broker-dealers. These rules generally apply to any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions (a "penny stock"). Such rules require the delivery, prior to
any penny stock transaction, of a disclosure schedule explaining the penny stock
market and the risks associated therewith and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and institutional or wealthy investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to the sale. The broker-dealer also must disclose the
commissions payable to the broker-dealer, current bid and offer quotations for
the penny stock and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Such information must be provided to the customer orally or in
writing before or with the written confirmation of trade sent to the customer.


                                       10


<PAGE>

Monthly statements must be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks. The additional burdens imposed upon broker-dealers by such requirements
could discourage broker-dealers from effecting transactions in our common stock.

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 public market analysis or investors, and the price
of our common stock may decline. Factors that could cause quarterly fluctuations
include:

     o   The Company's Enterprise Network Services subsidiary's 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.

     o   The Company's Wireless Bundled Services Division's 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.

     o   The Company's Wireless Messaging Services Division's ability to keep
         current customers and secure new customers.

     o   The Company's Network Operations Division's ability to acquire new
         customers through the Enterprise Network Services Division, the
         Wireless Bundled Services Division and third parties.

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

Accordingly, the failure to obtain significant future revenue, or lower than
expected revenue in the future, could adversely affect our stock price and
liquidity.

FOR THE YEAR 2006, THE MAJORITY OF OUR REVENUE WAS GENERATED FROM SHORT-TERM
AGREEMENTS.

For the twelve-month period ended December 31, 2006 the majority of our revenues
from customers resulted from short-term, terminable at will, arrangements. There
is no assurance that these 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.

WE COMPETE WITH MANY COMPANIES THAT ARE LARGER AND BETTER FINANCED THAN WE ARE,
AND OUR GROWTH AND PROFITABILITY ARE DEPENDENT ON OUR ABILITY TO COMPETE WITH
THESE ENTITIES.

We face competition from many entities with significantly greater financial
resources, well-established brand names and larger customer bases. We may become
subject to severe price competition for our products and 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.

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 products and services to our clients. 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.


                                       11


<PAGE>

WE MUST CONTINUALLY ENHANCE ITS SERVICES TO MEET THE CHANGING NEEDS OF ITS
CUSTOMERS OR FACE THE POSSIBILITY OF LOSING FUTURE BUSINESS TO COMPETITORS.

Future success will depend upon the Company's ability to enhance existing
services and to introduce new services to meet the requirements of customers in
a rapidly developing and evolving market. Present or future services may not
satisfy the needs of the market. If the Company is unable to anticipate or
respond adequately to its customers' needs, lost business may result and
financial performance will suffer.

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 products and new 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 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 product advances. The life cycles
of our products are difficult to estimate. Our growth and future financial
performance will depend in part upon our ability to enhance existing
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 product development efforts 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.

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's ability to successfully protect its proprietary technology is
essential to its 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,
which would reduce our cash flow. Any claims, even those made by third parties
who are without merit, could:

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

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

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


                                       12


<PAGE>

IF THE WIRELESS BROADBAND MARKET DOES NOT EVOLVE AS WE ANTICIPATE, OUR BUSINESS
WILL BE ADVERSELY AFFECTED.

If we fail to properly assess and address the broadband wireless market or if
our products and 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 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 products
less competitive or obsolete. As a result of any of these factors, our position
in existing markets or potential markets could be eroded.

WE MAY NOT BE SUCCESSFUL IN ACQUIRING OTHER EXISTING COMPANIES AND TECHNOLOGIES,
WHICH COULD NEGATIVELY AFFECT OUR PRODUCT AND SERVICES OFFERINGS AND SALES.

Our business plan is dependent on acquiring existing companies and technologies
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 sale or license our products and technologies to potential new
customers and into potential new markets, and to enable us to continue to enter
into new agreements 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
products and technologies could deteriorate.

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 seek 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:

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

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

     o   diversion of financial and management resources from existing
         operations;

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

     o   potential loss of key employees;

     o   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;

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

     o   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.


                                       13


<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY

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

<TABLE>
<S>     <C>
                                                                                        Approximate
Location             Function                                  Size (square feet)  Monthly lease payment
-------------------  ----------------------------------------  ------------------  ---------------------

League City, TX      ERF Wireless Inc. Corporate Headquarters        13,837              $ 10,110

Taylor, TX           ENS Operational Division Headquarters            4,387              $  3,493

Lubbock, TX          WBS Operational Division Headquarters           10,000              $  5,000
</TABLE>

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 2012, 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.


                                       14


<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES

MARKET PRICE INFORMATION AND DIVIDEND POLICY

Our common stock trades on the Nasdaq 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                    Low
                                             ----------              ----------
YEAR 2006
            Quarter ended December 31           $0.69                   $0.16
            Quarter ended September 30          $0.70                   $0.22
            Quarter ended June 30               $1.36                   $0.57
            Quarter ended March 31              $3.00                   $1.15
YEAR 2005
            Quarter ended December 31          $11.25                   $2.49
            Quarter ended September 30         $11.00                   $3.50
            Quarter ended June 30               $4.00                   $3.51
            Quarter ended March 31              $4.75                   $3.85

STOCKHOLDERS

As of March 31, 2007, we believe there were approximately 500 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 March 31, 2007,
concerning securities authorized for issuance under the 2004 Non-Qualified Stock
Option Plan and other outstanding options, warrants and rights:

<TABLE>
<S>     <C>
                                                                                                           Number of Securities
                                                                                                            Remaining Available
                                                            Number of Securities                            for Future Issuance
                                                              to Be Issued Upon      Weighted Averaged         Under Equity
                                                                 Exercise of         Exercise Price of       Compensation Plans
                                                             Outstanding Options,   Outstanding Options,    (Excluding Securities
                                                              Warrants & Rights     Warrants & Rights      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 (1)           150,000               $ 1.38                 2,822,366


                                                           ------------------------ --------------------- ------------------------
                        Total                                        150,000               $ 1.38                 2,822,366
                                                           ======================== ===================== ========================
</TABLE>

                                       15


<PAGE>

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, but were not
reported, in the third quarter ended August 31, 2006 and that occurred in the
fourth quarter of fiscal 2006.

During the fourth quarter of fiscal 2006, we converted the principal amount of
$200,000 of Series E Bonds and issued 536,725 shares of common stock and issued
three year warrants to purchase 536,725 shares of common stock at $5 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.

EQUITY REPURCHASES BY ISSUER

The Company did not effect any common stock repurchases during fiscal 2006.


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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-KSB, including the financial statements.

BUSINESS STRATEGY

The Company has four operating divisions to provide solutions and services to
different segments of the wireless industry. The Company's Enterprise Networks
Services Division serves enterprise customers, private entities, cities,
unincorporated municipalities and the general public. The Company's Wireless
Bundled Services Division provides wireless broadband products and services,
including Internet, voice, data and security services, and is in the early
stages of building or acquiring a seamless wireless broadband network throughout
much of North America to serve private entities, cities, municipalities and the
general public. The Company's Wireless Messaging Services Division provides
wireless broadband system design and implementation, manufactures and supplies
high-power infrastructure equipment to the wireless messaging industry and owns
and operates a wide-area messaging service (one- and two-way cellular and paging
retail). In addition, WMS provides a turn-key implementation of a triple play
voice, video, and data to residential developments internationally as well as in
the U.S. The Company's Network Operation Services Division provides the overall
day-to-day operations, maintenance, upgrading, 24/7 monitoring and expansion of
all wireless broadband networks that the Company constructs, acquires, maintains
and administers. Hereinafter, all references to the Company include the
operations and financial condition of the Company and its operating divisions.

During the twelve-month period ended December 31, 2006, the Company completed
its fifth regional banking network involving designing, constructing,
maintaining and monitoring a secure 20-Mbps enterprise class wireless banking
network for a Louisiana bank; interconnecting 12 locations in 10 cities along
with an upgrade to an existing BankNet network. This contract totaled
approximately $917,000, including a $655,000 installation contract, together
with annual maintenance and monitoring services contract over five years. This
project involves point-to-point links in excess of 30 miles with installation of
two 190-foot towers, two 120-foot towers, six 96-foot towers, two 65-foot towers
and 31 Motorola industrial microwave dish radios. The project also involved
installation of 12 of our proprietary CryptoBox encryption devices at the branch
locations and at the main operations center bank. The Company announced the
completion of this project in a press release dated July 31, 2006. The design
and installation of the high-speed wireless broadband network for this bank,
together with a recurring revenue contract for monitoring and maintenance
services over the next five-years, exemplifies our wireless broadband business
model for the regional banking community. The Company's proprietary CryptoVueTM
hardware, biometric encryption devices and processes implemented at each bank
branch location are the real enablers that allow us to deliver these secure
high-speed financial networks. The Company's banking network solutions not only
lower the banks' overall communications costs, but also allow the bank to add
new services such as Voice over IP, document and item imaging at the branch
level, video conferencing and a host of other new applications that improve
efficiency and lower costs of operations.

The Company has completed construction of five BankNet bank networks in three
states as well as a significant upgrade to an existing bank network in the
second quarter of 2006. The Company continues to focus its initial marketing
efforts at certain Louisiana, Mississippi, Alabama, Georgia, Texas and Florida
banks due to the likelihood of hurricanes and wide-scale disasters in those
states as well.


                                       16


<PAGE>

The Company's business strategy is to design, construct, secure, maintain and
monitor enterprise-class encrypted microwave broadband networks for the regional
banking industry. The primary market drivers for these new high-speed networks
are attributable to three recent events. The first driver is a change in banking
regulations that permits the imaging of checks and other documents as a
substitute means of validation, exchange and storage. These new regulations
allow banks to eliminate the transfer of paper transit items within the Federal
Reserve System but require large amounts of bandwidth to electronically transfer
the data. Many financial institutions are finding that their traditional
point-to-point wired T1 circuits (1.5 Mbps) are insufficient to meet their new
data communication needs.

The second driver is new banking requirements for better disaster recovery plans
and fault tolerant communications resulting from the problems the banking
industry encountered during the recent hurricane disasters along the Gulf and
Atlantic coasts. Financial institutions in those areas experienced unacceptable
interruptions as a result of their reliance on traditional telecommunications
networks during the recent natural disasters.

The third driver is the Gulf Opportunity (GO) Zone Act of 2005 enacted December
21, 2005, which provides a significant acceleration of cost recovery by allowing
businesses in the Gulf Coast areas of Louisiana, Mississippi and Alabama
affected by hurricane Katrina to claim a depreciation deduction in the first
year the property is used equal to 50 percent of its cost. This bonus
depreciation is available to companies of all sizes for their investments in
equipment, software and depreciable real property.

The Company's fault-tolerant network solutions for individual banks
("BranchNetTM systems") intend to provide up to 300 Mbps of encrypted microwave
data communications bandwidth with satellite failover among a financial
institution's branches spread across hundreds of miles (BranchNet). BranchNet
systems address the banking industry demands for secure, fault-tolerant
broadband networks, while significantly reducing the cost of the required
fault-tolerant bandwidth versus traditional wireline communications options
provided by the incumbent telephone carriers.

Over the next five years, the Company plans to fulfill its vision to develop,
own and operate a nationwide fiber, satellite and encrypted wireless network for
the banking industry called US BankNet. The Company leases fiber for long-haul
data transmissions, builds encrypted wireless infrastructure for the "last
mile", and incorporates satellite failover for redundancy.


RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2006, COMPARED TO YEAR ENDED DECEMBER 31, 2005

The following table sets forth summarized consolidated financial information for
the years ended December 31, 2006 and 2005:

<TABLE>
CONDENSED FINANCIAL INFORMATION

                                                              Twelve Months Ended December 31,
                                               ------------------------------------------------------------------
             ($ IN THOUSANDS)                      2006              2005            $ Change          % Change
                                               ------------      ------------      ------------      ------------
<S>                                            <C>               <C>               <C>                       <C>
Total sales                                    $     1,716       $       643       $     1,073               167%
Cost of goods sold                                   1,264               382               882               231%
                                               ------------      ------------      ------------      ------------
Gross profit                                           452               261               191                73%
                                               ------------      ------------      ------------      ------------
Percent of total sales                                  26%               41%
Operating expenses                                   5,756             3,364             2,392                71%
                                               ------------      ------------      ------------      ------------
Loss from operations                                (5,304)           (3,103)           (2,201)               71%
Other income/(expense)                                  72              (308)              380             -123%
                                               ------------      ------------      ------------      ------------
Net loss                                            (5,232)           (3,411)           (1,821)               53%
                                               ------------      ------------      ------------      ------------
Deemed dividend related to beneficial
     conversion feature of preferred stock            (130)           (1,342)            1,212              -90%
                                               ------------      ------------      ------------      ------------
Net loss attributable to common
shareholders                                   $    (5,362)      $    (4,753)      $      (609)               13%
                                               ============      ============      ============      ============
</TABLE>

For the year ended December 31, 2006, the Company's business operations
reflected an increase in Wireless Messaging Services, Wireless Bundled Services
and Enterprise Network Services. For the year ended December 31, 2006, the
Company's consolidated operations generated net sales of $1,716,000 compared to
prior year net sales of $643,000. The increase in net sales is primarily
attributable to an increase in product sales of $974,000, service sales of
$53,000 and other of $46,000 from the wireless banking network installations
attributable to two major customers and wireless broadband installations. For
the year ended December 31, 2006, the Company had a gross profit margin of 26%,
compared to a gross profit margin of 41% for the prior year. The decrease in
gross profit margin is primarily attributable to several factors: (i) an overall
lower than expected margins on product and service sales related to wireless
banking network installations from Enterprise Network Services; and (ii) lower
than expected margins on wireless broadband product and service sales from
Wireless Bundled Services.


                                       17


<PAGE>

The Company incurred a net loss of $5,232,000 for the year ended December 31,
2006. The Company's net loss for the twelve months ended December 31, 2006,
included approximately $308,000 in depreciation and amortization expenses,
$561,000 of interest amortization, $928,000 of derivative income, $84,000 of
non-cash interest expense, $249,000 of option and warrant expense, $685,000 of
other general and administrative net of non-cash charges, $2,456,000 in
employment expenses net of non-cash charges and $835,000 in professional
services net of non-cash charges.

SALES INFORMATION

Set forth below is a table presenting summarized sales information for our
business segments for the years ended December 31, 2006 and 2005:

<TABLE>
<S>     <C>
      ($ IN THOUSANDS)                                 Fiscal Year Ended December 31,
                                -----------------------------------------------------------------------------
      Business Segment             2006      % of Total       2005      % of Total    $ Change      % Change
                                ---------    ---------     ---------    ---------     ---------     ---------
Wireless Messaging Services     $    570           33%     $    416           65%     $    154            37%
Wireless Bundled Services            132            8%           60            9%           72           120%
Enterprise Network Services        1,014           59%          167           26%          847           507%
                                ---------    ---------     ---------    ---------     ---------     ---------
Total Sales                     $  1,716          100%     $    643          100%     $  1,073           167%
                                =========    =========     =========    =========     =========     =========
</TABLE>

For the year ended December 31, 2006, net sales increased to $1,716,000 from
$643,000 for the year ended December 31, 2005. The overall increase of 167% was
attributable to an $847,000 increase in Enterprise Network Services, increase of
$154,000 of Wireless Messaging Services and an increase in Wireless Bundled
Services of $72,000. The $847,000 increase in sales of the Enterprise Network
Services for the year ended December 31, 2006, was primarily attributable to
sales from product and service sales of enterprise-class encrypted wireless
banking network installations from two major customers. The increase of $154,000
in Wireless Messaging Services is primarily attributable to wireless broadband
system design and implementation. The increase of $72,000 in Wireless Bundled
Services is primarily attributable to increased customer base through
acquisition of ISP subscriber agreements.

COST OF GOODS SOLD

The following tables set forth summarized cost of goods sold information for the
years ended December 31, 2006 and 2005:

<TABLE>
<S>     <C>
      ($ IN THOUSANDS)                                  Fiscal Year Ended December 31,
                                -----------------------------------------------------------------------------
      Business Segment            2006        % of Total      2005       % of Total    $ Change     % Change
                                ---------     ---------     ---------    ---------     ---------    ---------

Wireless Messaging Services     $    282            22%     $    200           52%     $     82           41%
Wireless Bundled Services            114             9%           37           10%           77          208%
Enterprise Network Services          868            69%          145           38%          723          499%
                                ---------     ---------     ---------    ---------     ---------    ---------
Total Sales                     $  1,264           100%     $    382          100%     $    882          231%
                                =========     =========     =========    =========     =========    =========

                                                    Fiscal Year Ended
                                                       December 31,
                                     --------------------------------------------------
       ($ IN THOUSANDS)                 2006         2005       $ Change      % Change
                                     ---------    ---------     ---------     ---------

Products and integration service     $    993     $    249      $    744           299%
Rent and maintenance                       67           73            (6)           -8%
Salary and related costs                   91           23            68           296%
Depreciation                               54            9            45           500%
Other costs                                59           28            31           111%
                                     ---------    ---------     ---------     ---------
Total Operating Expenses             $  1,264     $    382      $    882           231%
                                     =========    =========     =========     =========
</TABLE>

For the year ended December 31, 2006, cost of goods sold increase by $882,000,
or 231%, to $1,264,000 from $382,000 as compared to the year ended December 31,
2005. The increase of $882,000 in cost of goods sold is primarily attributable
to: (i) product and service cost of $744,000 associated with Enterprise Network
Services due to increase sales from two major customers; and (ii) $68,000 of
salary and related cost is primarily attributable to direct labor cost
associated with Enterprise Network Services construction and integration of
banking networks; and (iii) $45,000 primarily attributable to depreciation
expense associated with acquisitions and extending our wireless network area to
increase our ISP customer base,(iv) $31,000 of other cost is primarily
attributable to freight and travel cost associated with Enterprise Network
Services construction and integration of banking networks.


                                       18


<PAGE>

OPERATIONS EXPENSES

The following table sets forth summarized operating expense information for the
years ended December 31, 2006 and 2005:

                                          Twelve Months Ended December 31,
                                     ----------------------------------------
      ($ IN THOUSANDS)                 2006       2005    $ Change   % Change
                                     -------    -------    -------    -------

Employment expenses                  $2,818     $1,456     $1,362         94%
Professional services                 1,574      1,202        372         31%
Rent and maintenance                    288        188        100         53%
Depreciation and amortization           254        110        144        131%

Other general and administrative        822        408        414        101%
                                     -------    -------    -------    -------
Total operating expenses             $5,756     $3,364     $2,392         71%
                                     =======    =======    =======    =======

For the year ended December 31, 2006, operating expenses increased by 71% to
$5,756,000, as compared to $3,364,000 for the year ended December 31, 2005. The
increases that occurred, as evidenced by the immediately preceding table, are
discussed below:

     o   A $1,362,000 increase in employment expense. The increase is primarily
         attributable to staffing increases associated with acquisitions
         completed in 2nd half of 2005 and 2006 as compared to staffing level in
         2005. The increase in employees was attributable to the SkyVue USA
         acquisition, other smaller wireless company acquisitions and management
         resources necessary for the Company's anticipated growth.

     o   A $372,000 increase in professional services. The increase is primarily
         related to accounting expense of $184,000, legal expense of $60,000,
         investor relations expense of $235,000, settlement expense of $102,000,
         offset with a $125,000 decrease in professional fees other and a
         $93,000 decrease in consulting expense due to a re-class to accounting
         expense. The increase in professional fees is principally associated
         with additional resources in the field of investor relations and legal
         expenses. Additionally, the Company utilizes certain consulting
         resources in accounting to update the financial reporting systems to
         appropriately handle the anticipated growth, debt registration and
         implementing internal controls.

     o   A $100,000 increase in rent and maintenance expenses, primarily due to
         leases obtained through SkyVue USA acquisition and repairs and
         maintenance of buildings.

     o   A $144,000 increase in depreciation and amortization, due principally
         to the SkyVue USA acquisition, resulting in increased amortization of
         intangibles of $101,000.

     o   A $414,000 increase in other general and administrative expense. The
         increase is primarily related to office supplies expense of $39,000,
         insurance expense of $19,000, utility expense of $122,000, advertising
         expense of $40,000, travel and entertainment expense of $93,000 and bad
         debt expense of $18,000. The increase in other and general
         administrative expense primarily attributable to increased cost
         associated with the Skyvue USA acquisition at end of year of 2005 and
         other smaller acquisitions.

OTHER (INCOME) EXPENSE, NET

The decrease in other (income) expense is primarily attributable to derivative
instruments income of $928,000. This income represents the net unrealized
(non-cash) charge during the twelve months ended December 31, 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. Additionally interest associated with the derivative instruments
accounted for $657,000 during the year.

NET LOSS

For the twelve months ended December 31, 2006, our net loss was $5,232,000
compared to a loss of $3,411,000 for the twelve months ended December 31, 2005.
The increase in the loss for the twelve months ended December 31, 2006 as
compared to the twelve months ended December 31, 2005, was attributable to the
factors discussed immediately above.

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS

For the twelve months ended December 31, 2006, our net loss was $5,362,000
compared to a loss of $4,753,000 for the twelve months ended December 31, 2005.
The Company's Net Loss Applicable to common shareholders included deemed
dividends on the beneficial conversion of the 87,000 shares of Series A
Preferred Stock that was limited to the amount of consideration received
totaling $130,000 in the year ended December 31, 2006.


                                       19


<PAGE>

YEAR ENDED DECEMBER 31, 2005, COMPARED TO YEAR ENDED DECEMBER 31, 2004

The following table sets forth summarized consolidated financial information for
the years ended December 31, 2005 and 2004:

CONDENSED FINANCIAL INFORMATION
<TABLE>
                                                            Twelve Months Ended December 31,
                                                  ----------------------------------------------------
                 ($ IN THOUSANDS)                   2005           2004        $ Change      % Change
                                                  -------        -------        -------       -------
<S>                                               <C>            <C>            <C>              <C>
Total sales                                       $   643        $   325        $   318            98%
Cost of goods sold                                    382             84            298           355%
                                                  -------        -------        -------       -------
Gross profit                                          261            241             20             8%
                                                  -------        -------        -------       -------
Percent of total sales                                 41%            74%
Operating expenses                                  3,364            960          2,404           250%
                                                  -------        -------        -------       -------
Loss from operations                               (3,103)          (719)        (2,384)          332%
Other income/(expense)                               (308)            --           (308)           --
                                                  -------        -------        -------       -------
Net loss                                           (3,411)          (719)        (2,692)          374%
                                                  -------        -------        -------       -------
Unrealized holding gain/(loss)                         --              2             (2)         -100%
                                                  -------        -------        -------       -------
Deemed dividend related to beneficial
     conversion feature of preferred stock         (1,342)          (750)          (592)           79%
                                                  -------        -------        -------       -------
Net loss attributable to common shareholders      $(4,753)       $(1,467)       $(3,286)          224%
                                                  =======        =======        =======       =======
</TABLE>

For the year ended December 31, 2005, the Company's business operations
reflected an increase in Wireless Messaging Services, Bundled Wireless Services
and Enterprise Network Services. For the year ended December 31, 2005, the
Company's consolidated operations generated net sales of $643,000 compared to
prior year net sales of $325,000. The increase in net sales is primarily
attributable to an increase in product sales of $93,000 and service sales of
$201,000 from the banking network business and wireless broadband installation
attributable to two major customers. For the year ended December 31, 2005, the
Company had a gross profit margin of 41%, compared to a gross profit percentage
of 74% for the prior year. The decrease in gross profit percentage is primarily
attributable to several factors: (i) a reclassification of rent and maintenance
to cost of goods sold of $36,000 related to paging services as compared to prior
year rent and maintenance of $32,000 classified in operating expense; (ii) lower
margin on product and service sales; and (iii) depreciation expenses of $9,000,
primarily associated with the acquisition of Skyvue USA ISP equipment.

The Company's net loss for the year ended December 31, 2005, included
approximately $243,000 in depreciation and amortization expenses, $889,000 in
non-cash charges, $1,367,000 in employment expenses net of non-cash and $543,000
in professional services net of non-cash charges

SALES INFORMATION

Set forth below is a table presenting summarized sales information for our
business segments for the years ended December 31, 2005 and 2004:

<TABLE>
<S>     <C>
            ($ IN THOUSANDS)                                        Fiscal Year Ended December 31,
                                   ------------------------------------------------------------------------------------------------
          Business Segment              2005        % of Total           2004         % of Total        $ Change        % Change
                                   -------------   --------------   --------------   --------------   -------------    ------------
    Wireless Messaging Services     $       416              65%    $         313              96%    $        103             33%
    Bundled Wireless Services                60               9%               12               4%              48            400%
    Enterprise Network Services             167              26%                -               0%             167              -
                                   -------------   --------------   --------------   --------------   -------------    ------------
    Total sales                    $        643             100%    $         325             100%    $        318             98%
                                   =============   ==============   ==============   ==============   =============    ============
</TABLE>

For the year ended December 31, 2005, net sales increased to $643,000 from
$325,000 for the year ended December 31, 2004. The overall increase of 98% was
attributable to a $167,000 increase in Enterprise Network Services, increase of
$103,000 of Wireless Messaging Services and an increase in Bundled Wireless
Services of $48,000. The $167,000 increase in sales of the Enterprise Network
Services for the year ended December 31, 2005, was primarily attributable to
sales from the Skyvue USA acquisition consisting of product and service sales of
enterprise-class encrypted wireless banking network business from a major
customer. The increase of $103,000 in Wireless Messaging Services is primarily
attributable to wireless broadband system design and implementation from a major
customer. The increase of $48,000 in Bundled Wireless Services is primarily
attributable to increased customer base through acquisition of ISP subscriber
agreements.


                                       20


<PAGE>

COST OF GOODS SOLD

The following tables set forth summarized cost of goods sold information for the
years ended December 31, 2005 and 2004:

<TABLE>
<S>     <C>
              ($ IN THOUSANDS)                                    Fiscal Year Ended December 31,
              Business Segment            2005       % of Total        2004         % of Total          $ Change        % Change
                                     -------------  ------------  --------------   --------------    --------------   --------------
      Wireless Messaging Services     $       200           52%   $          77              92%     $         123             160%
      Bundled Wireless Services                37           10%               7               8%                30             429%
      Enterprise Network Services             145           38%               -               0%               145               -
                                     -------------  ------------  --------------   --------------    --------------   --------------
      Total cost of goods sold       $        382          100%   $          84             100%     $         298             355%
                                     =============  ============  ==============   ==============    ==============   ==============

      DETAILED COST OF GOODS SOLD

                                                             Year Ended December 31,
                                                     --------------------------------------
              ($ IN THOUSANDS)                            2005                  2004               $ Change           % Change
                                                     ----------------     -----------------    -----------------    ---------------

      Products and integration service               $           249      $             75     $            174               232%
      Rent and maintenance                                        73                                         73
      Salary and related costs                                    23                                         23
      Depreciation                                                 9                                          9
      Other costs                                                 28                     9                   19               211%
                                                     ----------------     -----------------    -----------------    ---------------
      Total cost of goods sold                       $           382      $             84     $            298               355%
                                                     ================     =================    =================    ===============
</TABLE>

For the year ended December 31, 2005, cost of goods sold increase by $298,000,
or 355%, to $382,000 from $84,000 as compared to the year ended December 31,
2004. The increase of $298,000 in cost of goods sold is primarily attributable
to: (i) product and service cost of $174,000 associated with Skyvue USA
acquisition of Enterprise Network Services and Wireless Messaging Services due
to increase sales from two major customers; and (ii) $73,000 of rent and
maintenance cost associated with a reclassification of rent and maintenance to
cost of goods sold of $36,000 related to paging services as compared to prior
year rent and maintenance of $32,000 classified in operating expense and
additionally $37,000 cost associated with maintenance contracts related to
banking network.

OPERATIONS EXPENSES

The following table sets forth summarized operating expense information for the
years ended December 31, 2005 and 2004:

                                                Year Ended December 31,
                                     -------------------------------------------
             ($ IN THOUSANDS)         2005        2004      $ Change    % Change
                                     ------      ------      ------      ------

   Employment expenses               $1,456      $  546      $  910         167%
   Professional services              1,202          91       1,111        1221%
   Rent and maintenance                 188          74         114         154%
   Depreciation and amortization        110          12          98         817%
   Other general and administrative     408         237         171          72%
                                     ------      ------      ------      ------
   Total operating expenses          $3,364      $  960      $2,404         250%
                                     ======      ======      ======      ======

For the year ended December 31, 2005, operating expenses increased by 250% to
$3,364,000, as compared to $960,000 for the year ended December 31, 2004. The
increases that occurred, as evidenced by the immediately preceding table, are
discussed below:

     o   A $910,000 increase in employment expense. The increase is primarily
         attributable to an increase in employee head count to 35 from 14 from a
         year ago. The increase in employees mostly related to the Skyvue USA
         acquisition, other smaller wireless company acquisitions and management
         resources necessary for the Company's anticipated growth.

     o   A $1,111,000 increase in professional services. The increase is
         primarily related to consulting expense of $378,000, accounting expense
         of $223,000, legal expense of $125,000, investor relations expense of
         $165,000 and settlement expense of $102,000. The significant rise in
         professional fees is principally associated with additional resources
         in the field of consulting, accounting, and legal expenses.
         Additionally, the Company utilizes certain consulting resources to
         update the financial reporting systems to appropriately handle the
         anticipated growth and implement internal controls.

     o   An $114,000 increase in rent and maintenance expenses, primarily due to
         office lease expense for the corporate office and other leases obtained
         through the Skyvue USA acquisition.

     o   A $98,000 increase in depreciation and amortization, due principally to
         the Skyvue USA acquisition of amortization of intangibles of $70,000.


                                       21


<PAGE>

     o   A $171,000 increase in other general and administrative expense. The
         increase is primarily related to office supplies expense of $58,000,
         insurance and taxes expense of $29,000, utility expense of $49,000,
         advertising expense of $17,000 and travel, entertainment expense of
         $55,000 and offset with a $67,000 decrease in bad debt. The increase in
         other and general administrative expense primarily attributable to
         increased cost associated with the Skyvue USA acquisition. A decrease
         in current years allowance for doubtful accounts was attributable to
         collection of prior year accounts receivable which were deemed
         uncollectible in 2004.

OTHER (INCOME) EXPENSE, NET

The increase in other (income) expense is primarily attributable to derivative
instruments expense of $151,000. This expense represents the net unrealized
(non-cash) charge during the twelve months ended December 31, 2005 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. Additionally interest associated with the new debt increase to
$164,000 during the year.

NET LOSS

For the twelve months ended December 31, 2005, our net loss was $3,411,000
compared to a loss of $719,000 for the twelve months ended December 31, 2004.
The increase in the loss for the twelve months ended December 31, 2005 as
compared to the twelve months ended December 31, 2004, was attributable to the
factors discussed immediately above.

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS

For the twelve months ended December 31, 2005, our net loss was $4,753,000
compared to a loss of $1,467,000 for the twelve months ended December 31, 2004.
The Company's Net Loss Applicable to common shareholders included deemed
dividends on the beneficial conversion of the 1,894,000 shares of Series A
Preferred Stock that was limited to the amount of consideration received
totaling $1,342,000 in the year ended December 31, 2005.

CASH FLOWS

The Company's operating activities increased net cash used by operating
activities to $2,677,000 in the year ended December 31, 2006, compared to net
cash used of $1,968,000 in the year ended December 31, 2005. The increase in net
cash used by operating activities was primarily attributable to fund an increase
in the company's net operating loss $5,232,000, net of $2,698,000 non-cash
charges combined with derivative income $928,000 to equal net non-cash charge of
$1,770,000, combined together with $785,000 of cash used by fluctuations in
working capital requirements consisting of the combination of accounts
receivable, inventory, prepaid expenses, accounts payable, accrued expenses,
cost in excess of billings, deferred liability lease and deferred revenue.

The Company's investing activities used net cash of $226,000 in the year ended
December 31, 2005, compared to use of net cash of $373,000 in the year ended
December 31, 2005. Spending has decreased compared to last year capital spending
and growth through acquisition.

The Company's financing activities provided net cash proceeds of $2,694,000 in
the year ended December 31, 2006, compared to $2,937,000 of cash provided in the
year ended December 31, 2005. The cash provided in the twelve months ended
December 31, 2006, was primarily associated with the investor advances of
$130,000, proceeds from line of credit net and other financing arrangements net
of $2,446,000 and proceeds received from the company's private placement of
$118,000 from common stock net of commissions.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2006, the Company's current assets totaled $1,118,000 (including
cash and cash equivalents of $393,000). Total current liabilities were
$1,814,000, resulting in negative working capital of $696,000. The Company has
funded operations to date through a combination of utilizing cash on hand,
issuing common stock to settle certain current liabilities, borrowings and
raising additional capital through the sale of its securities.

At December 31, 2006, the Company had approximately $1 million available on a $3
million unsecured revolving credit facility maturing in February 2009. 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 6% rate. The loan may be prepaid without penalty
or repaid at maturity. In the event that the Company draws down the full $3
million amount available under the revolving credit facility on or prior to
December 31, 2007, and the Company requires additional working capital to pursue
its business strategy and operations and has not closed on alternative debt or
equity financing aggregating at least $1 million, the lender has agreed to fund
up to an additional $1 million during 2007 under the same terms and conditions.

We believe our cash, anticipated cash flow from operations and available credit
facilities afford us adequate liquidity for the next 12 months, although we
expect to raise additional capital during this period to fund our anticipated
growth for our banking and WISP network businesses if acceptable terms are
available, or to fund unexpected or unanticipated working capital expenditures.


                                       22


<PAGE>

Furthermore, we anticipate that we will need additional capital in the future to
continue to expand our business operations, which expenditures may include the
following:

     o   Acquisitions of one or more companies, networks or other assets

     o   Investment in towers, radios, customer premise equipment and other
         related equipment associated with wireless broadband expansion plans

     o   Investment in back office systems and related infrastructure to support
         the Company's wireless broadband expansion plans

     o   Investment in laboratory facilities including test and simulation
         equipment

     o   Investment or licensing of certain intellectual property related to the
         Company's wireless broadband expansion plans

     o   General working capital purposes

The Company operations for the twelve months ended December 31, 2006, was
primarily funded by investor advances of $130,000, proceeds from the Company's
line of credit, net totaling $2,006,000, proceeds from convertible debt
financing of $513,000 and net proceeds from sales of common stock of 118,000.

Other than the credit facility with Angus Capital Partners, we do not have any
significant credit facilities available with financial institutions or other
third parties and as such we must rely upon best efforts third-party funding
from individual accredited investors. The Company will use its best efforts to
raise additional funds through the sale of debt or equity securities to meet
future working capital requirements.

There can be no assurance that we will be successful in raising any funds from
any of these debt or equity offerings or from any future best efforts financing
efforts. If we are unable to either obtain financing from external sources or
generate internal liquidity from anticipated future operations, we may need to
curtail acquisition plans and operations.

CONTRACTUAL OBLIGATIONS

The following table sets forth contractual obligations as of December 31, 2006:

<TABLE>
                                                            Payments Due by Period
                                  -----------------------------------------------------------------------
                                                  Less than                                    More than
                                    Total          1  Year        1-3 Years      3-5 Years      5 Years
                                  ----------      ----------     ----------     ----------     ----------
<S>                               <C>             <C>            <C>            <C>            <C>
CONTRACTUAL OBLIGATIONS:
  Long-term debt obligations      $    3,839      $    1,502     $    2,337     $       --     $       --
  Operating lease obligations          1,522             434            881            207             --
                                  ----------      ----------     ----------     ----------     ----------
TOTAL CONTRACTUAL OBLIGATIONS     $    5,361      $    1,936     $    3,218     $      207     $       --
                                  ==========      ==========     ==========     ==========     ==========
</TABLE>

The Company's contractual obligations consist of long-term debt of $2,799,000,
derivative liabilities of $313,000 unamortized debt discount of $523,000 and
interest expense of $204,000 as set forth in Note 10 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 12 - Commitments and Contingencies.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2006, 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

GENERAL

We have adopted various accounting policies to prepare our consolidated
financial statements in accordance with U.S. GAAP. Our most significant
accounting policies are described in Note 1 to our consolidated financial
statements included elsewhere in this report. The preparation of our
consolidated financial statements in conformity with U.S. GAAP requires us to
make estimates and assumptions that affect the amounts reported in our
consolidated financial statements and accompanying notes. Our estimates and
assumptions, including those related to bad debts, inventories, intangible
assets, sales returns and discounts, and income taxes are updated as
appropriate.


                                       23


<PAGE>

Certain of our more critical accounting policies require the application of
significant judgment by management in selecting the appropriate assumptions for
calculating financial estimates. By their nature, these judgments are subject to
an inherent degree of uncertainty. These judgments are based on our historical
experience, terms of existing contracts, and our observance of trends in the
industry, information provided by our customers, and information available from
other outside sources, as appropriate. Different, reasonable estimates could
have been used in the current period. Additionally, changes in accounting
estimates are reasonably likely to occur from period to period. Both of these
factors could have a material impact on the presentation of our financial
condition, changes in financial condition or results of operations.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant inter-company accounts and transactions have
been eliminated in consolidation.

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 and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

REVENUE RECOGNITION

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.

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.

FIXED ASSETS

Furniture and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. The costs
associated with normal maintenance, repair, and refurbishment of equipment are
charged to expense as incurred. The capitalized cost of equipment and vehicles
under capital leases is amortized over the lesser of the lease term or the
asset's estimated useful life, and is included in depreciation and amortization
expense in the consolidated statements of operations.

When assets are retired or otherwise disposed of, the costs and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is recognized as income for the period. The cost of maintenance and
repairs is charged to income as incurred; significant renewals and betterments
are capitalized. Deductions are made for retirements resulting from renewals or
betterments.


                                       24


<PAGE>

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:

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

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

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

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

     o   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.

CONCENTRATIONS OF CREDIT RISK

Trade accounts receivable are concentrated with companies or entities in the
regional banking and Internet services industry. Accordingly, the credit risk
associated with the trade accounts receivable will fluctuate with the overall
condition of the regional banking and Internet services industries. The primary
component of accounts receivable relates to the Company's sales of banking
wireless broadband networks and Internet service revenues. As a result, such
estimates are based on the Company's historical collection experience and
accounts receivable does reflect a general or specific provision for an
allowance for doubtful accounts. During all periods presented, credit losses, to
the extent identifiable, were within management's overall expectations.

DERIVATIVE INSTRUMENTS

In connection with the sale of debt or equity instruments, we 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 identification of, and accounting for, derivative instruments is complex.
Our 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, we estimate 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, we have estimated the future
volatility of our common stock price based on not only the history of our stock
price but also the experience of other entities considered comparable to us. The
identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the FASB ratified the consensus reached by the Emerging Issues
Task Force ("EITF"), on Issue NO. 03-13, "Applying the Conditions in Paragraph
42 of FASB Statement No. 144 on Determining Whether to Report Discontinued
Operations." The Issue provides a model to assist in evaluating (a) which cash
flows should be considered in the determination of whether cash flows of the
disposal component have been or will be eliminated from the ongoing operations
of the entity and (b) the types of continuing involvement that constitute
significant continuing involvement in the operations of the disposal component.
Should significant continuing ongoing involvement exist, then the disposal
component shall be reported in the results of continuing operations or the
consolidated statements of operations and cash flows. We are currently
evaluating the premises of EITF No. 03-13 and will adopt it as required.


                                       25


<PAGE>

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 SEC issued Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when quantifying Misstatements in
Current Year Financial Statements ("SAB 108"). SAB 108 requires companies to
evaluate the materiality of identified unadjusted errors on each financial
statement and related financial statement disclosure using both the rollover
approach and the iron curtain approach, as those terms are defined in SAB 108.
The rollover approach quantifies misstatements based on the amount of the error
in the current year financial statement, whereas the iron curtain approach
quantifies misstatements based on the effects of correcting the misstatement
existing in the balance sheet at the end of the current year, irrespective of
the misstatement's year(s) of origin. Financial statements would require
adjustment when either approach results in quantifying a misstatement that is
material. Correcting prior year financial statements for immaterial errors would
not require previously filed reports to be amended. If a Company determines that
an adjustment to prior year financial statements is required upon adoption of
SAB 108 and does not elect to restate its previous financial statements, then it
must recognize the cumulative effect of applying SAB 108 in fiscal 2006
beginning balances of the affected assets and liabilities with a corresponding
adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is
effective for interim periods of the first fiscal year ending after November 15,
2006. The Company does not expect the adoption of this interpretation to have an
impact on its financial position or results of operations.

On October 10, 2006, the FASB issued FSP No. FAS 123(R)-5, titled AMENDING
GUIDANCE FOR ACCOUNTING FOR MODIFICATIONS OF INSTRUMENTS IN CONNECTION WITH
EQUITY RESTRUCTURING ("FSP FAS 123(R)-5"). FSP FAS 123(R)-5 addresses whether a
modification of an instrument in connection with an equity restructuring should
be considered a modification for purposes of applying FSP FAS 123(R)-1. It
stipulates that for instruments that were originally issued as employee
compensation and then modified solely to reflect an equity restructuring that
occurs when the holders are no longer employees, that there is no change in the
recognition or measurement of those instruments if (a) there is no increase in
fair value of the award and (b) all holders of the same class of instruments are
treated in the same manner. The guidance in FSP FAS 123(R)-5 is effective in the
first reporting period beginning after October 10, 2006. Early application is
permitted in periods for which financial statements have not been issued.
Management is currently evaluating the impact of FSP FAS 123(R)-5 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.

FSP FAS 123(R)-6 was issued to make several technical corrections to SFAS
123(R). These include exemption for non-public entities from disclosing the
aggregate intrinsic value of outstanding fully vested share options, revision to
the computation of the minimum compensation cost that must be recognized,
indication that at the date the illustrative awards were no longer probable of
vesting, any previously recognized compensation cost should have been reversed,
and changes to the definition of short-term inducement to exclude an offer to
settle an award. The guidance in FSP FAS 123(R)-6 is effective in the first
reporting period beginning after October 20, 2006. Early application is
permitted in periods for which financial statements have not yet been issued.
Management is currently evaluating the impact of FSP FAS 123(R)-6 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 February 2006, the FASB issued SFAS No. 155, "" ("SFAS No. 155") which amends
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133") and SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" ("SFAS No. 140"). SFAS No.
155 simplifies the accounting for certain derivatives embedded in other
financial instruments by allowing them to be accounted for as a whole if the
holder elects to account for the whole instrument on a fair value basis. SFAS
No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and
SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired,
issued or subject to a re-measurement event occurring in fiscal years beginning
after September 15, 2006. Earlier adoption is permitted, provided the company
has not yet issued financial statements, including for interim periods, for that
fiscal year. SFAS No. 155 will be effective for the Company in the first quarter
of fiscal 2007 and is not expected to have an impact on the Company's 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.


                                       26


<PAGE>

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.

INFLATION

The Company's results of operations have not been affected by inflation and
management does not expect inflation to have a significant effect on its
operations in the future.


                                       27


<PAGE>

ITEM 7. 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, 2006 and 2005, 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, 2006 and 2005, 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.

LBB & ASSOCIATES LTD., LLP
Houston, Texas
April 06, 2007


                                       28


<PAGE>

<TABLE>
<S>     <C>
                                                ERF WIRELESS, INC.
                                            CONSOLIDATED BALANCE SHEET
                                       DECEMBER 31, 2006 AND DECEMBER 2005
                                        ($ IN THOUSANDS EXCEPT SHARE DATA)

                                                                                     DECEMBER 31,     DECEMBER 31,
                                                                                         2006             2005
                                                                                     -----------      -----------

                                                     ASSETS

CURRENT ASSETS
  Cash and cash equivalents                                                          $       393      $       602
  Accounts receivable, net                                                                   387               85
  Inventories                                                                                132              139
  Cost and profit in excess of billings                                                       69               --
  Prepaid expenses                                                                           137              423
                                                                                     -----------      -----------
      TOTAL CURRENT ASSETS                                                                 1,118            1,249
                                                                                     -----------      -----------

PROPERTY AND EQUIPMENT
  Property and equipment                                                                   1,001              465
  Less accumulated depreciation                                                             (199)             (63)
                                                                                     -----------      -----------
      TOTAL PROPERTY AND EQUIPMENT                                                           802              402
                                                                                     -----------      -----------


INTANGIBLE ASSETS, NET                                                                       299              436
OTHER ASSETS                                                                                   5                3
                                                                                     -----------      -----------
TOTAL ASSETS                                                                         $     2,224      $     2,090
                                                                                     ===========      ===========

                                      LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES:
  Accounts payable                                                                   $       506      $       163
  Accrued expenses                                                                           281              203
  Derivative liabilities                                                                     313            1,143
  Notes payable and current portion of long-term debt                                        519              809
  Deferred liability leases                                                                  186               --
  Deferred revenue                                                                             9              307
                                                                                     -----------      -----------
      TOTAL CURRENT LIABILITIES                                                            1,814
                                                                                                            2,625
                                                                                     -----------      -----------

  Long-term notes payable                                                                  2,280              204
  Deferred liability leases                                                                  639               --
  Deferred revenue                                                                            25               23
                                                                                     -----------      -----------
      TOTAL LONG-TERM  LIABILITIES                                                         2,944              227
                                                                                     -----------      -----------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' DEFICIT:
Preferred stock -- $.001 par value
    Authorized 25,000,000 shares Issued and outstanding at December 31, 2006 and
    December 31, 2005, 3,800,649 and 4,173,530, respectively                                   4                4
  Common stock - $.001 par value
    Authorized 475,000,000 shares Issued and outstanding at December 31, 2006,
    and December 31, 2005, 24,039,733 and 7,645,031, respectively                             24                8
  Additional paid in capital                                                               9,065            5,491
  Accumulated deficit                                                                    (11,627)          (6,265)
                                                                                     -----------      -----------
      TOTAL SHAREHOLDERS' DEFICIT                                                         (2,534)            (762)
                                                                                     -----------      -----------

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                          $     2,224      $     2,090
                                                                                     ===========      ===========

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                                       29


<PAGE>

                               ERF WIRELESS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
              ($ IN THOUSANDS EXCEPT SHARE DATA AND LOSS PER SHARE)


                                                      2006             2005
                                                  -----------       -----------

SALES:
  Products                                        $     1,084       $       110
  Services                                                586               533
  Other                                                    46                --
                                                  -----------       -----------
TOTAL SALES                                             1,716               643
                                                  -----------       -----------

COSTS OF GOODS SOLD:
   Products and integration services                      993               249
   Rent, repairs and maintenance                           67                73
   Salary and related cost                                 91                23
   Depreciation                                            54                 9
   Other cost                                              59                28
                                                  -----------       -----------
TOTAL COSTS OF GOODS SOLD                               1,264               382
                                                  -----------       -----------
GROSS PROFIT                                              452               261
                                                  -----------       -----------

OPERATING EXPENSES:
  Selling, general and administrative                   5,502             3,254
  Depreciation and amortization                           254               110
                                                  -----------       -----------
TOTAL OPERATING EXPENSES                                5,756             3,364
                                                  -----------       -----------

LOSS FROM OPERATIONS                                   (5,304)           (3,103)
                                                  -----------       -----------

OTHER INCOME/(EXPENSES):
  Interest income                                           5                 7
  Interest expense                                       (738)             (164)
  Loss on extinguishment of debt                          (48)               --
  Warrant expense                                         (76)               --
  Derivative income (loss)                                929              (151)
                                                  -----------       -----------
TOTAL OTHER INCOME (EXPENSE)                               72              (308)
                                                  -----------       -----------

NET LOSS                                          $    (5,232)      $    (3,411)
                                                  ===========       ===========

Deemed dividend related to beneficial
     conversion feature of preferred stock               (130)           (1,342)

                                                  ===========       ===========
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS        $    (5,362)      $    (4,753)
                                                  ===========       ===========

NET LOSS PER COMMON SHARE:
  Basic                                           $     (0.37)      $     (0.61)
  Diluted                                         $     (0.37)      $     (0.61)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       30


<PAGE>

                                                         ERF WIRELESS, INC.
                                      CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
                                           FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
                                                          ($ IN THOUSANDS)

                                                                                                                            TOTAL
                                                                                                                            SHARE-
                                                    COMMON STOCK           PREFERRED STOCK      ADDITIONAL                  HOLDERS'
                                                 -------------------    ---------------------    PAID IN      RETAINED      EQUITY
                                                 SHARES      VALUE       SHARES       VALUE      CAPITAL      EARNINGS     (DEFICIT)
                                                --------    --------    --------     --------    --------     --------     --------

TOTAL SHAREHOLDERS' EQUITY                         4,487    $      5       2,331     $      2    $  1,523     $ (1,512)    $     18
   AS OF DECEMBER 31, 2004

Net loss                                              --          --          --           --          --       (3,411)      (3,411)

New stock issued to shareholders:
  Conversion of preferred stock to common stock    2,756           3        (147)          --          (3)          --           --
  For services, compensation and liabilities         260          --          --           --       1,099           --        1,099
  For retirement of debt and conversion of
    convertible preferred stock of employment
    contracts                                         --          --       1,990            2       1,340           --        1,342
  Beneficial conversion value - deemed dividend
    on preferred stock                                --          --          --           --       1,342       (1,342)          --
  Proceeds from sale of common stock, net            142          --          --           --         190           --          190
                                                --------    --------    --------     --------    --------     --------     --------
TOTAL SHAREHOLDERS' DEFICIT
   AS OF DECEMBER 31, 2005                         7,645           8       4,174            4       5,491       (6,265)        (762)

Net loss                                              --          --          --           --          --       (5,232)      (5,232)

New stock issued to shareholders:
  Conversion of preferred stock to common stock    8,583           8        (460)          --          (8)          --           --
  For services, compensation and liabilities       2,743           2          --           --       1,512           --        1,514
  For retirement of debt                           4,152           5          --           --       1,144           --        1,149
  Asset acquisition                                  750           1          --           --         299           --          300
  For retirement of debt and conversion of
    convertible preferred stock of employment
    contracts                                         --          --          87           --         130           --          130
  Beneficial conversion value - deemed dividend
    on preferred stock                                --          --          --           --         130         (130)          --
  Stock based compensation and stock option
    expense                                           --          --          --           --         173           --          173
  Warrant options expense                             --          --          --           --          76           --           76
  Proceeds from sale of common stock, net            167          --          --           --         118           --          118
                                                --------    --------    --------     --------    --------     --------     --------
TOTAL SHAREHOLDERS' DEFICIT
   AS OF DECEMBER 31, 2006                        24,040    $     24       3,801     $      4    $  9,065     $(11,627)    $ (2,534)
                                                ========    ========    ========     ========    ========     ========     ========

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                                                 31


<PAGE>

                                    ERF WIRELESS, INC.
                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 2006 AND 2005
                                     ($ IN THOUSANDS)


                                                             DECEMBER 31,     DECEMBER 31,
                                                                 2006            2005
                                                             -----------      -----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                     $    (5,232)     $    (3,411)
                                                             -----------      -----------

Adjustments to reconcile net loss to net cash
    used by operating activities:
  Loss on extinguishment of debt                                      48               --
  Amortization of debt discount                                      561              124
  Depreciation and amortization                                      308              119
  Stock issued for interest expense                                   84               --
  Stock issued for services rendered                               1,430              889
  Stock based compensation and stock option expense                  173               --
  Warrant expense                                                     76               --
  Derivative (income) loss                                          (928)             151
  Allowance for doubtful accounts                                     18              (14)
  (Increase) in accounts receivable, net                            (320)             (67)
  Decrease (increase) in inventories                                   7              (77)
  Decrease (increase) in prepaid expenses                            246             (233)
  (Increase) in cost and profit in excess of billings                (69)              --
  Increase in accounts payable                                       314               87
  Increase in accrued expenses                                        78              179
  Increase in deferred liability lease                               825               --
  (Decrease) increase in deferred revenue                           (296)             285
                                                             -----------      -----------
    Total Adjustment                                               2,555            1,443
                                                             -----------      -----------
NET CASH USED BY OPERATING ACTIVITIES                             (2,677)          (1,968)
                                                             -----------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property and equipment                                (224)            (252)
  Payment for purchase of SkyVue, net of cash acquired                --             (125)
  Decrease in marketable securities                                   --                7
  (Increase) in other assets                                          (2)              (3)
                                                             -----------      -----------
NET CASH USED BY INVESTING ACTIVITIES                               (226)            (373)
                                                             -----------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net proceeds from line of credit                                 2,506               --
  Proceeds from financing agreements                                 513            1,552
  Payment of debt obligations                                       (573)            (147)
  Proceeds from  investor loans                                      130            1,342
  Proceeds from sale of common stock, net                            118              190
                                                             -----------      -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                          2,694            2,937
                                                             -----------      -----------

NET (DECREASE) INCREASE IN CASH                                     (209)             596
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD             602                6
                                                             -----------      -----------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD           $       393      $       602
                                                             ===========      ===========

Supplemental disclosure of cash flow information:
  Net cash paid during the year for:
  Interest                                                   $         6      $         8
  Income taxes                                               $        --      $        --

Supplemental non-cash investing and financing activities:
   Asset purchase through issuance of stock                  $       300      $        --
   Retirement of debt through issuance of stock              $     1,149      $        --

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                           32
</TABLE>


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

NATURE OF THE COMPANY

ERF Wireless, Inc. (the Company), provides wireless communications products and
services including the Company's core focus of providing enterprise-class
wireless broadband services. The Company has formed four operating divisions to
provide solutions and services to different segments of the wireless industry.
The Company's Enterprise Network Services Division was formed to serve
enterprise customers, private entities, cities, unincorporated municipalities
and the general public. The Company's Wireless Bundled Services Division was
formed to provide wireless broadband products and services, including Internet,
voice, data, security and video services, and is in the early stages of building
or acquiring a seamless wireless broadband network throughout North America to
serve private entities, cities, municipalities and the general public. The
Company's Wireless Messaging Services Division provides wireless broadband
system design and implementation, manufactures and supplies high-power
infrastructure equipment for the wireless messaging industry and owns and
operates a wide-area wireless messaging service (one- and two-way cellular and
paging retail). The Company's Network Operations Services Division provides the
overall day-to-day operations, maintenance, upgrading, 24/7 monitoring and
expansion of all wireless broadband networks that the Company constructs,
acquires, maintains and administers. Please refer to segment footnote 14 for
additional information regarding Company 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 ERF Wireless, Inc., 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.

RECLASSIFICATION

Certain amounts in the 2005 financial statements have been reclassified to
conform to the 2006 financial presentation. These reclassifications have no
impact on net loss.

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 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.

LEASES

We recognize lease expense on a straight-line basis over the minimum lease terms
which expire at various dates through 2012. 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.


                                       33


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

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 assumed multiple
tower and office leases in the greater Lubbock, Texas area. As part of the
agreement ERF Wireless 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 2006 and 2005, this deferred lease
liability balance was $825,000 and $0.

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 $34,000 and $330,000 as of December 31, 2006, and December 31,
2005, respectively.

ADVERTISING COSTS

Advertising costs are expensed when incurred. For the periods ended December 31,
2006 and 2005, the Company expensed $82,000 and $42,000, respectively.

STOCK-BASED COMPENSATION

In December 2004, FASB issued a revision to SFAS 123 (also known as SFAS 123R)
that amends existing accounting pronouncements for share-based payment
transactions in which an enterprise receives employee and certain non-employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS 123R eliminates the ability to account for share-based compensation
transactions using APB 25 and generally requires such transactions be accounted
for using a fair-value-based method. SFAS 123R's effective date would be
applicable for awards that are granted, modified, become vested, or settled in
cash in interim or annual periods beginning after December 15, 2005. SFAS 123R
includes three transition methods: a prospective method, a modified prospective
method and a retroactive method. The Company adopted SFAS 123R in the fourth
quarter of the fiscal year ending December 31, 2005.

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


                                       34


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

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, in
thousands:

                                            December 31,     December 31,
                                               2006             2005
                                             --------         --------

         Raw material                        $     41         $    125
         Finished goods                            91               14
                                             --------         --------
                                             $    132         $    139
                                             ========         ========

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.

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.

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:

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

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

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

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

         o        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.


                                       35


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

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. 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.

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.

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 reduction on the
carrying value of the equity instrument 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
applicable to common stockholders by the weighted average number of common
shares outstanding.

Diluted net loss per common share is computed by dividing the net loss
applicable to common stockholders, 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, 2006, and December 31, 2005,
potential dilutive securities had an anti-dilutive effect and were not included
in the calculation of diluted net loss per common share.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the FASB ratified the consensus reached by the Emerging Issues
Task Force ("EITF"), on Issue NO. 03-13. "Applying the Conditions in Paragraph
42 of FASB Statement No. 144 on Determining Whether to Report Discontinued
Operations". The Issue provides a model to assist in evaluating (a) which cash
flows should be considered in the determination of whether cash flows of the
disposal component have been or will be eliminated from the ongoing operations
of the entity and (b) the types of continuing involvement that constitute
significant continuing involvement in the operations of the disposal component.
Should significant continuing ongoing involvement exist, then the disposal
component shall be reported in the results of continuing operations or the
consolidated statements of operations and cash flows. We are currently
evaluating the premises of EITF No. 03-13 and will adopt it as required.


                                       36


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE 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 SEC issued Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when quantifying Misstatements in
Current Year Financial Statements ("SAB 108"). SAB 108 requires companies to
evaluate the materiality of identified unadjusted errors on each financial
statement and related financial statement disclosure using both the rollover
approach and the iron curtain approach, as those terms are defined in SAB 108.
The rollover approach quantifies misstatements based on the amount of the error
in the current year financial statement, whereas the iron curtain approach
quantifies misstatements based on the effects of correcting the misstatement
existing in the balance sheet at the end of the current year, irrespective of
the misstatement's year(s) of origin. Financial statements would require
adjustment when either approach results in quantifying a misstatement that is
material. Correcting prior year financial statements for immaterial errors would
not require previously filed reports to be amended. If a Company determines that
an adjustment to prior year financial statements is required upon adoption of
SAB 108 and does not elect to restate its previous financial statements, then it
must recognize the cumulative effect of applying SAB 108 in fiscal 2006
beginning balances of the affected assets and liabilities with a corresponding
adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is
effective for interim periods of the first fiscal year ending after November 15,
2006. The Company does not expect the adoption of this interpretation to have an
impact on its financial position or results of operations.

On October 10, 2006, the FASB issued FSP No. FAS 123(R)-5, titled AMENDING
GUIDANCE FOR ACCOUNTING FOR MODIFICATIONS OF INSTRUMENTS IN CONNECTION WITH
EQUITY RESTRUCTURING ("FSP FAS 123(R)-5"). FSP FAS 123(R)-5 addresses whether a
modification of an instrument in connection with an equity restructuring should
be considered a modification for purposes of applying FSP FAS 123(R)-1. It
stipulates that for instruments that were originally issued as employee
compensation and then modified solely to reflect an equity restructuring that
occurs when the holders are no longer employees, that there is no change in the
recognition or measurement of those instruments if (a) there is no increase in
fair value of the award and (b) all holders of the same class of instruments are
treated in the same manner. The guidance in FSP FAS 123(R)-5 is effective in the
first reporting period beginning after October 10, 2006. Early application is
permitted in periods for which financial statements have not been issued.
Management is currently evaluating the impact of FSP FAS 123(R)-5 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.

FSP FAS 123(R)-6 was issued to make several technical corrections to SFAS
123(R). These include exemption for non-public entities from disclosing the
aggregate intrinsic value of outstanding fully vested share options, revision to
the computation of the minimum compensation cost that must be recognized,
indication that at the date the illustrative awards were no longer probable of
vesting, any previously recognized compensation cost should have been reversed,
and changes to the definition of short-term inducement to exclude an offer to
settle an award. The guidance in FSP FAS 123(R)-6 is effective in the first
reporting period beginning after October 20, 2006. Early application is
permitted in periods for which financial statements have not yet been issued.
Management is currently evaluating the impact of FSP FAS 123(R)-6 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 February 2006, the FASB issued SFAS No. 155, "" ("SFAS No. 155") which amends
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133") and SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" ("SFAS No. 140"). SFAS No.
155 simplifies the accounting for certain derivatives embedded in other
financial instruments by allowing them to be accounted for as a whole if the
holder elects to account for the whole instrument on a fair value basis. SFAS
No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and
SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired,
issued or subject to a re-measurement event occurring in fiscal years beginning
after September 15, 2006. Earlier adoption is permitted, provided the company
has not yet issued financial statements, including for interim periods, for that
fiscal year. SFAS No. 155 will be effective for the Company in the first quarter
of fiscal 2007 and is not expected to have an impact on the Company's 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.


                                       37


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

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,
                                                 2006           2005
                                              ---------      ---------
         Accounts receivable                  $     405      $      86
         Allowance for doubtful accounts            (18)            (1)
                                              ---------      ---------
         Accounts receivable, net             $     387      $      85
                                              =========      =========

NOTE 3 - PROPERTY AND EQUIPMENT:

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

                                              December 31,   December 31,
                                                  2006           2005
                                               ---------      ---------
         Automobile                            $      66      $      42
         Operating equipment                         627            211
         Office furniture and equipment               89             72
         Leasehold improvements                       60             17
         Computer equipment                          106             85
         Building                                      8             --
         Land                                         38             38
         Other                                         7             --
                                               ---------      ---------
           Total property and equipment            1,001            465
             Less accumulated depreciation          (199)           (63)
                                               ---------      ---------
           Net property and equipment          $     802      $     402
                                               =========      =========

Depreciation expense was approximately $136,000 and $49,000 for the twelve
months ended December 31, 2006 and 2005, respectively.


                                       38


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

NOTE 4 - INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):

<TABLE>
<S>     <C>
                                                         December 31, 2006
                                           ----------------------------------------------
                           Weighted
                            Average
                          Useful Life     Gross Carrying    Accumulated      Net Carrying
                           (in years)         Amount        Amortization        Amount
                          ------------     ------------     ------------     ------------

Customer relationships        3.0          $        296     $        126     $        170
Workforce in place            3.0                   125               59               66
Non-compete agreement         3.0                   100               47               53
Developed technology          3.0                    20               10               10
                                           ------------     ------------     ------------
                                           $        541     $        242     $        299
                                           ============     ============     ============


                                                         December 31, 2005
                                           ----------------------------------------------
                           Weighted
                            Average
                          Useful Life     Gross Carrying    Accumulated      Net Carrying
                           (in years)         Amount        Amortization        Amount
                          ------------     ------------     ------------     ------------

Customer relationships        3.0          $        261     $         36     $        225
Workforce in place            3.0                   125               17              108
Non-compete agreement         3.0                   100               14               86
Developed technology          3.0                    20                3               17
                                           ------------     ------------     ------------
                                           $        506     $         70     $        436
                                           ============     ============     ============
</TABLE>

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 October 17, 2006, ERFW completed the purchase of assets from NetYeti, Inc.,
and as part of the acquisition the Company acquired a customer list which was
valued at $35,000 and is being amortized over three years. Please see note 17
for additional details.


Total amortization of intangibles was $172,000 and $70,000 for the twelve months
ended December 31, 2006 and 2005, respectively. The estimated amortization
expense for the three years will be $180,000 for 2007, $110,000 for 2008 and
$9,000 in 2009.

NOTE 5 - DEBT CONVERSION

To date the Company has been funded by various Investors under the terms of a
Debt Conversion and Funding Agreement dated September 30, 2004, an Addendum to
Debt Conversion and Funding Agreement dated December 31, 2004, and a Second
Addendum to Debt Conversion and Funding Agreement dated July 1, 2005. During the
twelve months ended December 31, 2006, the Company was obligated to issue 86,667
shares of its Series A Preferred Stock for the conversion of $130,000 in debt
owed to these same Investors. The $130,000 of cash was received during the
twelve months ended December 31, 2006, and recorded as debt when initially
received and then converted to Series A Preferred Stock at the respective
quarter ending through December 31, 2006. The advances are unsecured, bear no
interest and are classified as investor advances and were immediately converted
into equity pursuant to the Debt Conversion and Funding Agreements. The Company
recorded a deemed dividend on the beneficial conversion of the 86,667 shares of
Series A Preferred Stock that was limited to the amount of consideration
received totaling $130,000 in the twelve months ended December 31, 2006. There
are no investor advances outstanding as of December 31, 2006. See note 6 for
additional details.

The Company was obligated to issue one share of Series A Convertible Preferred
Stock for every Fifty Cents ($0.50) in claims converted. The terms of the
agreement did not change in the addendum to Debt Conversion and Funding
Agreement with the exception of the incremental funding provision providing for
an incremental $750,000 in funding through the period ending December 31, 2006.
The Company was obligated to issue one share of Series A Convertible Preferred
Stock for every One Dollar and Fifty Cents ($1.50) in claims converted under the
Second Addendum to Debt Conversion and Funding Agreement. The Company had
$28,767 remaining available against the Second Addendum to Debt Conversion and
Funding Agreement at December 31, 2006.


                                       39


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

NOTE 6 - 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 five hundred million (500,000,000), of which twenty
five million (25,000,000) shall be shares of Preferred Stock with a par value of
$.001 per share ("Preferred Stock"), and four hundred seventy five million
(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, 2006, the Company had 24,039,733 shares of its $.001 par
value common stock issued and outstanding.

During the twelve months ended December 31, 2006, the Company issued 7,645,000
shares of common stock in lieu of cash for services rendered against
professional services and consulting agreements valued at $739,000, interest
expense of $84,000, settlement expense of $192,000, loss on extinguishment debt
$48,000 other services of $137,000, notes payable of $1,149,000, salary and
compensation of $362,000 and acquisition of assets of $300,000. The Company
valued the 7,645,000 shares at the closing market price on the date of issuance
of such shares.

PREFERRED STOCK

The Company has 25,000,000 shares of Series A Preferred Stock authorized of
which 3,800,649 shares were issued and outstanding as of December 31, 2006. 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, 2006, the Company would be required to issue
70,982,240 shares of its Common Stock, subject to certain contractually imposed
conversion restrictions as described herein. . During the 4th quarter 2005, all
of the Series A holders entered into a Series A Conversion Restriction Agreement
whereby all Series A holders, as a group, are prohibited from converting more
than 5% of the total outstanding (as of September 30, 2005) Series A holdings in
any one calendar quarter. Additionally, the Company had $28,767 of funding
remaining against the Second Addendum to Debt Conversion and Funding Agreement
dated July 1, 2005, providing for the issuance of 500,000 shares of Series A for
the conversion of $750,000 in debt. If the Company borrowed the remaining
$28,767, it would be required to issue 358,175 shares of Common Stock. See note
5 Debt Conversion for additional details.

WARRANTS

The Company had warrants outstanding to third parties purchase 2,033,924 common
shares as of December 31, 2006.

Warrants for 880,000 shares were issued by the Company in June 200,000 warrants
to be exercised. 3. Specifically, the Company sold 120,000 shares of Common
Stock for $25,000 to an accredited investor of the Securities Act and issued
such a warrant to purchase 880,000 shares of Common Stock at an exercise price
of $0.20 per share expiring December 31, 2007. The Company attributed no value
to these warrants in the June 2003 period in which they were issued, given that
the warrants had an exercise price of $0.20 per share as compared to the market
value of $0.01 per share in June 2003 on a total volume of 300 shares traded in
the open market in June 2003. In January 2006, the Company and the holders of
the warrants agreed to (i) limit the amount of shares that can be sold upon
exercise and (ii) purchase a certain amount of shares of originally issued
common stock within 60 days (subject to extension) of the effective date of the
February 2006 resale registration statement. The Investor exercised 100,000
warrants leaving a remaining balance of 780,000 warrants to be exercised.

Warrants for 208,339 shares of common stock at $5.00 per share and warrants for
208,339 shares at $7.50 per share were issued by the Company during 2005 and
2006. Specifically, the Company sold 208,312 shares of Common Stock for $312,500
to accredited investors of the Securities Act and issued such warrants to
purchase 208,339 shares of Common Stock at $5.00 per share and 208,339 shares of
common stock at $7.50 per share expiring August 2007. The Company attributed no
value to these warrants in the quarters in which they were issued. During the
4th 2006 management offered the Private Placement Memorandum Holders an
opportunity to exchange their stock for E-Series Bonds of which several
investors agreed to in aggregate in the amount of $100,000 resulting in
canceling 66,667 of the $7.50 warrants and $5.00 warrants reducing the
outstanding class warrants from 208,339 to 141,670.

Warrants for 389,999 at $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. See Note 10 for valuation and marked-to-market activity.


                                       40


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

Warrants for 580,585 shares of common stock at $5.00 per share were issued by
the Company during the 3rd and 4th quarter of 2006. Specifically, the Company
sold $512,500 of E-series bonds to accredited investors of the Securities Act.
According to the agreement if the Bondholder converts within one year from
investment; the conversion includes 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. The Company has had
twenty-four and one-half units converted and has attributed $76,000 to warrant
expense using the Black Scholes option price model in the quarter in which the
unit was converted. As discussed in the 2nd paragraph above during the 4th 2006
management offered the Private Placement Memorandum Holders an opportunity to
exchange their stock for E-Series Bonds of which several investors agreed to in
aggregate in the amount of $100,000 increasing the amount of E-Series Bonds to
$612,500. See Note 10 for details of E-Series Bonds.

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

                                               Options/Warrants
                                             Issued & Outstanding
                                        ----------------------------
            Exercise     Expiration     December 31,   December 31,
             Price          Date            2006           2005
         -------------  -------------   -------------  -------------
             0.20          Dec-07             780,000       880,000
             5.00          Aug-07             141,670       141,670
             7.50          Aug-07             141,670       141,670
             3.57          Sep-10             389,999       389,999
             5.00          Aug-09             580,585             -
                                        -------------- -------------
                                            2,033,924     1,553,339
                                        ============== =============

NOTE 7 - 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, 2006    December 31, 2005
                                  -----------------    -----------------

U. S. Federal statutory tax rate  %             34     %             34
U.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, 2006    December 31, 2005
                                      -----------------    -----------------
Computed expected tax benefit         $         (1,779)    $         (1,160)
Increase in valuation allowance                  1,779                1,160
                                      -----------------    -----------------
Income 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, 2006,
and December 31, 2005, are presented below (in thousands):

                                       December 31, 2006    December 31, 2005
                                       -----------------    -----------------
Deferred tax assets:
  Net operating loss carry forwards    $         (3,199)    $         (1,420)
  Less valuation allowance                        3,199                1,420
                                       -----------------    -----------------
Net deferred tax assets                $              -     $              -
                                       =================    =================


                                       41


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

Management has determined that a valuation allowance of $3,199,000 at December
31, 2006 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
2006 was approximately $1,779,000. As of December 31, 2006, the Company has a
net operating loss carry-forward of $10,692,000, which is available to offset
future federal taxable income, if any, with expiration beginning 2012 and ending
2025.

NOTE 8 - EARNINGS PER SHARE:

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

<TABLE>
<S>     <C>
                                                   For the twelve months ended December 31, 2006
                                              ------------------------------------------------------
                                                   Income             Shares            Per-Share
                                                (Numerator)       (Denominator)           Amount
                                              --------------      --------------      --------------
Net loss                                      $      (5,232)                          $          --
Basic EPS:
  Income available to common stockholders            (5,232)             14,082               (0.37)
  Effect of dilutive securities warrants                                                         --
                                              --------------      --------------      --------------
Diluted EPS:
  Income available to common stockholders
    and assumed conversions                   $      (5,232)             14,082       $       (0.37)
                                              ==============      ==============      ==============


                                                   For the twelve months ended December 31, 2005
                                              ------------------------------------------------------
                                                   Income             Shares            Per-Share
                                                (Numerator)       (Denominator)           Amount
                                              --------------      --------------      --------------
Net loss                                      $      (3,411)                 --       $          --
Basic EPS:
  Income available to common stockholders            (3,411)              5,570               (0.61)
  Effect of dilutive securities warrants                                                         --
                                              --------------      --------------      --------------
Diluted EPS:
  Income available to common stockholders
    and assumed conversions                   $      (3,411)              5,570       $       (0.61)
                                              ==============      ==============      ==============
</TABLE>

For the years ended December 31, 2006 and 2005, dilutive securities existed. The
effect of the dilutive securities for the year ended December 31, 2006, would
have been 87,406,881 shares of common stock issued assuming all debt instruments
were converted, all Series A preferred stock converted and all options and
warrants were exercised.

NOTE 9 - MAJOR CUSTOMERS

The Company had gross sales of approximately $1,716,000 and $643,000 for the
twelve months ended December 31, 2006 and 2005, respectively. The Company had
two customers that represented approximately 34% and 19% of the gross sales in
the twelve months ended December 31, 2006 and had two customers that represented
11% and 27% of gross sales for the twelve months ended December 31, 2005.

<TABLE>
<S>     <C>
NOTE 10 - NOTES PAYABLE AND LONG-TERM DEBT

Notes payable and long-term debts consist of the following as of December 31, 2006 (in thousands):

                                                                              Maturity      Interest   Gross       Debt      Net
                                                       Terms                     Date          Rate    Balance   Discount   Balance
                                     ---------------------------------------- ------------ ---------- --------- ---------- ---------
Taylor Economic Development Corp.    $1,119 / Month including interest        June-07         7.00%          5          -         5
Vangard Wireless, Inc.               $200 / Month including interest          December-10     6.00%          9          -         9
Axis Capital, Inc                    $347 / Month including interest          August-08       8.60%          6          -         6
Insurance notes                      $1,993 / Month including interest        September-07    9.00%         34          -        34
Investor notes                       2 years (See below)                      Demand          6.00%        874        437       437
Line of credit                       2 years/ Quarterly interest (See below)  February-08     6.00%      2,006          -     2,006
E-bond investor notes                3 years/ Semiannual interest (See below) Various         10.00%       388         86       302
                                                                                                      --------- ---------- ---------
Total debt                                                                                            $  3,322  $     523     2,799
                                                                                                      ========= ==========
Less current maturities                                                                                                         986
Less debt discount current maturities                                                                                          (467)
                                                                                                                           ---------
Long-term debt                                                                                                             $  2,280
                                                                                                                           =========
</TABLE>

The gross maturities of these debts are $986,000, $302,000, $2,031,000 and
$3,000 for the years ended December 31 2007, 2008, 2009 and 2010, respectively.


                                       42


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

Notes payable and long-term debts consist of the following as of December 31,
2005 (in thousands):

<TABLE>
<S>     <C>
                                                                          Maturity    Interest    Gross       Debt
                                                       Terms                Date        Rate     Balance    Discount    Net Balance
                                      ---------------------------------  -----------  --------  ---------  ----------  -------------
First National Bank in Cameron        $377 / Month including interest    March-07       7.00%          6                          6
Taylor Economic Development Corp.     $1,119 / Month including interest  June-07        7.00%         19                         19
Insurance company                     $1,753 / Month including interest  August-06      8.35%         35                         35
SkyVue USA East Central Texas, Inc    $40,000 / Quarterly plus interest  February-08    6.00%        348                        348
Investor notes                        2 years (See below)                Demand         6.00%      1,500         895            605
                                                                                                ---------  ----------  -------------
Total debt                                                                                      $  1,908   $     895          1,013
                                                                                                =========  ==========
Less current maturities                                                                                                       1,704
Less debt discount current maturities                                                                                          (895)
                                                                                                                       -------------
Long-term debt                                                                                                         $        204
                                                                                                                       -------------
</TABLE>

INVESTOR NOTES

0n September 13, 2005, the Company closed a financing arrangement with Global
Capital Funding L.P. ("Global"), GCA Strategic Investment Fund Limited
("GCASIF"), HIPL Family Trust ("HIPL"), and DP Securities Inc. ("DPS")
("Global," "GCASIF," HIPL" and "DPS," collectively, the "Investors") in which it
issued to: (i) Global, a convertible secured note in the principal amount of
$1,285,000 ("Global Note") and a common stock purchase warrant (the "Global
Warrant") to purchase 300,000 shares of Company common stock; (ii) GCASIF, a
convertible secured note in the principal amount of $50,000 (the "GCASIF Note")
and a common stock purchase warrant (the "GCASIF Warrant") to purchase up to
13,953 shares of the Company common stock; and (iii) HIPL, a convertible secured
note in the principal amount of $66,750 (the HIPL Note") and common stock
purchase warrant (the "HIPL warrant") to purchase up to 20,930 shares of the
common stock; and (iv) DPS a convertible secured note in the principal amount of
$98,250 (the "DPS Note") and a common stock purchase warrant (the "DPS Warrant")
to purchase up to 55,116 shares of common stock. The Global Note, GCASIF Note,
HIPL Note and DPS Note, collectively, "Investor Notes" and the Global Warrant,
GCASIF Warrant, and DPS Warrant, collectively, "Investor Warrants".

The Investor Notes accrue interest at a rate per annum equal to six percent and
are secured by substantially all of the Company's assets. The Investor Notes are
convertible into shares of the Company common stock at a conversion price equal
to the lesser of (i) $3.50 or (ii) 85% of the average of the three lowest VWAPs,
as reported by Bloomberg, during the ten trading days immediately preceding the
date of the related notice of conversion; provided further, however, that, until
six months following the effective date of the registration statement in no
event will the conversion price be lower than the lesser of (y) $1.50 or (z) 50%
of the VWAP, as reported by Bloomberg, on January 13, 2006, the effective date
of the registration statement. Upon expiration of such six-month period or upon
occurrence of an event of default which is not cured, the foregoing floor
calculation shall no longer be effective. The six months expired on June 13th,
2006. The Company has registered the resale of the shares of the Company common
stock underlying the Investor Notes and the shares issuable upon exercise of the
Investor Warrants.

The Company has the ability to prepay in company common stock amounts owed under
these Investors Notes for a price equal to the greater of: (i) the outstanding
principal amount of the Investor Note, plus all accrued but unpaid interest,
including default interest, if any; and (ii) (x) the number of shares of common
stock into which the Investor Note, including all accrued but unpaid interest
and default interest, if any, is then convertible, times (y) the average VWAP of
the common stock for the five trading days immediately prior to the date that
the Investor Note is called for prepayment. The Company has the right to prepay
the notes in cash at 102% of the outstanding principal and interest in the first
year or 101% of the outstanding principal and interest in the second year. The
associated Investor Warrants are exercisable by the Investors for five years at
$3.57 per share, subject to adjustment upon issuance of shares or warrants below
market, of Company common stock.

The Investor Notes were determined to include free standing warrants and various
embedded derivative liabilities. The derivative liabilities are the conversion
feature and the redemption option (compound embedded derivative liability). At
the date of issuance (September 06, 2005, and November 21, 2005) the Investor
Notes, warrant liabilities and 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
$96,631 for the year ended December 31, 2005, $458,229 for the year ended
December 31, 2006 and will be $437,123 for year ending December 31, 2007,
respectively.


                                       43


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

The following table summarizes the convertible debt activity for the period
September 6, 2005, to December 31, 2006:

<TABLE>
                                                                                Compound
                                                                 Warrant        Derivative
                Description                  Investor Notes    Liabilities      Liability           Total
                                             ---------------  --------------  ---------------  ----------------
<S>                                          <C>              <C>             <C>              <C>
  Fair value issuance at inception           $      508,017   $     470,702   $      521,281   $     1,500,000
  09-06-05 to 09-30-05 change in fair value          18,373       2,389,132        1,012,547         3,420,052
  10-01-05 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           227,582
  10-01-06 to 12-31-06 change in fair value         140,846        (118,744)         (26,162)           (4,060)
  Conversions from inception to date               (625,649)                                          (625,649)
                                             ---------------  --------------  ---------------  ----------------
  Fair value at December 31, 2006            $      437,228   $      38,366   $      204,822   $       680,416
                                             ===============  ==============  ===============  ================

From inception to date through December 31, 2006, the Company recorded a net
derivative income of $749,000 and for the twelve months ended December 31, 2006,
a net derivative income of $899,000. The Company in conjunction with the
convertible note as of twelve months ended December 31, 2006, has recorded debt
interest expense of $632,000

ERF Wireless, Inc., also incurred deferred financing costs of $178,500 in
connection with the closing of the financing arrangement. The costs are
recognized over the life of the Investor Notes, or 24 months, by using the
straight line method. For the twelve months ended December 31, 2006, the Company
recorded deferred financing cost in interest expense of $89,000.

The following assumptions were used in the fair value determination of warrants
liabilities at December 31, 2006:

<CAPTION>

                                                                          Warrants
                                    -------------------------------------------------------------------------------------
        Assumptions                  9/6/2005   9/30/2005   12/31/2005   3/31/2006   6/30/2006   9/30/2006   12/31/2006
-----------------------------       -------------------------------------------------------------------------------------
<S>                                   <C>      <C>          <C>         <C>         <C>         <C>          <C>
Dividend yield                          0.00%       0.00%        0.00%       0.00%       0.00%       0.00%        0.00%
Risk-free rate for term                 3.89%       4.18%        4.35%       4.44%       5.10%       4.62%        4.74%
Volatility                             31.00%      31.00%       76.00%      78.00%      95.00%     140.00%      140.00%
Maturity Date                         5 years  4.93 years   4.68 years  4.44 years  4.19 years  3.93 years   3.68 years
</TABLE>

A Black-Scholes methodology was used to value the warrants.

SKYVUE NOTES

On August 12, 2005, the Company issued two notes to SkyVueUSA East Central
Texas, Inc., totaling $475,000 that bear interest at 6% and are secured by all
of the capital stock issued and outstanding of ERF Enterprise Network Services,
Inc.,( a subsidiary of the Company). The initial payment was $115,000, with nine
subsequent quarterly payments of $40,000 plus interest. In September 2006, the
company paid the remaining principal balance on the note resulting from the
acquisition of SkyVue by issuing 1,090,000 shares of common stock, at $.29 which
settled the note and all related covenants.

The common stock payment of 1,090,000 shares to SkyVue was made in restrictive
144 Stock. SkyVue has a security lien on all of the capital stock issued and
outstanding of ERF Enterprise Network Services, Inc., (a subsidiary of the
Company) until the stock restriction is removed.

LINE OF CREDIT

Effective March 10, 2006, ERF Wireless, Inc. (the "Company"), entered into a
two-year unsecured revolving credit facility with certain private investors that
provides a $2 million dollar line of credit. The terms of the two-year unsecured
revolving credit facility allow ERF Wireless to draw upon the facility as
financing requirements dictate and provide for quarterly interest payments at a
6% rate. The loan may be prepaid without penalty or repaid at maturity. In the
event that ERF Wireless draws down the full $2 million amount available under
the Revolving Note dated February 2006 ("Note") on or prior to December 31,
2006, and if ERF Wireless requires additional working capital to pursue its
business strategy and operations, Angus Capital Partners agree to fund on a
requested basis an additional $1 million during 2006 under the same terms and
conditions as set forth in the Note. At December 31, 2006, the balance of the
credit line was $2,006,041. On April 5, 2007, the Company amended its two-year
$3,000,000 revolving credit facility to mature on February 28, 2009 and granted
the lender a security interest in all the assets of the Door. The amendment also
included a provision that in the event the Company draws down the full $3
million amount available under the revolving credit facility on or prior to
December 31, 2007, and the Company requires additional working capital to pursue
its business strategy and operations and has not closed on alternative debt or
equity financing aggregating at least $1 million, the lender has agreed to fund
up to an additional $1 million during 2007 under the same terms and conditions.



                                       44


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

E-SERIES BOND INVESTOR NOTE

On May 1, 2006, the Company has offered a Private Placement Memorandum to
certain Accredited Investors whereby the Company is selling one hundred units of
E-Series bonds (the "Bonds") at $25,000 per unit for a total maximum offering of
$2,500,000. The Bonds are due and payable upon maturity at the end of the
three-year period after the issuance date. Interest on the Bonds is payable at
the rate of 10% per annum, and is payable semiannually. The Bondholder may
require ERF Wireless to convert the Bond (including any unpaid interest) into
shares of the Company's 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 due up to the date
the stock is issued. Shares issued under this option will be valued at the
lesser of $1.50 or the 20-day trailing average per share closing price of ERFW
common stock for the 20 days immediately preceding the notice of conversion.
This first year conversion includes 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 may be repaid in cash or in shares of our common
stock, which will be valued at the average last sales price of our common stock
over the 60-trading-day period preceding any payment date. If the Company
chooses to issue shares of our common stock as repayment of the Bond as payment
of interest, we will issue shares representing 125% of the Bond principal. If
the Company's choose to issue shares of our common stock as payment of interest,
we will issue shares representing 100% of the interest due. If the Company
chooses to pay cash for either the Bond repayment or any interest payment, we
will pay cash representing 100% of the amounts owed. ERF Wireless may redeem the
Bonds at any time after the first year following their purchase but not before.
The offering will terminate on June 30, 2007, unless such date is extended at
the Company's discretion. As of December 31, 2006 the Company has sold $612,500
of E-Series Bonds and the balance due at December 31, 2006 is $301,650.

The E-Series 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 E-Series 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
$13,277 for the twelve months ended December 31, 2006, and the estimated debt
accretion for subsequent years is $29,675, and $32,991 and $23,621 for years
ending December 31, 2007, 2008 and 2009, respectively.

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

<TABLE>
                                                                     Compound
                                                    E-Series        Derivative
                  Description                          Bonds          Liability          Total
                                                  --------------  ---------------  --------------
<S>                                               <C>             <C>              <C>
  Fair value issuance at inception                $     513,392   $       99,108   $     612,500
  05-31-06 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)          1,876
  10-01-06 to 12-31-06 change in fair value               6,648          (13,213)         (6,565)
  Conversions from inception to date                   (225,000)                        (225,000)
                                                  --------------  ---------------  --------------
  Fair value at December 31, 2006                 $     301,650   $       70,174   $     371,824
                                                  ==============  ===============  ==============

For inception to date through December 31, 2006, the Company recorded a net
derivative income of $29,000. The Company in conjunction with the convertible
note as of twelve months ended December 31, 2006, has recorded debt interest
expense of $32,000.

NOTE 11 - UNCOMPLETED CONTRACTS

Costs, estimated earnings and billings on uncompleted contracts for the twelve
months ended December 31, 2006 and December 31, 2005, are summarized as follows
(in thousands):

<CAPTION>

                                                December 31,      December 31,
                                                    2006              2005
                                                -------------     -------------
<S>                                             <C>               <C>
Costs incurred on uncompleted contracts         $        854      $          -
Estimated profit                                          62                 -
                                                -------------     -------------
Gross revenue                                            916                 -
                                                -------------     -------------
Less: billings to date                                   847                 -
                                                -------------     -------------
Costs and profit in excess of billings          $         69      $          -
                                                =============     =============
</TABLE>

                                       45


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

NOTE 12 - COMMITMENTS AND CONTINGENCIES

LEASES AND LICENSE AGREEMENTS

For the twelve months ended December 31, 2006 and 2005, rental expenses of
approximately $299,000 and $204,000, 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 September 2012, and requiring payment of
property taxes, insurance, maintenance and utilities.

 Future minimum lease payments under non-cancelable operating leases at December
31, 2006 were as follows:

                            Period Ending
                            December 31,         Amount
                           ----------------  --------------
                                2007         $     434,127
                                2008               347,163
                                2009               309,577
                                2010               224,578
                                2011               185,598
                                2012                20,696

                                             --------------
                                Total        $   1,521,739
                                             ==============

EMPLOYMENT AGREEMENTS

R. GREG SMITH

On August 1, 2004, the Company entered into an Executive Employment Agreement
with R. Greg Smith, our CFO. Mr. Smith is paid a base salary of $180,000 per
year and is eligible to receive a bonus equal to 1% of the revenues for the most
recent twelve-month period of each acquisition made by the Company during his
employment period. Mr. Smith received 63,828 shares of our Series A Convertible
Preferred Stock par value $0.01 per share, as consideration for a sign-on bonus
at a price of $0.50 per share for total consideration of $31,913.50. The
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 and each
preferred share has 20 votes. During 2006, Mr. Smith converted 52,623 shares of
his Series A Convertible Preferred Stock into 982,820 shares of the Company's
common stock. Mr. Smith is also entitled to receive up to 1,000,000 stock
options under the Company's 2004 Non-Qualified Stock Option Plan for attainment
of certain future cumulative revenue milestone achievements. These options, if
any are earned, will vest when granted and have an exercise price of the lowest
five-day average closing price existing for the Company's common stock during
the twelve-month period immediately preceding the date of the vesting event. Mr.
Smith is subject to a lock-up agreement which prohibits Mr. Smith from selling
shares until August 1, 2006, unless agreed to by the Company in writing. During
2006, Mr. Smith's employment contract was renewed for one additional year by the
Board of Directors through August 1, 2007.

As of December 31, 2006, Greg Smith has earned 100,000 options to purchase
100,000 common shares for attainment of certain cumulative revenue milestones
set forth in his employment agreement. These options are at an exercise price of
$1.38 and expire on July 31, 2009. The income statement includes a compensation
charge of $91,596 which charge is based on Black-Scholes option pricing model.

JOHN ADRIAN BURNS

On August 12, 2005, the Company entered into an executive employment agreement
with John Adrian Burns as Chief Executive Officer and Chairman of ERF Enterprise
Network Services, Inc. ("ENS"). Mr. Burns is paid $180,000 per year and other
normal benefits available to all company employees. Additionally, Mr. Burns is
eligible to receive non-qualified non-transferable stock options based on the
future financial performance of ENS. These future financial performance targets
are deemed the vesting events. The options are priced at $3.72 and when attained
can be converted on a cashless basis into ERF Wireless, Inc. (Parent), common
stock. The common shares received have piggyback registration rights and expire
on the close of business of July 30, 2008. The vesting events and related
incentive options are as follows:

     o   50,000 options qualify when the annual revenue of ENS exceeds
         $3,000,000; 75,000 options qualify when the annual revenue of ENS
         exceeds $6,000,000; 100,000 options qualify when the annual revenue of
         ENS exceeds $12,000,000, and 125,000 options qualify when the annual
         revenue of ENS exceeds $20,000,000.

     o   50,000 options qualify when the adjusted annual EBIDTA of ENS exceeds
         $500,000; 75,000 options qualify when the adjusted annual EBIDTA of ENS
         exceeds $1,000,000; 100,000 options qualify when the adjusted annual
         EBIDTA of ENS exceeds $2,000,000; and 125,000 options qualify when the
         adjusted annual EBIDTA of ENS exceeds $3,000,000


                                       46


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

     o   50,000 options qualify when the adjusted annual EBIDTA of the Parent
         exceeds $1.00; 75,000 options qualify when the adjusted annual EBIDTA
         of the Parent exceeds $500,000; 100,000 options qualify when the
         adjusted annual EBIDTA of the Parent exceeds $1,000,000; and 1 25,000
         options qualify when the adjusted annual EBIDTA of the Parent exceeds
         $5,000,000

JOHN ARLEY BURNS

On August 12, 2005, the Company entered into an executive employment agreement
with John Arley Burns as President of ENS. Mr. Burns is paid $150,000 per year
and other normal benefits available to all company employees. Additionally, Mr.
Burns is eligible to receive non-qualified non-transferable stock options based
on the future financial performance of ENS.

These future financial performance targets are deemed the vesting events. The
options are priced at $3.72 and when attained can be converted on a cashless
basis into ERF Wireless, Inc. (Parent), common stock. The common shares received
have piggyback registration rights and expire on the close of business of July
30, 2008. The vesting events and related incentive options are as follows:

     o   35,000 options qualify when the annual revenue of ENS exceeds
         $3,000,000; 50,000 options qualify when the annual revenue of the ENS
         exceeds $6,000,000; 75,000 options qualify when the annual revenue of
         ENS exceeds $12,000,000; and 100,000 options qualify when the annual
         revenue of ENS exceeds $20,000,000

     o   35,000 options qualify when the adjusted annual EBIDTA of ENS exceeds
         $500,000; 50,000 options qualify when the adjusted annual EBIDTA of ENS
         exceeds $1,000,000; 75,000 options qualify when the adjusted annual
         EBIDTA of ENS exceeds $2,000,000; and 100,000 options qualify when the
         adjusted annual EBIDTA of ENS exceeds $3,000,000

BRIAN CUBLEY

In August 2004, the Company entered into an employment agreement with Brian
Cubley. Pursuant to the employment agreement Brian Cubley is to receive $80,000
until October 15, 2005, and $90,000 per year thereafter. Mr. Cubley also
received 31,914 shares of Series A Preferred Stock at $0.50 per share. Mr.
Cubley is also eligible to receive non-qualified non-transferable stock options
to purchase up to 500,000 shares of the Company's common stock based upon the
attainment of certain performance based milestones at 115% of the lowest five
day average closing price for the Company previous year. Lastly, Mr. Cubley is
entitled to a bonus for each calendar year in which the Company's Messaging
Services Division is profitable equal to 5% of the revenues of the Messaging
Services Division. As of August 1st, 2006 Brian Cubley's employment contract was
renewed through July 31, 2007.

As of December 31, 2006, Brian Cubley has earned 50,000 options to purchase
50,000 common shares for attainment of certain cumulative revenue milestones set
forth in his employment agreement. These options are at an exercise price of
$1.38 and expire on July 31, 2009. The income statement includes a compensation
charge of $45,798 which charge is based on Black-Scholes option pricing model.

NOTE 13 - RELATED PARTY

In December 2005, the holders of record of the Series A Preferred Stock,
including the named trusts set forth in Item 12 and Greg Smith, entered into a
Series A Preferred Conversion Restriction Agreement, in which each agreed to
restrict the number of shares of Series A Preferred Stock that they converted
into common stock each calendar quarter to the lesser of (i) 5% all of their
respective shares of the Company's Series A Preferred Stock or (ii) 1% of the
common stock then outstanding of record on the first day of each calendar
quarter. In consideration for the execution of the Series A Preferred Conversion
Restriction Agreement, the Company granted the holders the right of first
refusal to participate in any sale of the Series A Preferred Stock between
January 1, 2006 and December 31, 2006.

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 free
trading stock. The Company at its discretion may issue up to 50% of the monthly
fee in 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, 2006, total fees incurred by
the Company under the agreement were $119,000.

Under various financing agreements, the Company received advances from related
family trusts that totaled $130,000 in 2006, $1,142,000 in 2005 and $750,000 in
2004. The company repaid these advances through the issuance of 87,000 shares of
convertible preferred stock in 2006, 1,761,000 shares in convertible preferred
stock in 2005 and 1,500,000 in convertible preferred stock in 2004. Frances
Cubley, the mother of 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.


                                       47


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

NOTE 14 - 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.

NETWORK OPERATING SERVICES DIVISION (NOS)

NOS provides the overall day-to-day operations, maintenance, upgrading, 24/7
monitoring and expansion of all wireless broadband networks that the Company
constructs, acquires, maintains and administers. The transactions in the NOS
segment for the nine months were not material.

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.

<TABLE>

For the twelve months ended December 31, 2006 (in thousands)

                                                   WMS           WBS          ENS        Total
                                                -------------------------------------------------
<S>                                             <C>           <C>          <C>          <C>
                 Revenue                        $    570      $    132     $  1,014     $  1,716
                 Segment loss                       (668)         (300)      (1,378)      (2,346)
                 Segment assets                      120           948          505        1,573
                 Capital expenditures                 14           416          (12)         418
                 Depreciation                         15            53           12           80

For the twelve months ended December 31, 2005 (in thousands)

                                                   WMS           WBS          ENS        Total
                                                -------------------------------------------------
                 Revenue                        $    416      $     60     $    167     $    643
                 Segment loss                       (294)         (254)        (447)        (995)
                 Segment assets                       90           194          662          946
                 Capital expenditures                  -           171           66          237
                 Depreciation                         24             8            4           36
</TABLE>


                                       48


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

         Reconciliation of Segment Loss         December 31,      December 31,
           from Operations to Net Loss             2006              2005
         ----------------------------------     -----------       -----------

         Total segment loss from operations     $    (2,346)      $      (995)
         Total corporate overhead                    (2,886)           (2,416)
                                                -----------       -----------
         Net loss                               $    (5,232)      $    (3,411)
                                                ===========       ===========


            Reconciliation of Segment           December 31,      December 31,
              Assets to Total Assets               2006              2005
         ----------------------------------     -----------       -----------

         Total segment assets                   $     1,573       $       946
         Total corporate assets                         651             1,144
                                                -----------       -----------
         Consolidated  assets                   $     2,224       $     2,090
                                                ===========       ===========

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.

Two customers accounts for $589,000 and $333,000 of Enterprise Network Services
Division revenues. One customer accounts for $71,000 of Wireless Messaging
Services Division revenues at December 31, 2006.

NOTE 15 - SUPPLEMENTAL NON-CASH DISCLOSURES:

During 2006, the Company issued stock in lieu of cash as payment for the
following (in thousands):

                                                         Supplemental
                                                           Non-Cash
                                                          Disclosure
                                                        --------------
                  Professional fees                     $         739
                  Settlements                                     192
                  Salary and compensation                         362
                  Other services rendered                         137
                  Interest expense                                 84
                  Loss on extinguishment of debt                   48
                  Acquisition                                     300
                  Notes payable                                 1,149
                                                        --------------
                  Total non-cash settlements            $       3,011
                                                        ==============

NOTE 16 - EMPLOYEE STOCK OPTIONS

In 2004, the Board of Directors adopted a Non-Qualified Stock Option Plan under
which 5,000,000 shares of the Company's common stock were reserved for issuance.
In March 2007 the shares reserved for issuance increased to 10,000,000 shares.
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, 2006, 658,117 common stock shares remain to be converted from
Series A preferred stock. Also the Company has granted to certain officers and
employees 150,000 stock options which are currently exercisable. As of December
31, 2006, under the Non-Qualified Stock Option Plan, 5,929,022 shares were
issued and exercised to certain employees and consultants for services rendered.

The Company has adopted FASB Statement 123R "Accounting for Stock-Based
Compensation" effective December 2005, for the year ended December 31, 2006.
SFAS 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees." As permitted under SFAS 123R, the Company adopted the modified
prospective method in December 2005. In accordance with the "modified
prospective" method, compensation cost is recognized beginning with the
effective date (a) based on the requirements of SFAS 123R for all share-based
payments granted after the effective date and (b) based on the requirements of
SFAS 123 for all awards granted to employees prior to the effective date of SFAS
123R that remain unvested on the effective date.


                                       49


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

The weighted average fair value of the individual options granted during the
twelve months ended December 31, 2006, is estimated at $1.45 on the date of
grant. The fair values were determined using a Black-Scholes option-pricing
model with the following assumptions:

                          8/1/2004  8/12/2005  12/31/2005  1/23/2006  3/31/2006
                         -------------------------------------------------------
     Assumptions          Options    Options    Options     Options    Options
-----------------------  -------------------------------------------------------
Dividend yield              0.00%      0.00%      0.00%      0.00%       0.00%
Risk-free rate for term     3.50%      4.18%      4.35%      4.45%       4.98%
Volatility                207.00%     31.00%     76.00%     89.00%      78.00%
Remaining life                  5          3          1        2.5         3.3

Option activity was as follows for the twelve months ended December 31, 2006,
and December 31, 2005:

                                                            2006
                                             -----------------------------------
                                                                Weighted-Average
                                                   Shares        Exercise Price
                                             -----------------  ----------------
         Outstanding at beginning of year           3,105,000         $3.31
         Granted                                      232,000          2.27
         Assumed through acquisitions                       -             -
         Exercised                                          -             -
         Forfeited/cancelled                         (485,000)         2.91
                                             -----------------  ----------------

         Outstanding throughout the period          2,852,000         $3.21
                                             =================  ================

         Exercisable at December 31, 2006          150,000.00         $1.38
                                             =================  ================


                                                            2005
                                             -----------------------------------
                                                                Weighted-Average
                                                   Shares        Exercise Price
                                             -----------------  ----------------
         Outstanding at beginning of year           1,500,000         $2.88
         Granted                                    1,605,000          3.71
         Assumed through acquisitions                       -             -
         Exercised                                          -             -
         Forfeited/cancelled                                -             -
                                             -----------------  ----------------

         Outstanding throughout the period          3,105,000         $3.31
                                             =================  ================

         Exercisable at December 31, 2005        $          -         $   -
                                             =================  ================

Information about options outstanding was as follows at December 31, 2006:

<TABLE>
<S>     <C>
                                       Remaining          Average                      Average
      Class            Number     Average Contractual     Exercise       Number        Exercise
 Exercise Price     Outstanding      Life in Years         Price      Exercisable       Price
------------------  ------------- --------------------- ------------- -------------  -------------

      $1.38              150,000          2.58              $1.38          150,000       $1.38
      $2.88              900,000          2.58              $2.88                -           -
      $3.72            1,570,000          1.58              $3.72                -           -
      $2.27              232,000          1.58              $2.27                -           -
                    -------------                                     -------------
                       2,852,000          2.58              $3.21          150,000       $1.38
                    =============                                     =============
</TABLE>

                                       50


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

NOTE 17 - BUSINESS AND ASSET ACQUISITION

THE DOOR ACQUISITION

On December 15, 2006, ERFW completed the purchase of assets from Southwest
Enhanced Network Services, LP (the "Door") to expand its wireless coverage area
in the greater Lubbock, Texas and certain New Mexico cities areas. The assets
purchased include all of the assets associated with the fixed wireless broadband
Internet operations of The Door including the FCC licensed spectrum, inventory,
equipment, contract rights, vehicles, Internet address space, a 37-mile fiber
optic cable route from Lubbock to Oakley, Texas, general intangibles and
wireless broadband equipment infrastructure comprising the network that covers
approximately 25,000 square miles in a geographic area adjacent to the Lubbock,
Texas and surrounding Texas Panhandle communities and certain New Mexico
communities including Roswell, Hobbs and Lovington.

The asset purchase agreement required ERFW to pay Southwest Enhanced Network
Services, LP an amount equal to $1.00 plus the assumption of certain operating
lease liabilities aggregating $1,136,681. Additionally, Seller agreed to pay
Buyer $825,000 ("the Assumption Cost"); with $500,000 due at Closing and the
remaining $325,000, due on February 28, 2007, as consideration for the Buyer
agreeing to accept the Assumed Liabilities. These seller payments have been
received by the Company. The amount of the Assumption Cost is based on the
intention of the parties that all of the Assumed Leases requiring consent for
assignment will be properly assigned with the Buyer. The Company recorded the
cash received as a deferred lease liability which will be offset against the
lease payments over the respective lease terms. This transaction was accounted
for as an asset purchase.


NETYETI ACQUISITION

On October 17, 2006, ERFW completed the purchase of assets from NetYeti, Inc. to
expand its wireless coverage area in the greater Houston, Texas area. The assets
purchased include all the current customer base and Motorola Canopy wireless
broadband equipment comprising the network that covers approximately 1,500
square miles in a geographic area adjacent to the Houston metropolitan area. The
requires ERFW to pay NetYeti, Inc., a payment of $300,000 in ERFW restricted
common stock(750,000 shares) and incur a payment obligation to NetYeti, Inc.,
assume certain liabilities including leases payable to a equipment financier
totaling $29,393. This transaction was determined to be a business combination
according to SFAS 141. The allocation of the purchase price to the assets
acquired and liabilities assumed based on the fair values estimated by
management was as follows:

                   Tangible assets                           $ 294,000
                   Intangible assets, customer lists            35,000
                   Liabilities assumed                         (29,000)
                                                             ---------
                   Total                                     $ 300,000
                                                             =========

SKYVUE ACQUISITION

On August 8, 2005, the Company entered into an Asset Purchase Agreement to
purchase assets from Skyvue USA East Central Texas, Inc., a Texas corporation
("Skyvue USA"). The formal closing on this transaction occurred on August 12,
2005. The assets will be used to operate an enterprise-class encrypted wireless
banking network business. ERFW paid Skyvue USA $600,000 in consideration,
assumed $27,000 in liabilities, plus is obligated for earn-out payments based
upon a multiple of Adjusted EBITDA of the assets contributed to ERFW's newly
created wholly owned subsidiary, ERF Enterprise Network Services, Inc., a Texas
corporation.

The Company obtained an audit related to Skyvue's operation for the prior two
financial years and completed an analysis of the intangible assets and
allocation of purchase price. Accordingly, the Company included a disclosure of
all information required by paragraphs 51 and 52 of SFAS 141. With respect to
the potential additional consideration in the form of earnout payments, such
additional consideration cannot be reasonably estimated and, accordingly, the
Company will apply FASB 142 rules regarding recording this consideration should
the newly created subsidiary achieve its adjusted EBITDA thresholds. The
following table summarizes the estimated fair value of the Skyvue USA assets as
recorded in the Company's Consolidated Financial Statements:

                                                         (in thousands)
         Current assets                                     $    32
         Property and equipment                                  89
         Intangible assets                                      506
                                                             ------
         Total assets acquired                                  627

         Current liabilities                                     18
         Non-current liabilities                                  9
                                                            -------
         Total liabilities assumed                               27
                                                            -------
         Net assets acquired                                $   600
                                                            =======


                                       51


<PAGE>

                               ERF WIRELESS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

Additionally, the Company has determined the allocated value of the various
elements of intangible assets acquired from the acquisition of SkyvueUSA. The
following table summarizes the allocated value of the intangibles acquired:

                                                              (in thousands)
         Customer relationships             3.0                $        261
         Workforce in place                 3.0                         125
         Non-compete agreement              3.0                         100
         Developed technology               3.0                          20
                                                               -------------
                                                               $        506
                                                               =============

The amortization period for the intangible assets is three years or $169,000 per
year. The results of operations from date of acquisition are included in
December 31, 2005, financial statements.

INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma combined financial statements are based on the
historical financial statements of ERF Wireless, Inc. and Skyvue USA East
Central Texas, Inc. (Skyvue) after giving effect to our acquisition of Skyvue
and the borrowings under the amended credit facility to finance the acquisition
as described in the accompanying notes to the unaudited pro forma combined
financial statements.

The accompanying unaudited pro forma combined statements of operations for the
year ended December 31, 2005 and 2004, are presented as if the acquisition of
Skyvue had occurred on January 1, 2004. All material adjustments to reflect the
acquisition and the repayment of the borrowings under the amended credit
facility are set forth in the column "Pro Forma Adjustments."

The pro forma data is for informational purposes only and may not necessarily
reflect future results of operations or financial position or what the results
of operations or financial position would have been had ERF Wireless, Inc. and
Skyvue been operating as combined entities for the periods presented.


                                       52


<PAGE>

<TABLE>
                                      PRO FORMA COMBINED STATEMENT OF OPERATIONS
                                                  ERF WIRELESS, INC.
                                         FOR THE YEAR ENDED DECEMBER 31, 2005
                                       (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
                                                      (UNAUDITED)

                                                                                                              ADJUSTED
                                                  ERF WIRELESS       SKYVUE USA        PRO FORMA             PRO FORMA
                                                  (REGISTRANT)        (TARGET)        ADJUSTMENTS   NOTES     BALANCE
                                                    -------           -------           -------     -----     -------
<S>                                                   <C>               <C>               <C>                   <C>
Revenues                                            $   643           $   136           $    --               $   779

Cost of goods sold                                      382                89                (2)      G           469
                                                    -------           -------           -------               -------

Gross profit                                            261                47                 2                   310
                                                    -------           -------           -------               -------
Operating expenses:
    Selling, general and administrative               3,254               131                --                 3,385
    Depreciation and amortization                       110                --                85       H           195
                                                    -------           -------           -------               -------

Total operating expense                               3,364               131                85                 3,580
                                                    -------           -------           -------               -------
Loss from operations                                 (3,103)              (84)              (83)               (3,270)
Other income/ (expense)                                (308)              (13)                9       I          (312)
                                                    -------           -------           -------               -------
Net loss                                            $(3,411)          $   (97)          $   (74)              $(3,582)
                                                    -------           -------           -------               -------
Deemed dividend related to beneficial
     conversion feature of preferred stock           (1,342)               --                --                (1,342)

                                                    -------           -------           -------               -------
Net loss applicable to common shareholders          $(4,753)          $   (97)          $   (74)              $(4,924)
                                                    =======           =======           =======               =======
Net loss per common share:
   Basic                                            $ (0.61)                            $    --               $ (0.64)
                                                    -------           -------           -------               -------
   Diluted                                          $ (0.61)                            $    --               $ (0.64)
                                                    =======           =======           =======               =======

SEE NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 2005

G. Cost of goods sold - Reduced by adjusting related Skyvue depreciation
expenses to reflect the fair market value of the acquired assets.

H. Selling, general and administrative - Increased by $85K related to the
amortization of intangible assets from the current acquisition.

I. Interest expense - eliminate interest for debt not acquired by ERF Wireless
Inc.

                                                          53


<PAGE>

                                                   ERF WIRELESS, INC
                                      PRO FORMA COMBINED STATEMENT OF OPERATIONS
                                         FOR THE YEAR ENDED DECEMBER 31, 2004
                                       (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
                                                      (UNAUDITED)

                                                                                                              ADJUSTED
                                                  ERF WIRELESS       SKYVUE USA        PRO FORMA             PRO FORMA
                                                  (REGISTRANT)        (TARGET)        ADJUSTMENTS   NOTES     BALANCE
                                                    -------           -------           -------     -----     -------
Revenues                                            $   325           $   510           $    --               $   835

Cost of goods sold                                       84               333                --                   417
                                                    -------           -------           -------               -------

Gross profit                                            241               177                --                   418
                                                    -------           -------           -------               -------
Operating expenses:
    Selling, general and administrative                 948               289                                   1,237
    Depreciation and amortization                        12                --               169                   181
                                                    -------           -------           -------               -------

Total operating expense                                 960               289               169                 1,418
                                                    -------           -------           -------               -------

Loss from operations                                   (719)             (112)             (169)               (1,000)
Interest and other expense                                                (31)               27       J            (4)
                                                    -------           -------           -------               -------
Net loss                                            $  (719)          $  (143)          $  (142)              $(1,004)
                                                    -------           -------           -------               -------
Other comprehensive income:
   Unrealized holding gain                                2                --                --       K             2
                                                    -------           -------           -------               -------
Total other comprehensive loss                      $  (717)          $  (143)          $  (142)              $(1,002)
                                                    =======           =======           =======               =======

Deemed dividend related to beneficial
     conversion feature of preferred stock             (750)               --                --                  (750)
                                                    -------           -------           -------               -------
Net loss applicable to common shareholders          $(1,467)          $  (143)          $  (142)              $(1,752)
                                                    =======           =======           =======               =======

Net loss per common share:
   Basic                                            $ (0.78)          $    --           $    --               $ (0.93)
                                                    -------           -------           -------               -------
   Diluted                                          $ (0.78)          $    --           $    --               $ (0.93)
                                                    =======           =======           =======               =======

SEE NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 2004

J. Selling, general and administrative - increased by $169K related to the
amortization of intangible assets from the Skyvue acquisition.

K. Interest expense - eliminate interest for debt and not acquired by ERF Wireless Inc.


                                                          54
</TABLE>


<PAGE>

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

ITEM 8A. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
to the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized, and reported within the
time periods specified by the Securities and Exchange Commission's rules and
forms, and that information is accumulated and communicated to our management,
including our principal executive and principal financial officers (whom we
refer to in this periodic report as our Certifying Officers), as appropriate to
allow timely decisions regarding required disclosure. Our management evaluated,
with the participation of our Certifying Officers, the effectiveness of our
disclosure controls and procedures as of December 31, 2006, pursuant to Rule
13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our
Certifying Officers concluded that, as of December 31, 2006, our disclosure
controls and procedures were effective.

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

ITEM 8B. OTHER INFORMATION

Not applicable


                                       55


<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
        GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Our directors and executive officers and their ages as of March 31, 2007, are
shown below.

           Name          Age                     Position
           ----          ---                     --------
     H. Dean Cubley       66      Chairman of the Board of Directors and CEO
     R. Greg Smith        48                 Director and CFO
     John Burns           55          Director; Chairman and CEO of ENS
     Bartus H. Batson     65                     Director


DR. H. DEAN CUBLEY has served as director and chairman of ERF Wireless since May
2004, as acting president, secretary and treasurer from May 2004 until August
2004 and as CEO since October, 2006. Dr. Cubley has served as a director of
Eagle Broadband, Inc. (f/k/a Eagle Wireless International, Inc.), since March of
1996; was chairman of the board from March 1996 to April 2004; chief executive
officer from March 1996 to October 2003; and president from March 1996 until
September 2001.

MR. R. GREG SMITH has served as the Company's chief financial officer since
August 2004, as the chief executive officer from August 2004 to October 2006,
and as a director since August 2004. Mr. Smith's professional background
includes some 26 years of demonstrated executive management experience,
including 12 years experience as CFO of publicly traded companies. Mr. Smith
most recently was employed by Eagle Broadband, Inc., where he was recruited to
assist in the restructuring of numerous Eagle subsidiaries; serving in dual
roles as CFO and as CEO of certain Eagle subsidiaries from early 2002. Prior to
Eagle, Mr. Smith spent 13 years in various corporate finance functions including
CFO in the healthcare informatics market with ADAC Healthcare Information
Systems, Inc.

MR. JOHN A. BURNS joined ERF Wireless in August 2005 as a director, and as
chairman and chief executive officer of the ERF subsidiary, ERF Enterprise
Network Services, Inc. Mr. Burns was also appointed COO in October 2006. Prior
to joining ERF Wireless, Mr. Burns founded FundsXpress, Inc., where he served as
chairman of the board, chief executive officer and president since its formation
in 1995. At FundsXpress, he raised over $80 million to develop one of the
leading Internet banking companies in America, providing services to over 500
financial institutions.

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. Prior to that, Dr. Batson
served as president of X-Analog's predecessor company; CADSA, Inc. 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

MR. J. ARLEY BURNS is the President of the Company's ENS subsidiary. He
co-founded Skyvue USA East Central Texas in 2002. Mr. Burns spends the majority
of his time and efforts on all operational aspects of the business, including
building the Company's maintenance & monitoring systems, scaling construction
operations, and directing the R&D staff on development of the CryptoVue(TM)
Encryption System.

MR. JOHN NAGEL is currently serving as VP of Special Projects for ERF Wireless.
In his current role he was responsible for construction the 24/7 Network
Operations Center (NOC) for ERF's wireless ISP services as well as the point to
point private networks for all of ERF's Bank customers. The bank networks are
private, encrypted, point to point wireless networks now operating across from
Texas to Louisiana. Mr. Nagel has most recently been in charge of the project
management of the wireless state wide network for the Louisiana State Police
contract which ERF has recently negotiated. This project is still in early
construction phases.

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
comprised of Dr. Cubley and Dr. Batson and a compensation committee comprised of
Dr. Cubley and Dr. Batson. The board serves as the nomination committee. The
board has determined that Dr. Cubley qualifies as an audit committee financial
expert as defined in Item 407(d)(5) of Regulation S-B.


                                       56


<PAGE>

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,
with the exception of two reports of open market acquisitions by Dr. Cubley
which were late by one and two business days due to late notifications from
broker, which acquisitions have now been reported on Form 4 filings.

CODE OF ETHICS

The Company has not established a Code of Business Conduct and Ethics. We expect
to adopt such a Code within 2007 year in conjunction with an expansion of our
Board of Directors and will report the adoption of a Code of Business Conduct
and Ethics on Form 8-K promptly thereafter.

ITEM 10. EXECUTIVE COMPENSATION

The following table contains compensation data for our named executive officers.
Mr. Smith served as our chief executive officer and chief financial officer from
August 1, 2004 through October 2006; at which time the board of directors
appointed Dr. H. Dean Cubley as our chief executed officer. Since October 2006,
Mr. Smith has continued in his role as chief financial officer in conjunction
with this appointment. Dr. Cubley has served as our chief executive officer
since October 2006. Mr. John Burns has served as an executive officer since
August 2005. Mr. Arley Burns and John Nagel have served as key employees since
August 2005 and January 2006, respectively. These individuals are considered our
"named executive officers" as defined in Item 402(a) of Regulation S-B.

<TABLE>
<S>     <C>
                                  SUMMARY COMPENSATION TABLE

                                  Salary and
     Name and                     Consulting              Stock        All Other
Principal Position     Year         Payments    Bonus      Awards      Compensation       Total
                                     ($)        ($)         ($)            ($)            ($)

H. Dean Cubley        2006           1,000        -          -               -            1,000
                      2005          15,000        -          -               -           15,000
                      2004               -        -          -               -                -

R. Greg Smith         2006         181,000        -          -               -          181,000
                      2005         195,000    5,000          -               -          200,000
                      2004          75,000        -          -               -           75,000

John Burns            2006         182,000        -          -               -          182,000
                      2005         106,000        -          -               -          106,000
                      2004               -        -          -               -                -

Arley Burns           2006         153,000        -          -               -          153,000
                      2005          60,000        -          -               -           60,000
                      2004               -        -          -               -                -

John Nagel            2006         100,000        -          -               -          100,000
                      2005           9,000        -          -               -            9,000
                      2004               -        -          -               -                -
</TABLE>

                                       57


<PAGE>

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE

The table below sets forth information with respect to our named executive
officers regarding the value of equity compensation as of December 31, 2006.

<TABLE>
<S>     <C>
                                                                                                                          Equity
                                                                                                             Equity      Incentive
                                              Equity                                                       Incentive    Plan Awards:
                                             Incentive                                         Market     Plan Awards:  Number of
               Number of                    Plan Awards:                         Number of     Value of     Number of     Unearned
              Securities      Number of     Number of                           Shares or     Shares or     Unearned      Shares,
    Name      Underlying     Underlying    Securities     Option                 Units of     Units of      Shares,      Units or
              Unexercised    Unexercised   Underlying    Exercised    Option    Stock That   Stock That     Units or       Other
                Options        Options     Unexercised     Price    Expiration   Have Not     Have Not       Other      Rights That
                  (#)            (#)         Unearned       ($)        Date       Vested       Vested     Rights That    Have Not
               Exercisable  Unexercisable    Options                               ($)          ($)         Have Not      Vested
                                               (#)                                                           Vested         ($)
H. Dean Cubley         -              -         -             -            -            -           -           -            -
R. Greg Smith    100,000        900,000         -         $1.38     07/31/09      900,000     180,000           -            -
John Burns             -      1,050,000         -         $3.72     07/31/08    1,050,000     210,000           -            -
Arley Burns            -        520,000         -         $3.72     07/31/08      520,000     104,000           -            -
John Nagel             -              -         -             -            -            -           -           -            -
</TABLE>

Mr. Smith is also entitled to receive up to 1,000,000 stock options under the
Company's 2004 Non-Qualified Stock Option Plan for attainment of certain future
cumulative revenue milestone achievements. These options, if any are earned,
will vest when granted and have an exercise price of the lowest five-day average
closing price existing for the Company's common stock during the twelve-month
period immediately preceding the date of the vesting event. As of December 31,
2006, Greg Smith has earned 100,000 options to purchase 100,000 common shares
for attainment of certain cumulative revenue milestones set forth in his
employment agreement. These options are at an exercise price of $1.38 and expire
on July 31, 2009.

Mr. John Adrian Burns is eligible to receive non-qualified non-transferable
stock options based on the future financial performance of ENS. These future
financial performance targets are deemed the vesting events. The options are
priced at $3.72 and when attained can be converted on a cashless basis into ERF
Wireless, Inc. (Parent), common stock. The common shares received have piggyback
registration rights and expire on the close of business of July 30, 2008. The
vesting events and related incentive options are as follows:

     o   50,000 options qualify when the annual revenue of ENS exceeds
         $3,000,000; 75,000 options qualify when the annual revenue of ENS
         exceeds $6,000,000; 100,000 options qualify when the annual revenue of
         ENS exceeds $12,000,000, and 125,000 options qualify when the annual
         revenue of ENS exceeds $20,000,000.

     o   50,000 options qualify when the adjusted annual EBIDTA of ENS exceeds
         $500,000; 75,000 options qualify when the adjusted annual EBIDTA of ENS
         exceeds $1,000,000; 100,000 options qualify when the adjusted annual
         EBIDTA of ENS exceeds $2,000,000; and 125,000 options qualify when the
         adjusted annual EBIDTA of ENS exceeds $3,000,000

     o   50,000 options qualify when the adjusted annual EBIDTA of the Parent
         exceeds $1.00; 75,000 options qualify when the adjusted annual EBIDTA
         of the Parent exceeds $500,000; 100,000 options qualify when the
         adjusted annual EBIDTA of the Parent exceeds $1,000,000; and 1 25,000
         options qualify when the adjusted annual EBIDTA of the Parent exceeds
         $5,000,000

Mr. Arley Burns is eligible to receive non-qualified non-transferable stock
options based on the future financial performance of ENS.

These future financial performance targets are deemed the vesting events. The
options are priced at $3.72 and when attained can be converted on a cashless
basis into ERF Wireless, Inc. (Parent), common stock. The common shares received
have piggyback registration rights and expire on the close of business of July
30, 2008. The vesting events and related incentive options are as follows:

     o   35,000 options qualify when the annual revenue of ENS exceeds
         $3,000,000; 50,000 options qualify when the annual revenue of the ENS
         exceeds $6,000,000; 75,000 options qualify when the annual revenue of
         ENS exceeds $12,000,000; and 100,000 options qualify when the annual
         revenue of ENS exceeds $20,000,000

     o   35,000 options qualify when the adjusted annual EBIDTA of ENS exceeds
         $500,000; 50,000 options qualify when the adjusted annual EBIDTA of ENS
         exceeds $1,000,000; 75,000 options qualify when the adjusted annual
         EBIDTA of ENS exceeds $2,000,000; and 100,000 options qualify when the
         adjusted annual EBIDTA of ENS exceeds $3,000,000


                                       58


<PAGE>

EMPLOYMENT AND CONSULTING AGREEMENTS

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

R. GREG SMITH. Mr. Smith's employment agreement was executed in August 2004, and
expires August 2007. During the term of his employment, Mr. Smith is entitled to
the following compensation: (i) base salary of $180,000 per year; (ii) bonus
equal to 1% of revenues for the most recent twelve-month period of each
acquisition made by the Company during his employment period; (iii) received
63,828 shares of our Series A Preferred Stock as a sign-on bonus; (iv) receive
up to 1,000,000 stock options through attainment of certain future cumulative
revenue milestone achievements. As of December 31, 2006, Mr. Smith has earned
100,000 options to purchase 100,000 common shares due to the attainment of
certain revenue milestone within his agreement. His agreement does not contain
any change of control provisions.

JOHN BURNS. Mr. Burns' employment agreement was executed in August 2005, and is
for a period of three years. During the term of his employment, Mr. Burns' is
entitled to a base salary of $180,000 per year and receive up to 1,050,000 stock
options through attainment of certain future cumulative financial milestone
achievements. As of December 31, 2006, none of the options to purchase common
stock have vested. His agreement does not contain any change of control
provisions.

ARLEY BURNS. Mr. Burns, a key employee, entered into a three-year employment
agreement with the Company in August 2005. Mr. Burns is entitled to a base
salary of $150,000 per year and receive up to 520,000 stock options through
attainment of certain future cumulative financial milestone achievements. His
agreement does not contain any change of control provisions

DIRECTOR COMPENSATION

Set forth below is information regarding compensation paid to each director
during 2006. Additionally, we reimburse our directors for travel and lodging
expenses in connection with their attendance at board meetings.

<TABLE>
<S>     <C>
                                                                          Change in
                                                                            Pension
                                                                          Value and
                   Fees Earned                            Non-Equity     Nonqualified
       Name         or Paid in     Stock      Option    Incentive Plan     Deferred       All Other
                       Cash        Awards     Awards     Compensation    Compensation    Compensation      Total
                       ($)          ($)         ($)          ($)           Earnings          ($)            ($)
                                                                             ($)
H. Dean Cubley         1,240         -           -            -               -               -            1,240
R. Greg Smith            620         -           -            -               -               -              620
John Burns               620         -           -            -               -               -              620
Bartus H. Batson       1,240         -           -            -               -               -            1,240
</TABLE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

As of December 31, 2006, 24,039,733 shares of common stock were outstanding and
3,800,649 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:

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

     o   each of our directors;

     o   each of our named executive officers; and

     o   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.


                                       59


<PAGE>

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.

<TABLE>
<S>     <C>
                                                                             SHARES OF SERIES
                                                                                A PREFERRED
                                           SHARES OF COMMON STOCK                  STOCK                     TOTAL PERCENTAGE
                                                BENEFICIALLY                   BENEFICIALLY                  OF VOTING POWER
                                                  OWNED (1)                        OWNED                           (2)
------------------------------------ ---------------------------------- ------------------------------ -----------------------------
      NAME AND ADDRESS OF
        BENEFICAL OWNER                     NUMBER                %           NUMBER               %         NUMBER           %
------------------------------------ ---------------------------------- ------------------------------ -----------------------------
Frances Cubley  (3)                        3,932,345(4)         16.36%       3,389,328   (5)      89%       71,718,905       71.68%
STJV Trust                                   236,226             0.98%       1,986,487            52%       39,965,966       39.94%
Pauline Trust                                541,783             2.25%         300,275             8%        6,547,283        6.54%
Carson Family Trust                        1,485,174             6.18%         269,124             7%        6,867,654        6.86%
Leopard Family Trust                         560,459             2.33%         266,305             7%        5,886,559        5.88%
Jauquine Trust                               535,171             2.23%         109,131             3%        2,717,791        2.72%
Systom Trust                                 573,532             2.39%         458,006            12%        9,733,652        9.73%
R. Greg Smith                              1,124,213(6)          4.68%          11,205             0%        1,348,313        1.35%
Dr. H. Dean Cubley                           231,599             0.96%               -             0%          231,599        0.23%
Dr Bartus H. Batson                           10,000             0.04%               -             0%           10,000        0.01%
John Burns                                    88,554(7)          0.37%               -             0%           88,554        0.09%
All Executives Officers and
  Directors as a group                     1,454,366             6.05%          11,205             0%        1,678,466        1.68%
                (4 persons)
Arley Burns                                   86,051             0.36%               -             0%           86,051        0.09%
John Nagel                                   502,218             2.09%               -             0%          502,218        0.50%
</TABLE>

     (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) Ms. Frances Cubley, the mother of Dr. H. Dean Cubley, Chairman of the
         Board of Directors and CEO of the Company, 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 3,932,345 shares owned by the Francis Cubley Trusts.
     (5) Includes 3,389,328 shares of Series A Preferred Stock held by the
         Francis Cubley Trusts.
     (6) Includes 1,121,546 shares held by Lariat Financial, Inc., a corporation
         controlled by Mr. Smith. This does not include options to purchase
         900,000 shares of common stock that are exercisable upon cumulative
         revenue of the Company, which as of December 2006, the Company does not
         believe such revenue's will be exceeded during the next 60 days.
     (7) This does not include (i) an option to purchase 1,050,000 shares of
         common stock that are exercisable upon cumulative revenue and EBIDTA of
         the Company's Enterprise Network Services division and the Company,
         since the Company does not believe such revenue's will be exceeded
         during the next 60 days; and (ii) the note issued SkyVue that is
         convertible was repaid in restrictive common stock September 2006, Mr.
         Burns is a director of SkyVue.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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.
The Company is obligated to pay Synchton $12,000 per month in cash or free
trading stock. The Company at its discretion may issue up to 50% of the monthly
fee in 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, son of H. Dean Cubley. For the year ended December 31, 2006,
total fees incurred by the Company under the agreement were $119,000.

Brian Cubley, son of H. Dean Cubley, served as an employee during 2006 and
continues to serve as an employee during current fiscal year. During fiscal 2006
Mr. Cubley was paid $90,000 in cash for services rendered. In fiscal 2005 Mr.
Cubley also received 31,914 shares of Series A Preferred Stock at $0.50 per
share. Mr. Cubley is also eligible to receive non-qualified non-transferable
stock options to purchase up to 500,000 shares of the Company's common stock
based upon the attainment of certain performance based milestones at 115% of the
lowest five day average closing price for the Company previous year; As of
December 31, 2006, Brian Cubley has earned options to purchase 50,000 shares of
common stock at exercise price of $1.38 and expire on July 31, 2009.
Additionally, Mr. Cubley is entitled to a bonus for each calendar year in which
the Company's Messaging Services Division is profitable equal to 5% of the
revenues of the Messaging Services Division; no bonus was earned in 2006.


                                       60


<PAGE>

The Company received advances from related family trusts that totaled $130,000
in 2006, and repaid these advances through the issuance of 86,667 shares of
preferred stock in 2006, which were converted into 1,618,617 shares of common
stock. Frances Cubley, the mother of 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. Additionally, certain of these
family related trusts are participants in the Angus Capital $3,000,000 revolving
non convertible credit facility that bears interest at 12% per annum that
matures in February 2009.
<TABLE>
<S>     <C>
ITEM 13. EXHIBITS

         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 Texas 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 31        Certification of Chief Executive officer and Chief Financial officer pursuant to Rules
                           13a-14 (a) and 15d-14 (a), as adopted pursuant to section 302 of the Sarbanes-Oxley
                           Act of 2002 (12)
         Exhibit 32        Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
                           Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (12)

         (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)   Filed herewith
         (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.
</TABLE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

During the fiscal years ended December 31, 2006, and December 31, 2005, the
aggregate fees billed by LBB & Associates LTD., LLP, were as follows:

                                 December 31,         December 31,
                                    2006                  2005
                                 ------------         ------------

         Audit fees                 $70,605             $58,148
         Audit 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.

                                       61

<PAGE>

                                   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 Cubley
                                       ------------------------------
                                       Name:  H. Dean Cubley
                                       Title: Chief Executive Officer
                                       Date:  April 16, 2007


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   April 16, 2007
                            Principal Executive Officer,
                            and Director

 /s/ R. Greg Smith          Chief Financial Officer,             April 16, 2007
                            Principal Financial Officer
                            and Director

 /s/ John A. Burns          Chief Operating Officer              April 16, 2007
                            and Director

 /s/ Dr. Bartus H. Batson   Director                             April 16, 2007


                                       62