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, 2007




COMMISSION
FILE NUMBER 000-27467




ERF
WIRELESS, INC.


(Exact
name of registrant as specified in its charter)







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







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


(Address
of principal executive offices) (Zip Code)




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




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




None.




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




$.001
PAR VALUE COMMON STOCK




Check
whether the issuer is not required to file report pursuant to Section 13 or 15(d)
of the Exchange Act [_]




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. [X]




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




ERF
Wireless, Inc.'s revenue for its most recent fiscal year was
$5,569,000.




As of
March 26, 2008 the aggregate market value of the shares of common stock held by
non-affiliates (based on the closing price of $0.57 per share for the common
stock as quoted on that date) was approximately $41,148,331.




As of
March 25, 2008, the Company had outstanding 72,190,054 shares of its $.001 par
value common stock.




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







TABLE
OF CONTENTS






ITEM
              NUMBER
            
            CAPTION
              PAGEPART
      IITEM
      1.
            Description
      of Business
            4ITEM
      2.
            Description
      of Property13ITEM
      3.
            Legal
      Proceedings
            13ITEM
      4.
            Submission
      of Matters to a Vote of Security Holders
            13PART
      IIITEM
      5.
            Market
      for Common Equity, Related Stockholder Matters and Small Business Issuer
      Purchases of Equity Securities
            14ITEM
      6.
            Management's
      Discussion and Analysis or Plan of Operations
            15ITEM
      7.
            Financial
      Statements
            24ITEM
      8.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            50ITEM
      8A.
            Controls
      and Procedures
            50ITEM
      8B.
            Other
      Information
            51PART
      IIIITEM
      9.
            Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(A) of the Exchange Act
            53ITEM
      10.
            Executive
      Compensation
            54ITEM
      11.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            56ITEM
      12.
            Certain
      Relationships and Related Transactions
            57ITEM
      13.
            Exhibits
            58ITEM
      14.
            Principal
      Accountant Fees and Services
            59








2


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.


3


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 designing, constructing, maintaining and monitoring high capacity
secure encrypted wireless T1 replacement networks for the regional banking
industry.  In addition, a complement to the core banking business and
to provide maintenance services for the banks as well as to produce additional
recurring revenue, the Company acquires and/or constructs 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 the regional banks as well as 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. 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, through its Wireless
Bundled Services (WBS) subsidiary, use the same network under a revenue sharing
agreement with the banks to sell wireless broadband services to private
entities, cities, municipalities and the general public in that
region.




Enterprise
Network Services currently has long term maintenance contracts with five (5)
banking networks. For the twelve months ended December 31, 2007 Enterprise
Network Services contributed 23% of the revenues of the Company and 19% 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 and data 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 in areas where the
Company already has or plans to have customers for its ENS wireless banking
product.




As of the
twelve months ended December 31, 2007, the Wireless Bundled Services contributed
34% of the revenues of the Company and 11% 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.




WIRELESS
MESSAGING SERVICES




Wireless
Messaging Services provides wireless broadband and fiber-to-the-home 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 (paging retail). 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 certain paging transmitter equipment. The majority of Wireless
Messaging Services' contracts are short term. Wireless Messaging Services
contributed 44% of the Company's revenues for the twelve months ended December
31, 2007, and 1% 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 Bundled Services, 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, 2007, 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 revenue stream.


4




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 web sites atwww.erfwireless.comand www.erfwireless.net. 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 provides a 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 as are generally utilized in
the banking and healthcare industries.




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 we believe will
accelerate the growth of the wireless broadband industry.




The
Company'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 underway since 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. The
Company has entered into a marketing agreement with Motorola 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.




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.




To date
the Company has acquired certain assets and or operations of eleven small and
medium size 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. A strategy is to agree 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.


5




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 in 2005 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 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 formed to provide wireless broadband products and
services, including Internet, voice and data to serve private entities, cities,
municipalities and the general public. These services are 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 offers these services by acquiring established rural wireless broadband
companies.




Wireless
Bundled Services operates 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.





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 (paging
retail). Wireless Messaging Services implements and constructs new
fiber-to-the-home broadband networks for third party customers. Wireless
Messaging Services also manufactures some high power wireless paging transmitter
equipment.




The
wireless broadband system design and implementation function is a service that
Wireless Messaging Systems provides to 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.


6




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 fiber-to-the-home product that is being offered provided to residential
developments both in the U.S. as well as internationally.




NETWORK
OPERATIONS SERVICES




Network
Operations Services Division provides the overall day-to-day operation and 24/7
monitoring to all wireless broadband networks that the Wireless Messaging
Services, Wireless Bundled 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 notify the appropriate repair organization regarding a network
problem in any of the wireless broadband networks that ERF Wireless owns or
operates.




COMPETITION




The
Company competes in the regional banking data network business with traditional
telephone companies. These companies offer limited bandwidth wireline circuits.
The Company expects that well capitalized companies may provide a similar type
of secure wireless broadband capability in the future, resulting in
competition.




We also
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, most of which offer the same Internet connectivity
services.




The
Company sells 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.




INTELLECTUAL
PROPERTY, PROPRIETARY RIGHTS AND LICENSES




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




We 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.


7




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




GOVERNMENTAL
REGULATION




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




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").  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 26, 2008, we employ 67 full-time employees and 10 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 36% and 12% of gross sales for the
twelve months ended December 31, 2007. During the year ended December 31, 2006,
two different customers that represented 34% and 19% of the Company's gross
sales.


8




RESEARCH
AND DEVELOPMENT




We
provide internal research and development for our patent pending CryptoVue
technology utilized by our Enterprise Network Services subsidiary in the
regional banking application as well as other industries. Otherwise, we rely on
the providers of the products we sell to upgrade their products through research
and development. Consequently, we do not perform material research and
development and we have not incurred any material research and development costs
during the two previous fiscal years and do not anticipate incurring any such
costs in the current fiscal year.




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, 2007, we had an accumulated deficit of $18,694,000. Our gross revenues for
the twelve months ended December 31, 2007 were $5,569,000, with a loss from
operations of $5,773,000 and a net loss applicable to common shareholders of
$7,067,000. 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 expect to incur losses from
operations in 2008.




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




As of
December 31, 2007, we had cash and cash equivalents balances of $2,211,000 and
working capital of $224,000. The Company has a multi-year $4 million unsecured
revolving credit facility, and as of December 31, 2007, there was approximately
$1,591,000 available under that facility. Additionally, we have available
project and equipment financing of $11,000,000. We believe our cash, anticipated
cash flow from operations and available credit facilities afford us adequate
liquidity for 2008, although we will likely need to raise additional capital
during this period to fund our anticipated growth for our banking and WISP
network businesses if acceptable terms are available, and 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.




A
DEFAULT OF THE TERMS OF OUR SIGNIFICANT DEBT OBLIGATIONS MAY SUBJECT US TO THE
RISK OF FORECLOSURE ON CERTAIN OF OUR ASSETS




As of
December 31, 2007, some operating assets, inventory, furniture and accounts
receivable are pledge as collateral on $2,145, 000 of outstanding notes and
capital leases. The occurrence of an event of default under any of our
obligations might subject us to foreclosure by the lenders to the extent
necessary to repay any amounts due. If a foreclosure were to happen, it would
have a material adverse effect on our financial condition. We are not required
to establish a sinking fund for the repayment of our outstanding debt.
Accordingly, we may be required to obtain funds to repay the debt 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:




·
            15,000,000
      shares of common stock pursuant to the Company's option plans, of which
      options to purchase 2,274,753 shares are outstanding as of December 31,
      2007;




·
            3,938,579
      shares of common stock underlying outstanding common
    warrants;


9




·
            544,555
      shares of common stock issuable upon conversion of bonds and exercise of
      warrants that are issuable only upon conversion of such
    bonds;




·
            12,369,472
      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, 2007.




The
weighted average purchase price per share of common stock upon the issuance of
these derivative securities, as if converted on December 31, 2007, is
approximately (i) $2.98 per share of common stock underling the options, (ii)
4.95 per share of common stock underling the warrants, (iii) $1.01 per share of
common stock underlying the bonds and $5.00 for the common stock underlying the
warrant issuable upon conversion of the bonds; and (iv) $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
$1.01 per share and $.49 per share since January 1, 2008. 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.




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:




·
            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.




·
            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.




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




·
            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.




·
            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, lower than expected revenue in
the future, increased losses in the future, and decreased working capital could
adversely affect our stock price and liquidity.




DURING
2007, THE MAJORITY OF OUR REVENUE WAS GENERATED FROM SHORT-TERM
AGREEMENTS.




For the
twelve-month period ended December 31, 2007 the majority of our revenues from
customers resulted from short-term, terminable at will, arrangements. Our
customers that provided in excess of 10% of our revenues in prior periods are
subject to short-term, terminable at will, arrangements, and it is expected that
these customers will not be providing in excess of 10% of our revenues in future
periods. 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.


10




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.




WE
MUST CONTINUALLY ENHANCE OUR SERVICES TO MEET THE CHANGING NEEDS OF OUR
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.


11




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:




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




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




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




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




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




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




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


12




·
            diversion
      of financial and management resources from existing
      operations;




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




·
            potential
      loss of key employees;




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




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




·
            potential
      write-offs of acquired assets.




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




ITEM 2. DESCRIPTION OF PROPERTY




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


Location
                
                Function
                
                Size (square feet)
                
                
                Approximate Monthly lease
      paymentLeague
      City, TX
                
                ERF
      Wireless Inc. Corporate Headquarters
                
                
                13,837
                
                
                $
                10,110Taylor,
      TX
                
                ENS
      Operational Division Headquarters
                
                
                4,387
                
                
                $
                3,493Lubbock,
      TX
                
                WBS
      West Texas Operational Division Headquarters
                
                
                10,000
                
                
                $
                5,000Blanco,
      TX
                
                WBS
      Central Texas Operational Division Headquarters
                
                
                2,400
                
                
                $
                2,200




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




The
Company occupies office and tower facilities under several non-cancelable
operating lease agreements expiring at various dates through September 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.


13




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
              
              
              LowYEAR
      2007Quarter
      ended December 31
              
              $
              1.67
              
              
              $
              0.75Quarter
      ended September 30
              
              $
              1.52
              
              
              $
              0.30Quarter
      ended June 30
              
              $
              0.44
              
              
              $
              0.09Quarter
      ended March 31
              
              $
              0.22
              
              
              $
              0.09YEAR
      2006Quarter
      ended December 31
              
              $
              0.72
              
              
              $
              0.16Quarter
      ended September 30
              
              $
              0.75
              
              
              $
              0.16Quarter
      ended June 30
              
              $
              1.50
              
              
              $
              0.56Quarter
      ended March 31
              
              $
              3.00
              
              
              $
              1.05




STOCKHOLDERS




As of
March 26, 2008, we believe there were approximately 2,500 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 December 31, 2007,
concerning securities authorized for issuance under the 2004 and 2007
Non-Qualified Stock Option Plans;





Number
      of Securties to be Issued Upon Exercise of Outstanding Options, Warrants
      & Rights
            
            Weighted
      Averaged Exercise Price of Outstanding Options, Warrants &
      Rights
            
            
            Number
      of Securties Remaining Available for Future Issuance Under Equity
      Compensation Plans (Excluding Securties Reflected in Column
      (a)(a)
            
            
            (b)
            
            
            (c)Equity
      compensation plans approved by security holders:None
            
            
            -
            
            
            
            -
            
            
            
            -Equity
      compensation plans not approved by security holders:2004
      Non-Qualified Stock Compensation Plan
            
            
            150,000
            
            
            $
            1.38
            
            
            
            -2007
      Non-Qualified Stock Compensation Plan
            
            
            225,000
            
            
            $
            0.10
            
            
            
            2,274,753Total
            
            
            375,000
            
            
            $
            0.61
            
            
            
            2,274,753






14




RECENT
SALES OF UNREGISTERED SECURITIES




Set forth
below is certain information concerning issuances of common stock that were not
registered under the Securities Act that occurred in the fourth quarter of
fiscal 2007.




On
October 31, 2007, an accredited investor acquired 461,422 shares of common stock
at $0.86 per share in a private placement.




On
November 09, 2007, accredited investors acquired 158,985 shares of common stock
at $0.88 per share in a private placement.




On
November 16, 2007, accredited investors acquired 2,058,219 shares of common
stock at $0.89 per share in a private placement.




On
November 27, 2007, accredited investors acquired 21,704 shares of common stock
at $0.94 per share in a private placement.




On
December 05, 2007, accredited investors acquired 563,920 shares of common stock
at $0.91 per share in a private placement.




On
December 20, 2007, accredited investors acquired 65,244 shares of common stock
at $0.77 per share in a private placement.




On
December 28, 2007, accredited investors acquired 106,640 shares of common stock
at $0.70 per share in a private placement.




During
the fourth quarter of fiscal 2007, we converted the principal amount of $75,000
of bonds and issued 313,666 shares of common stock and issued three year
warrants to purchase 313,666 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. Sales commissions of $35,000 were paid to register brokers in
connection with these issuances listed above.




EQUITY
REPURCHASES BY ISSUER




The
Company did not effect any common stock repurchases during fiscal
2007.




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.




RECENT
EVENTS




During
and subsequent to the quarter ended September 30, 2007, the Company has made
significant progress with its strategic business plan as evidenced by the
completion and announcement of numerous agreements. These include:




·
            The
      completion of the acquisition of assets and operations of two central
      Texas Wireless Internet Service Providers (WISPs), Momentum Online and
      TSTAR Internet; adding approximately 5,500 customers and $2.4 million in
      annualized revenues. These acquisitions cover 5 counties in central Texas
      and will give the company a footprint covering 3,200 square miles, when
      integrated with the Company's existing central Texas WiNet and US-BankNet
      System, will give the Company a footprint covering a population of more
      than 22,500 businesses, over 550,000 residents and 36 regional and
      community bank charters aggregating 462 branch locations. Additionally,
      these acquisitions give the Company access to 55 towers, in addition to 78
      towers that the Company already controls across the
  state.




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




·
            The
      completion of $4,725,000, net of syndication costs, in equity financing
      from accredited investors during the second half of
  2007.




·
            The
      completion of $10 million in lease line of credit from BancLeasing, Inc.
      for funding the Company's US-BankNet
System.


15




·
            The
      Company paid off in cash the remaining $366,000 balance of the original
      $1,500,000 convertible debenture entered into with Global Capital Funding
      Group, L.P. (GCA), in September
2007.




·
            The
      Company announced the completion of a new $2 million lease line with
      Agility Ventures LLC to provide incremental expansion capital for its
      growing wireless ISP operations in October
2007.




·
            The
      Company announced that its patent-pending ERF Wireless CryptoVue(TM)
      Network Security Appliance would be marketed as a stand-alone VPN device
      for encrypting wired and wireless wide-area
  networks.




·
            The
      patent-pending CryptoVue Network Security Appliance has successfully
      completed a testing program conducted by Motorola in its Schaumburg,
      Illinois, labs to validate its use with the MOTOwi4 wireless broadband
      solutions in applications requiring secure wireless communications. Under
      a Product Affiliation Agreement recently signed with Motorola, ERF
      Wireless has made its CryptoVue Network Security Appliance available to
      Motorola and Authorized Motorola Canopy Solutions Providers wanting to
      deploy secure wireless communications networks for non-financial
      industries as well.




·
            The Company announced that it is
      deploying US-BankNet in the state of Texas to eventually provide
      connectivity to over 250 banks targeted in the state. The rollout of
      US-BankNet in Texas complements the deployment of US-BankNet already
      underway in the state of
Louisiana.




·
            The
      Company signed an agreement with CamSoft Data Systems to provide technical
      support for the Iberville Bank WiNet network that will cover 12 Iberville
      Bank WiNet locations; thereby converting their BranchNet system into a
      revenue-producing asset.




·
            The
      Company signed a contract to acquire the largest transmission tower
      facility in Galveston County, Texas, to serve as the transmission hub for
      most of the Company's banking and wireless broadband networks in the
      southeastern part of Texas. This 1,120 foot tall tower and associated real
      estate is situated in an area south of Houston and provides a direct line
      of sight to a circular ground-level footprint seventy miles in diameter
      that includes all the cities in three counties, with a population base of
      more than 5 million people.




RESULTS
OF OPERATIONS




YEAR
ENDED DECEMBER 31, 2007, COMPARED TO YEAR ENDED DECEMBER 31, 2006




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




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




For the
year ended December 31, 2007, the Company's consolidated operations generated
net sales of $5,569,000 compared to prior-year net sales of $1,716,000 for the
year ended December 31, 2006. The increase in net sales is primarily
attributable to the substantial progress made to date on the El Dorado Golf and
Beach Club of San Jose del Cabo, Mexico project, an increase in recurring
wireless WISP services during the year and 4th quarter
WISP acquisitions of nearly 5,000 customers and an increase in banking network
services resulting from nearly completing a installation with a major customer
and additional product and service sales to existing customer base. For the year
ended December 31, 2007, the Company had a gross profit margin of 26%, compared
to a gross profit margin of 26% for the prior-year period ended December 31,
2006. There was no change in gross profit margin percentage as compared to the
prior year, but primarily increase due to increase sales volume as follow; (i)
approximately $201,000 increase in gross margin attributable to the El Dorado
FTTH project, (ii) approximately $886,000 increase in gross margin attributable
to the increased WISP customer base and (iii) offset by $103,000 decrease in
gross margins for banking network services.


16




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




SALES
INFORMATION




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


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




For the
year ended December 31, 2007, net sales increased to $5,569,000 from $1,716,000
for the year ended December 31, 2006. The overall increase of 225% was primarily
attributable to the substantial progress made to date on the El Dorado Golf and
Beach Club of San Jose del Cabo, Mexico project, an increase in recurring
wireless WISP services during the year and 4th quarter
WISP asset acquisitions including approximately 5,000 customers and an increase
in banking network services resulting from an ongoing installation with a major
customer and additional product and service sales to existing customer
base.




COST
OF GOODS SOLD




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


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






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




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


17




OPERATIONS
EXPENSES




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




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




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




·
            A
      $639,000 increase in employment expense, primarily attributable to
      increased work force to 67 employees from 31 employees from a year ago
      primarily associated with our growing WISP operations and a year end bonus
      of $200,000 to employees for length of
service;




·
            A
      $446,000 increase in professional
services;




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




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




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




OTHER
(INCOME) EXPENSE, NET




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




NET
LOSS




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




NET
LOSS APPLICABLE TO COMMON SHAREHOLDERS




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




CASH
FLOWS




The
Company's operating activities increased net cash used by operating activities
to $2,739,000 in the year ended December 31, 2007, compared to net cash used of
$2,677,000 in the year ended December 31, 2006. The increase in net cash used by
operating activities was primarily attributable to fund an increase in the
Company's net operating loss $7,067,000, net of $4,489,000 non-cash charges and
$81,000 of cash provided by fluctuations in working capital requirements
consisting of the combination of accounts receivable, inventory, prepaid
expenses, accounts payable, accrued expenses, cost and profit in excess of
billings, deferred liability lease and deferred revenue.


18




The
Company's investing activities used net cash of $729,000 in the year ended
December 31, 2007, compared to use of net cash of $226,000 in the year ended
December 31, 2006. The increase in investing activities is primarily growing
WISP capabilities through asset acquisition and expansion of our infrastructure
in Texas, New Mexico and Louisiana.




The
Company's financing activities provided net cash of $5,286,000 in the year ended
December 31, 2007, compared to $2,694,000 of cash provided in year ended
December 31, 2006. The cash provided in the year ended December 31, 2007, was
primarily associated with the proceeds from equity financings and the line of
credit, net.




LIQUIDITY
AND CAPITAL RESOURCES




GENERAL




At
December 31, 2007, the Company's current assets totaled $3,741,000 (including
cash and cash equivalents of $2,211,000). Total current liabilities were
$3,517,000, resulting in working capital of $224,000. 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. The Company operations
for the twelve months ended December 31, 2007, was primarily funded by proceeds
from the Company's line of credit totaling $403,000, sale of restricted common
stock, net to accredited investors of $4,725,000, proceeds for equipment
financing $305,000 and convertible debt financing of $388,000.




CURRENT
DEBT FACILITY




At
December 31, 2007, the Company had approximately $1,591,000 available on a $4
million unsecured revolving credit facility with Angus Capital Partners, which
matures 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 12% rate. The
loan may be prepaid without penalty or repaid at maturity.




ISSUANCE
OF COMMON STOCK




During
the fiscal year ended December 31, 2007, we issued to various accredited
investors an aggregate of 12,007,000 shares of restricted common stock for net
consideration of $4,725,000. We relied on Section 4(2) of the Act in effecting
this transaction.






During
the fiscal year ended December 31, 2007, we issued 8,822,080 shares of common
stock to employees and business consultants, for aggregate consideration of
$1,870,533 of services rendered, pursuant to a registration statement on form
S-8.




DUTCHESS
FACILITY




On June
14, 2007, we entered into an Investment Agreement with Dutchess whereby Dutchess
agreed to purchase up to $10,000,000 of our common stock over the course of
thirty-six (36) months.  The Company filed a Registration Statement
with the SEC covering an issuance of 10,000,000 of common stock under the equity
line agreement. The Company has received comments from the SEC and intends to
refile a pre-effective amendment to the registration with updated audited
financial statements during 2008.




USE
OF WORKING CAPITAL




We
believe our cash, anticipated cash flow from operations and available credit
facilities afford us adequate liquidity for the balance of fiscal 2008, 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. 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:




·
            Acquisitions
      of one or more companies, networks or other
  assets:




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




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




·
            Investment
      in laboratory facilities including test and simulation
      equipment:




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


19




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.




CONTRACTUAL
OBLIGATIONS




The
following table sets forth contractual obligations as of December 31,
2007:


Payments
      Due by PeriodTotal
              
              
              Less
      than 1 Year
              
              
              1-3
      Years
              
              
              3-5
      Years
              
              
              More
      than 5 YearsContractual
      obligations:Long-term
      debt obligations
              
              $
              5,687
              
              
              $
              1,709
              
              
              $
              3,813
              
              
              $
              165
              
              
              $
              -Capital
      lease obligations
              
              
              1,856
              
              
              
              609
              
              
              
              1,050
              
              
              
              192
              
              
              
              5Operating
      lease obligations
              
              
              1,335
              
              
              
              443
              
              
              
              867
              
              
              
              25
              
              
              
              -Total
      contractual obligations
              
              $
              8,878
              
              
              $
              2,761
              
              
              $
              5,730
              
              
              $
              382
              
              
              $
              5




The
Company's contractual obligations consist of long-term debt of $4,810,000,
derivative liabilities of $403,000, unamortized debt discount of $34,000, and
interest expense of $441,000 as set forth in Note 11 to the company's financial
statements, Notes Payable and Long-Term Debt, and certain obligations for
operating leases requiring future minimal commitments under non-cancelable
leases set forth in Note 13 - Commitments and Contingencies.




OFF-BALANCE
SHEET ARRANGEMENTS




As of
December 31, 2007 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.




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.


20




DEFERRED
SYNDICATION COSTS




Deferred
syndication costs consist of those expenditures incurred that are directly
attributable to fundraising and the collection thereto. Upon successful
collection of the funds, all expenses incurred will be reclassified to
additional paid in capital and treated as syndication costs; netted against the
funds raised.




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.




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




WARRANTY




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




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.




GOODWILL





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




LONG-LIVED
ASSETS




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




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




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


21




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




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




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




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




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




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


22




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




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




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.


23


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, 2007 and 2006, 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, 2007 and 2006 and the results of its operations and its
cash flows for each of the two years then ended in conformity with accounting
principles generally accepted in the United States of America.




LBB
& ASSOCIATES LTD., LLP


Houston,
Texas


March 25,
2008







24




ERF
WIRELESS, INC.


CONSOLIDATED
BALANCE SHEETS


December
31, 2007 and 2006


($
in thousands except share data)









December
      31,
            
            December
      31,2007
            
            2006ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            2,211
            
            $
            393Accounts
      receivable, net
            
            
            365
            
            
            387Accounts
      receivable other
            
            
            114
            
            
            -Inventories
            
            
            118
            
            
            132Cost
      and profit in excess of billings
            
            
            410
            
            
            69Prepaid
      expenses
            
            
            523
            
            
            137Total
      current assets
            
            
            3,741
            
            
            1,118Property
      and equipmentProperty
      and equipment
            
            
            3,246
            
            
            1,001Less
      accumulated depreciation
            
            
            (564
            )
            
            (199
            )Net
      property and equipment
            
            
            2,682
            
            
            802Goodwill
            
            
            260
            
            
            -Intangible
      assets, net
            
            
            1,541
            
            
            299Other
      assets
            
            
            142
            
            
            5Total
      assets
            
            $
            8,366
            
            $
            2,224LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Notes
      payable and current portion of long-term debt
            
            $
            513
            
            $
            519Capital
      lease current portion of long-term capital lease payable
            
            
            403
            
            
            -Accounts
      payable
            
            
            1,089
            
            
            506Accrued
      expenses
            
            
            929
            
            
            281Derivative
      liabilities
            
            
            403
            
            
            313Deferred
      liability lease
            
            
            164
            
            
            186Deferred
      revenue
            
            
            16
            
            
            9Total
      current liabilities
            
            
            3,517
            
            
            1,814Long-term
      debt, net of current portion
            
            
            2,885
            
            
            2,280Capital
      leases, net of current portion
            
            
            1,009
            
            
            -Deferred
      liability lease
            
            
            476
            
            
            639Deferred
      revenue
            
            
            10
            
            
            25Total
      long-term  liabilities
            
            
            4,380
            
            
            2,944Commitments
      and contingenciesShareholders’
      equity (deficit):Preferred
      stock  -  $.001 par valueAuthorized  25,000,000
      sharesIssued
      and outstanding at December 31, 2007 andDecember
      31, 2006, 3,311,534 and 3,800,649, respectively
            
            
            3
            
            
            4Common
      stock  -  $.001 par valueAuthorized
      475,000,000 sharesIssued
      and outstanding at December 31, 2007, andDecember
      31, 2006, 61,541,358 and 24,039,733, respectively
            
            
            62
            
            
            24Additional
      paid in capital
            
            
            19,098
            
            
            9,065Accumulated
      deficit
            
            
            (18,694
            )
            
            (11,627
            )Total
      shareholders’ equity (deficit)
            
            
            469
            
            
            (2,534
            )Total
      liabilities and shareholders' equity (deficit)
            
            $
            8,366
            
            $
            2,224




See
      accompanying notes to consolidated financial statements. 25




ERF
WIRELESS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006


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





2007
              
              
              2006Sales:Products
              
              $
              2,116
              
              
              $
              1,084Services
              
              
              3,255
              
              
              
              586Other
              
              
              198
              
              
              
              46Total
      sales
              
              
              5,569
              
              
              
              1,716Costs
      of goods sold:Products
      and integration services
              
              
              3,100
              
              
              
              993Rent,
      repairs and maintenance
              
              
              214
              
              
              
              67Salary
      and related cost
              
              
              294
              
              
              
              91Depreciation
              
              
              275
              
              
              
              54Other
      cost
              
              
              250
              
              
              
              59Total
      costs of goods sold
              
              
              4,133
              
              
              
              1,264Gross
      profit
              
              
              1,436
              
              
              
              452Operating
      expenses:Selling,
      general and administrative
              
              
              6,824
              
              
              
              5,502Depreciation
      and amortization
              
              
              385
              
              
              
              254Total
      operating expenses
              
              
              7,209
              
              
              
              5,756Loss
      from operations
              
              
              (5,773
              )
              
              
              (5,304
              )Other
      income/(expenses):Interest
      income
              
              
              8
              
              
              
              5Interest
      expense
              
              
              (891
              )
              
              
              (738
              )Gain
      (loss) on sale of assets
              
              
              (3
              )
              
              
              -Loss
      on extinguishment of debt
              
              
              -
              
              
              
              (48
              )Warrant
      expense
              
              
              (155
              )
              
              
              (76
              )Derivative
      (expense) income
              
              
              (253
              )
              
              
              929Total
      other income (expense)
              
              
              (1,294
              )
              
              
              72Net
      loss
              
              $
              (7,067
              )
              
              $
              (5,232
              )Deemed
      dividend related to beneficialconversion
      feature of preferred stock
              
              
              -
              
              
              
              (130
              )Net
      loss available to common shareholders
              
              $
              (7,067
              )
              
              $
              (5,362
              )Net
      loss per common share:Basic
              
              $
              (0.17
              )
              
              $
              (0.37
              )Diluted
              
              $
              (0.17
              )
              
              $
              (0.37
              )See
      accompanying notes to consolidated financial statements.




26


ERF
WIRELESS, INC.


CONSOLIDATED
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)


FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006


($
in thousands)






Additional
              
              
              
              
              
              TotalCommon
      Stock
              
              
              Preferred
      Stock
              
              
              Paid
      in
              
              
              Accumulated
              
              
              Shareholders’Shares
              
              
              Value
              
              
              Shares
              
              
              Value
              
              
              Capital
              
              
              Deficit
              
              
              Equity
      (Deficit)Total
      shareholders’ deficit
              
              
              7,645
              
              
              $
              8
              
              
              
              4,174
              
              
              $
              4
              
              
              $
              5,491
              
              
              $
              (6,265
              )
              
              $
              (762
              )as
      of December 31, 2005Net
      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
              
              
              
              -
              
              
              
              1,514For
      retirement of debt
              
              
              4,152
              
              
              
              5
              
              
              
              -
              
              
              
              -
              
              
              
              1,144
              
              
              
              -
              
              
              
              1,149Asset
      acquisition
              
              
              750
              
              
              
              1
              
              
              
              -
              
              
              
              -
              
              
              
              299
              
              
              
              -
              
              
              
              300For
      retirement of debt and conversion of convertible preferred stock of
      employment contracts
              
              
              -
              
              
              
              -
              
              
              
              87
              
              
              
              -
              
              
              
              130
              
              
              
              -
              
              
              
              130Beneficial
      conversion value - deemed dividend on preferred
      stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              130
              
              
              
              (130
              )
              
              
              -Stock
      based compensation and stock option expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              173
              
              
              
              -
              
              
              
              173Warrant
      expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              76
              
              
              
              -
              
              
              
              76Proceeds
      from sale of common stock, net
              
              
              167
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              118
              
              
              
              -
              
              
              
              118Total
      shareholders’ deficitas
      of December 31, 2006
              
              
              24,040
              
              
              
              24
              
              
              
              3,801
              
              
              
              4
              
              
              
              9,065
              
              
              
              (11,627
              )
              
              
              (2,534
              )Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (7,067
              )
              
              
              (7,067
              )New
      stock issued to shareholders:Conversion
      of preferred stock to common stock
              
              
              9,132
              
              
              
              9
              
              
              
              (489
              )
              
              
              (1
              )
              
              
              (8
              )
              
              
              -
              
              
              
              -For
      services, interest, liabilities and compensation
              
              
              10,151
              
              
              
              10
              
              
              
              -
              
              
              
              -
              
              
              
              2,715
              
              
              
              -
              
              
              
              2,725For
      retirement of debt
              
              
              4,966
              
              
              
              5
              
              
              
              -
              
              
              
              -
              
              
              
              1,004
              
              
              
              -
              
              
              
              1,009Asset
      acquisition
              
              
              1,245
              
              
              
              2
              
              
              
              -
              
              
              
              -
              
              
              
              1,369
              
              
              
              -
              
              
              
              1,371Stock
      based compensation and stock option expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              85
              
              
              
              -
              
              
              
              85Warrant
      expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              155
              
              
              
              -
              
              
              
              155Proceeds
      from sale of common stock, net
              
              
              12,007
              
              
              
              12
              
              
              
              -
              
              
              
              -
              
              
              
              4,713
              
              
              
              -
              
              
              
              4,725Total
      shareholders’ equityas
      of December 31,  2007
              
              
              61,541
              
              
              $
              62
              
              
              
              3,312
              
              
              $
              3
              
              
              $
              19,098
              
              
              $
              (18,694
              )
              
              $
              469See
      accompanying notes to consolidated financial statements.


27


ERF
WIRELESS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006


($ in thousands)





2007
            
            
            2006Cash
      flows from operating activitiesNet
      loss
            
            $
            (7,067
            )
            
            $
            (5,232
            )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Loss
      on sale of assets
            
            
            3
            
            
            
            -Loss
      on extinguishment of debt
            
            
            -
            
            
            
            48Amortization
      of debt discount
            
            
            326
            
            
            
            561Depreciation
      and amortization
            
            
            660
            
            
            
            308Stock
      issued for services rendered
            
            
            2,725
            
            
            
            1,514Stock
      based compensation and stock option expense
            
            
            85
            
            
            
            173Warrant
      expense
            
            
            155
            
            
            
            76Derivative
      expense (income)
            
            
            253
            
            
            
            (928
            )Bad
      debt expense
            
            
            40
            
            
            
            18Decrease
      (increase) in accounts receivable, net
            
            
            34
            
            
            
            (320
            )Increase
      in accounts receivable other
            
            
            (114
            )
            
            
            -Decrease
      in inventories
            
            
            22
            
            
            
            7(Increase)
      decrease in prepaid expenses
            
            
            (340
            )
            
            
            246(Increase)
      in cost and profit in excess of billings
            
            
            (341
            )
            
            
            (69
            )Increase
      in accounts payable
            
            
            466
            
            
            
            314Increase
      in accrued expenses
            
            
            594
            
            
            
            78(Decrease)
      increase in deferred liability lease
            
            
            (185
            )
            
            
            825(Decrease)
      in deferred revenue
            
            
            (55
            )
            
            
            (296
            )Total
      Adjustment
            
            
            4,328
            
            
            
            2,555Net
      cash used by operating activities
            
            
            (2,739
            )
            
            
            (2,677
            )Cash
      flows from investing activitiesProceeds
      from sale of assets
            
            
            13
            
            
            
            -Purchase
      of property and equipment
            
            
            (308
            )
            
            
            (224
            )Business acquistions,
      net of cash acquired
            
            
            (343
            )
            
            
            -(Increase)
      in other assets
            
            
            (91
            )
            
            
            (2
            )Net
      cash used by investing activities
            
            
            (729
            )
            
            
            (226
            )Cash
      flows from financing activitiesNet
      proceeds from line of credit
            
            
            403
            
            
            
            2,506Proceeds
      from financing agreements
            
            
            388
            
            
            
            513Proceeds
      from capitalized lease obligations
            
            
            305
            
            
            
            -Payment
      of debt obligations
            
            
            (455
            )
            
            
            (573
            )Payment
      on capital lease obligations
            
            
            (80
            )
            
            
            -Proceeds
      from  investor loans
            
            
            -
            
            
            
            130Proceeds
      from sale of common stock, net
            
            
            4,725
            
            
            
            118Net
      cash provided by financing activities
            
            
            5,286
            
            
            
            2,694Net
      (decrease) increase in cash
            
            
            1,818
            
            
            
            (209
            )Cash
      and cash equivalents at the beginning of the period
            
            
            393
            
            
            
            602Cash
      and cash equivalents at the end of the period
            
            $
            2,211
            
            
            $
            393Supplemental
      disclosure of cash flow information:Net
      cash paid during the year for:Interest
            
            $
            44
            
            
            $
            6Income
      taxes
            
            $
            -
            
            
            $
            -Supplemental
      non-cash investing and financing activities:Conversion
      of debt through issuance of common stock
            
            $
            1,009
            
            
            $
            1,149Issuance
      of shares for asset acquistions
            
            $
            1,371
            
            
            $
            300Property
      acquired under capital lease
            
            $
            1,187
            
            
            $
            -See
      accompanying notes to consolidated financial statements.


28


ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED 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 is in the early stages of building or acquiring
wireless broadband networks to serve private entities, cities, municipalities
and the general public. The Company's Wireless Messaging Services Division
manufactures and supplies high-power infrastructure equipment for the wireless
messaging industry and owns and operates a wide-area wireless messaging service
(paging retail). The Company's Network Operations Services Division provides the
overall day-to-day 24/7 monitoring of all wireless broadband networks that the
Company constructs, acquires, maintains and administers. Please refer to segment
footnote 15 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.
  USE
OF ESTIMATES
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the balance sheet. Actual results could differ from
those estimates.
  CASH
AND CASH EQUIVALENTS
  Cash and
cash equivalents include cash and all highly liquid financial instruments with
original purchased maturities of three months or less. At various times during
the year, the Company maintained cash balances in excess of FDIC insurable
limits. Management feels this risk is mitigated due to the longstanding
reputation of these banks.
  CREDIT
RISK
  In the
normal course of business, the Company extends unsecured credit to the majority
of its customers. The company controls credit risk associated with its
receivables through credit checks, approvals, and monitoring procedures.
Generally, the company requires no collateral from its customers.
  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.
  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.
  29
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
 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 2007 and 2006, this deferred lease
liability balance was $640,000 and $825,000.
  ASSETS
HELD UNDER CAPITAL LEASES
  Assets
held under capital leases are recorded at the lower of the net present value of
the minimum lease payments or the fair value of the leased asset at the
inception of the lease.  Amortization expense is computed using the
straight-line method over the shorter of the estimated useful lives of the
assets or the period of the related lease.
  ALLOWANCE
FOR DOUBTFUL ACCOUNTS
  The
Company uses the allowance method to account for uncollectible accounts
receivable. The Company's estimate is based on historical collection experience
and a review of the current status of accounts receivable. The company reviews
its accounts receivable balances by customer for accounts greater than 90 days
old and makes a determination regarding the collectibility of the accounts based
on specific circumstances and the payment history that exists with such
customers. The company also takes into account its prior experience, the
customer's ability to pay and an assessment of the current economic conditions
in determining the net realizable value of its receivables. The company also
reviews its allowances for doubtful accounts in aggregate for adequacy following
this assessment. Accordingly, the company believes that its allowances for
doubtful accounts fairly represent the underlying collectibility risks
associated with its accounts receivable.
  DEFERRED
REVENUES
  Revenues
that are billed in advance of services being completed are deferred until the
conclusion of the period of the service for which the advance billing relates.
Deferred revenues are included on the balance sheet in current and long-term
liabilities until the service is performed and then recognized in the period in
which the service is completed. The Company's deferred revenues consist of
billings in advance of services being rendered for its wireless broadband,
banking network monitoring and maintenance and wireless messaging customers and,
accordingly, are deferred and recognized monthly as earned. The Company had
deferred revenues in current and long-term liabilities of approximately $26,000
and $34,000 as of December 31, 2007, and December 31, 2006,
respectively.
  ADVERTISING
COSTS
  Advertising
costs are expensed when incurred. For the periods ended December 31, 2007 and
2006, the Company expensed $69,000 and $82,000, 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.
  30
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
  The
Company's derivative instrument liabilities are re-valued at the end of each
reporting period, with changes in the fair value of the derivative liability
recorded as charges or credits to income in the period in which the changes
occur. For options, warrants and bifurcated embedded derivative features that
are accounted for as derivative instrument liabilities, the Company estimates
fair value using either quoted market prices of financial instruments with
similar characteristics or other valuation techniques. The valuation techniques
require assumptions related to the remaining term of the instruments and
risk-free rates of return, our current common stock price and expected dividend
yield, and the expected volatility of our common stock price over the life of
the option. Because of the limited trading history for our common stock, the
Company estimates the future volatility of its common stock price based on not
only the history of its stock price but also the experience of other entities
considered comparable to the Company.
  INVENTORIES
  Inventories
are valued at the lower of cost or market. The cost is determined by using the
average cost method. Inventories consist of the following items, in
thousands:
 December
      31,
                  
                  
                  December
      31,2007
                  
                  
                  2006Raw
      material
                  
                  $
                  49
                  
                  
                  $
                  41Finished
      goods
                  
                  
                  69
                  
                  
                  
                  91$
                  118
                  
                  
                  $
                  132
  The
Company has pledged substantially all the inventory of WBS as collateral against
outstanding notes.
  PROPERTY
AND EQUIPMENT
  Property
and equipment are stated at cost less accumulated depreciation. Major renewals
and improvements are capitalized; minor replacements, maintenance and repairs
are charged to current operations. Depreciation is computed by applying the
straight-line method over the estimated useful lives which are generally three
to seven years.
  Impairment
losses are recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. No impairment losses
have been recorded since inception.
  GOODWILL
 
 Goodwill
represents the excess of the cost of companies acquired over the fair value of
their net assets at the dates of acquisition. Under current accounting
pronouncement, the company is required to annually assess the carrying value of
goodwill associated with each of its distinct business units that comprise its
business segments of the company to determine if impairment in value has
occurred.
  INTANGIBLE
ASSETS
  Intangible
assets are amortized using methods that approximate the benefit provided by the
utilization of the assets. The Company continually evaluates the amortization
period and carrying basis of intangible assets to determine whether subsequent
events and circumstances warrant a revised estimated useful life or impairment
in value. To date, no such impairment has occurred. To the extent such events or
circumstances occur that could affect the recoverability of our Intangibles
assets, we may incur charges for impairment in the future.
  LONG-LIVED
ASSETS
  We review
our long-lived assets, which include intangible assets subject to amortization,
for recoverability whenever events or changes in circumstances indicate that the
carrying amount of such long-lived asset or group of long-lived assets
(collectively referred to as "the asset") may not be recoverable. Such
circumstances include, but are not limited to:
  ·
              a
      significant decrease in the market price of the
  asset;
  ·
              a
      significant change in the extent or manner in which the asset is being
      used;
  ·
              a
      significant change in the business climate that could affect the value of
      the asset;
  ·
              a
      current period loss combined with projection of continuing loss associated
      with use of the asset;
  ·
              a
      current expectation that, more likely than not, the asset will be sold or
      otherwise disposed of before the end of its previously estimated useful
      life.
  31
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
   We
continually evaluate whether such events and circumstances have occurred. When
such events or circumstances exist, the recoverability of the asset's carrying
value shall be determined by estimating the undiscounted future cash flows (cash
inflows less associated cash outflows) that are directly associated with and
that are expected to arise as a direct result of the use and eventual
disposition of the asset. To date, no such impairment has occurred. To the
extent such events or circumstances occur that could affect the recoverability
of our long-lived assets, we may incur charges for impairment in the
future.
  REVENUE
RECOGNITION
  The
Company's revenue is generated primarily from the sale of wireless
communications products and services on a nationwide basis, including providing
enterprise-class wireless broadband services. The Company recognizes revenue
when persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable, and collectibility is
probable.
  The
Company records revenues from its fixed-price, long-term contracts using the
percentage-of-completion method. Revenues are recorded based on construction
costs incurred to date as a percentage of estimated total cost at completion.
The percentage-of-completion, determined by using total costs incurred to date
as a percentage of estimated total costs at completion, reflects the actual
physical completion of the project. If the current projected costs on a fixed
fee contract exceed projected revenue, the entire amount of the loss is
recognized in the period such loss is identified. This method of revenue
recognition is used because management considers total cost to be the best
available measure of progress on the contracts.
  The
Company recognizes product sales generally at the time the product is shipped.
Concurrent with the recognition of revenue, the Company provides for the
estimated cost of product warranties and reduces revenue for estimated product
returns. Sales incentives are generally classified as a reduction of revenue and
are recognized at the later of when revenue is recognized or when the incentive
is offered. Shipping and handling costs are included in cost of goods
sold.
  Service
revenue is principally derived from wireless broadband services, including
internet, voice, and data and monitoring service. Subscriber fees are recorded
as revenues in the period during which the service is provided.
  WARRANTY
  The
Company's suppliers generally warrant the products distributed by the Company
and allow returns of defective products, including those that have been returned
to the Company by its customers. The Company does not independently warrant the
products that it distributes, but it does provide warranty services on behalf of
the supplier.
  INCOME
TAXES
  Income
taxes are computed using the asset and liability method. Under the asset and
liability method, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and are measured using the currently enacted tax rates and laws.
A valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized.
  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.
  32
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
   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, 2007, and December 31, 2006, 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 December 2007, the FASB issued
SFAS No. 141R,Business
Combinations.
SFAS 141R establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. SFAS No. 141R also provides guidance for recognizing and measuring
the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statement to evaluate
the nature and financial effects of the business combination. SFAS 141R is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. We expect SFAS No. 141R will have an impact on
our consolidated financial statements when effective, but the nature and
magnitude of the specific effects will depend upon the nature, terms and size of
the acquisitions we consummate after the effective date. We are still assessing
the impact of this standard on our future consolidated financial
statements.
  In July
2006, the FASB issued FASB Interpretation ("FIN") No. 48 Accounting for
Uncertainly in Income Taxes - An Interpretation of FASB Statement No. 109. FIN
48 prescribes detailed guidance for the financial statement recognition,
measurement, and disclosure of uncertain tax positions recognized in an
enterprise's financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes. Tax positions must meet a more-likely-than-not recognition
threshold at the effective date to be recognized upon the adoption of FIN 48 and
in subsequent periods. FIN 48 will be effective for fiscal years beginning after
December 15, 2006, and the provisions of FIN 48 will be applied to all positions
upon the adoption of the Interpretation. The cumulative effect of this applying
the provisions of this Interpretation will be reported as an adjustment to the
opening balance of retained earnings for that fiscal year. Management is
currently evaluating the impact of FIN 48 on the financial statements but does
not believe that its adoption will have a material effect on the Companies'
financial position, results of operations, or cash flows.
  In
September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Management is currently
evaluating the impact SFAS No. 157 will have on the Company's financial
position, results of operations, and cash flows.
  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.
  33
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  NOTE
2 - ACCOUNTS RECEIVABLE
  Accounts
Receivable consists of the following (in thousands):
  December
      31,
                
                
                December
      31,2007
                
                
                2006Accounts
      receivable
                
                $
                412
                
                
                $
                405Allowance
      for doubtful accounts
                
                
                (47
                )
                
                
                (18
                )Accounts
      receivable, net
                
                $
                365
                
                
                $
                387
 The
Company has pledged substantially all the accounts receivables of WBS as
collateral against outstanding notes and capital leases.
 
 NOTE
3 - PROPERTY AND EQUIPMENT:
  Components
of property and equipment consist of the following items (in
thousands):
  December
      31,
                
                
                December
      31,2007
                
                
                2006Automobile
                
                $
                157
                
                
                $
                66Operating
      equipment
                
                
                2,123
                
                
                
                627Office
      furniture and equipment
                
                
                137
                
                
                
                89Leasehold
      improvements
                
                
                47
                
                
                
                60Computer
      equipment
                
                
                214
                
                
                
                106Building
                
                
                8
                
                
                
                8Land
                
                
                28
                
                
                
                38Other
                
                
                532
                
                
                
                7Total
      property and equipment
                
                
                3,246
                
                
                
                1,001Less
      accumulated depreciation
                
                
                (564
                )
                
                
                (199
                )Net
      property and equipment
                
                $
                2,682
                
                
                $
                802
  Depreciation
expense was approximately $376,000 and $136,000 for the twelve months ended
December 31, 2007 and 2006, respectively.
  The
Company has pledged substantially all the operating equipment and some furniture
and vehicles as collateral against outstanding notes and capital
leases.
  NOTE
4 - GOODWILL
  At
December 31, 2007 and 2006, goodwill totaled $260,000 and $0,
respectively.  The goodwill is attributable to the following
acquisitions:
  ·
              On
      October 17, 2007, ERFW completed the purchase of assets from Momentum
      Online Internet Services, Inc., and as part of the acquisition the Company
      acquired Goodwill which was valued at $225,000, which is not subject to
      amortization.
  ·
              On
      October 31, 2007, ERFW completed the purchase of assets from TSTAR, Inc.,
      and as part of the acquisition the Company acquired goodwill which was
      valued at $35,000, which is not subject to
  amortization.
  Please
see note 18 for additional details.
  34
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  NOTE
5 - INTANGIBLE ASSETS, NET
  Intangible
assets consist of the following (in thousands):
 December
      31, 2007Weighted
                  Average
      Useful
                  Life
      (in years)
                
                
                Gross
                  Carrying
                  Amount
                
                
                Accumulated
      Amortization
                
                
                Net
      Carrying
                  AmountCustomer
      relationships
                
                
                3.0
                
                
                $
                1,822
                
                
                $
                329
                
                
                $
                1,493Workforce
      in place
                
                
                3.0
                
                
                
                125
                
                
                
                101
                
                
                
                24Non-compete
      agreement
                
                
                3.0
                
                
                
                100
                
                
                
                80
                
                
                
                20Developed
      technology
                
                
                3.0
                
                
                
                20
                
                
                
                16
                
                
                
                4$
                2,067
                
                
                $
                526
                
                
                $
                1,541
   December
      31, 2006Weighted
                    Average
      Useful
                    Life
      (in years)
                  
                  
                  Gross
                    Carrying
                    Amount
                  
                  
                  Accumulated
      Amortization
                  
                  
                  Net
      Carrying
                    Amount
 Customer
      relationships
                
                
                3.0
                
                
                $
                296
                
                
                $
                126
                
                
                $
                170Workforce
      in place
                
                
                3.0
                
                
                
                125
                
                
                
                59
                
                
                
                66Non-compete
      agreement
                
                
                3.0
                
                
                
                100
                
                
                
                47
                
                
                
                53Developed
      technology
                
                
                3.0
                
                
                
                20
                
                
                
                10
                
                
                
                10$
                541
                
                
                $
                242
                
                
                $
                299
  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, 2007, ERFW completed the purchase of assets from Momentum Online
Internet Services, Inc., and as part of the acquisition the Company acquired a
customer list which was valued at $700,000 and is being amortized over three
years. Please see note 18 for additional details.
  On
October 31, 2007, ERFW completed the purchase of assets from TSTAR, Inc., and as
part of the acquisition the Company acquired a customer list which was valued at
$826,000 and is being amortized over three years. Please see note 18 for
additional details.
  Total
amortization of intangibles was approximately $285,000 and $172,000 for the
twelve months ended December 31, 2007 and 2006, respectively. The estimated
amortization expense for the three years will be $619,000 for 2008, $518,000 for
2009 and $404,000 in 2010.
  NOTE
6 - 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 and 2007. See note 7 for
additional details.
  35
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
 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 and 2007.
  NOTE
7 - COMMON STOCK, PREFERRED STOCK AND WARRANTS
  The total
number of shares of stock of all classes which the Company shall have the
authority to issue is 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, 2007, the Company had 61,541,358 shares of its $.001 par value
common stock issued and outstanding.
  During
the twelve months ended December 31, 2007, the Company issued 16,363,664 shares
of common stock in lieu of cash for services rendered against professional
services and consulting agreements valued at $1,376,000, interest expense of
$152,000, settlement expense of $457,000, other services of $84,000, notes
payable of $1,009,000, salary and compensation of $656,000 and acquisition of
assets of $1,371,000. The Company valued the 16,363,664 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
3,311,534 shares were issued and outstanding as of December 31, 2007. 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, 2007, the Company would be required to issue 61,847,358 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 6 Debt
Conversion for additional details.
  WARRANTS
  The
Company had warrants outstanding to third parties purchase 3,938,579 common
shares as of December 31, 2007.
  Warrants
for 880,000 shares were issued by the Company in June 2003. 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 Investor has exercised all warrants as of December 31,
2007.
  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. These warrants have been extended
to June 30, 2008.  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 11 for valuation and marked-to-market activity.
  36
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Warrants
for 3,265,240 shares of common stock at $5.00 per share were issued by the
Company during 2006 and 2007. Specifically, the Company sold $1,000,000 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 five units
converted and has attributed $232,000 to warrant expense using the Black Scholes
option price model in the quarter in which the unit was converted. See Note 11
for valuation and marked-to-market activity.
  The
following table summarizes warrants that are issued, outstanding and
exercisable.
  Options/WarrantsIssued
      & OutstandingExercise
      Price
                  
                  Expiration
      Date
                  December
      31,
                  
                  December
      31,2007
                  
                  20060.20
                  
                  Dec-07
                  
                  -
                  
                  
                  780,0005.00
                  
                  Jun-08
                  
                  141,670
                  
                  
                  141,6707.50
                  
                  Jun-08
                  
                  141,670
                  
                  
                  141,6703.57
                  
                  Sep-10
                  
                  389,999
                  
                  
                  389,9995.00
                  
                  Various
                  
                  3,265,240
                  
                  
                  580,5853,938,579
                  
                  
                  2,033,924
  NOTE
8 - INCOME TAXES
  The
Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes." Implementation of SFAS 109 did
not have a material cumulative effect on prior periods nor did it result in a
change to the current year's provision.
  The
effective tax rate for the Company is reconcilable to statutory tax rates as
follows:
 December
      31,
                  2007
                
                
                December
      31,
                  2006U.
      S. Federal statutory tax rate
                
                %
                34
                
                
                %
                34U.S.
      valuation difference
                
                
                (34
                )
                
                
                (34
                )Effective
      U. S. tax rate
                
                
                -
                
                
                
                -Foreign
      tax valuation
                
                
                -
                
                
                
                -Effective
      tax rate
                
                
                -
                
                
                
                -
  Income
tax expense (benefit) attributable to income from continuing operations differed
from the amounts computed by applying the U.S. Federal income tax of 34% to
pretax income from continuing operations as a result of the following (in
thousands):
 December
      31,
                  2007
                
                
                December
      31,
                  2006Computed
      expected tax benefit
                
                $
                (2,403
                )
                
                $
                (1,779
                )Increase
      in valuation allowance
                
                
                2,403
                
                
                
                1,779Income
      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, 2007, and
December 31, 2006, are presented below (in thousands):
 December
      31,
                  2007
                
                
                December
      31,
                  2006Deferred
      tax assets:Net
      operating loss carry forwards
                
                $
                (5,602
                )
                
                $
                (3,199
                )Less
      valuation allowance
                
                
                5,602
                
                
                
                3,199Net
      deferred tax assets
                
                $
                -
                
                
                $
                -
  Management
has determined that a valuation allowance of $5,602,000 at December 31, 2007 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 2007 was
approximately $2,403,000. As of December 31, 2007, the Company has a net
operating loss carry-forward of $17,821,000, which is available to offset future
federal taxable income, if any, with expiration beginning 2012 and ending
2025.
  37
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  NOTE
9 - EARNINGS PER SHARE:
  The
following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amount):
  For
      the twelve months ended December 31, 2007Income
                
                
                Shares
                
                
                Per-Share(Numerator)
                
                
                (Denominator)
                
                
                AmountNet
      loss
                
                $
                (7,067
                )
                
                41,308
                
                
                $
                (0.17
                )Basic
      EPS:Loss available
      to common stockholders
                
                
                (7,067
                )
                
                
                41,308
                
                
                
                (0.17
                )Effect
      of dilutive securities
                
                
                -
                
                
                
                
                
                
                
                -Diluted
      EPS:Loss available
      to common stockholders
                
                $
                (7,067
                )
                
                
                41,308
                
                
                $
                (0.17
                )and
      assumed conversionsFor
      the twelve months ended December 31, 2006Income
                
                
                Shares
                
                
                Per-Share(Numerator)
                
                
                (Denominator)
                
                
                AmountNet
      loss
                
                $
                (5,232
                )
                
                
                14,082
                
                
                $
                (0.37
                )Basic
      EPS:Loss available
      to common stockholders
                
                
                (5,362
                )
                
                
                14,082
                
                
                
                (0.38
                )Effect
      of dilutive securities
                
                
                -
                
                
                
                
                
                
                
                -Diluted
      EPS:Loss available
      to common stockholders
                
                $
                (5,362
                )
                
                
                14,082
                
                
                $
                (0.38
                )
  For the
years ended December 31, 2007 and 2006, dilutive securities existed. The effect
of the dilutive securities for the year ended December 31, 2007, would have been
61,462,235 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
10 - MAJOR CUSTOMERS
  The
Company had gross sales of approximately $5,569,000 and $1,716,000 for the
twelve months ended December 31, 2007 and 2006, respectively. The Company had
two customers that represented approximately 36% and 12% of the gross sales in
the twelve months ended December 31, 2007 and had two customers that represented
34% and 19% of gross sales for the twelve months ended December 31,
2006.
  NOTE
11 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES
 
 Notes
payable, long-term debts and capital leases consist of the following as of
December 31, 2007 (in thousands):
 
 Terms
                
                Maturity
      Date
                
                Interest
      Rate
                
                
                Gross
      Balance
                
                
                Debt
      Discount
                
                
                Net
      BalanceBancleasing,
      Inc.
                
                $5,330
      / Month including interest
                
                October-14
                
                
                11.62
                %
                
                
                $
                305
                
                
                $
                -
                
                
                $
                305Agility
      Capital Lease
                
                $45,343
      / Month including interest
                
                Various
                
                
                18.82
                %
                
                
                
                1,099
                
                
                
                -
                
                
                
                1,099Balboa
      Lease
                
                $225
      / Month including interest
                
                June-10
                
                
                27.74
                %
                
                
                
                5
                
                
                
                -
                
                
                
                5Varilease
                
                $994
      / Month including interest
                
                March-08
                
                
                20.38
                %
                
                
                
                3
                
                
                
                -
                
                
                
                3Axis
      Capital, Inc
                
                $347
      / Month including interest
                
                August-08
                
                
                8.60
                %
                
                
                
                3
                
                
                
                -
                
                
                
                3Vangard
      Wireless, Inc.
                
                $200
      / Month including interest
                
                December-10
                
                
                6.00
                %
                
                
                
                6
                
                
                
                -
                
                
                
                6Liberity
      Finance
                
                $517
      / Month including interest
                
                September-09
                
                
                13.97
                %
                
                
                
                10
                
                
                
                -
                
                
                
                10Chase
      Bank
                
                $449
      / Month including interest
                
                November-09
                
                
                5.89
                %
                
                
                
                11
                
                
                
                -
                
                
                
                11Blanco
      National Bank
                
                $3,913
      / Month including interest
                
                August-10
                
                
                9.50
                %
                
                
                
                103
                
                
                
                -
                
                
                
                103Robert
      McClung, Momentum
                
                $23,476
      / Quarterly including interest
                
                October-10
                
                
                7.50
                %
                
                
                
                250
                
                
                
                -
                
                
                
                250George
      Kemper, TSTAR
                
                $38,254
      / Quarterly including interest of $421
                
                April-10
                
                
                7.50
                %
                
                
                
                350
                
                
                
                -
                
                
                
                350Premium
      Assignment, Insurance notes
                
                $ /
      Month including interest
                
                September-08
                
                
                9.00
                %
                
                
                
                15
                
                
                
                -
                
                
                
                15Line
      of credit
                
                2
      years/ Quarterly interest (See below)
                
                February-09
                
                
                6.00
                %
                
                
                
                2,409
                
                
                
                -
                
                
                
                2,409E-bond
      investor notes
                
                3
      years/ Semiannual interest (See below)
                
                Various
                
                
                10.00
                %
                
                
                
                275
                
                
                
                34
                
                
                
                241Total
      debt
                
                
                
                
                
                
                
                
                
                
                $
                4,844
                
                
                $
                34
                
                
                
                4,810Less
      current maturities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                950Less
      debt discount current maturities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (34
                )Long-term
      debt
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                3,894
  38
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
  The gross
maturities of these debts are $950,000, $3,142,000, $544,000, $42,000, $47,000
and $119,000 for the years ended December 31, 2008, 2009, 2010, 2011 and 2012,
and thereafter, respectively.
  Notes payable and long-term debts consist of the
following as of December 31, 2006 (in thousands):
  Terms
                
                Maturity
      Date
                
                Interest
      Rate
                
                
                Gross
      Balance
                
                
                Debt
      Discount
                
                
                Net
      BalanceTaylor
      Economic Development Corp.
                $1,119
      / Month including interest
                
                June-07
                
                
                7.00
                %
                
                
                $
                5
                
                
                $
                -
                
                
                $
                5Vangard
      Wireless, Inc.
                $200
      / Month including interest
                
                December-10
                
                
                6.00
                %
                
                
                
                9
                
                
                
                -
                
                
                
                9Axis
      Capital, Inc
                $347
      / Month including interest
                
                August-08
                
                
                8.60
                %
                
                
                
                6
                
                
                
                -
                
                
                
                6Insurance
      notes
                $1,993
      / Month including interest
                
                September-07
                
                
                9.00
                %
                
                
                
                34
                
                
                
                -
                
                
                
                34Investor
      notes
                2
      years (See below)
                
                Demand
                
                
                6.00
                %
                
                
                
                874
                
                
                
                437
                
                
                
                437Line
      of credit
                2
      years/ Quarterly interest (See below)
                
                February-08
                
                
                6.00
                %
                
                
                
                2,006
                
                
                
                -
                
                
                
                2,006E-bond
      investor notes
                3
      years/ Semiannual interest (See below)
                
                Various
                
                
                10.00
                %
                
                
                
                388
                
                
                
                86
                
                
                
                302Total
      debt
                
                
                
                
                
                
                
                
                
                $
                3,322
                
                
                $
                523
                
                
                
                2,799Less
      current maturities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                986Less
      debt discount current maturities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (467
                )Long-term
      debt
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                2,280
  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".These notes have been
repaid as of December 31, 2007 and the warrants remain outstanding. The warrants
are exercisable at $5.00 per share and expire in September 2010.
  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 $437,123 for year ending December 31, 2007,
respectively.
  The following table summarizes
the convertible debt activity for the period September 6, 2005, to December 31,
2007:
 Description
                
                Investor
                  Notes
                
                
                Warrant
                  Liabilities
                
                
                Compound
                  Derivative
                
                
                TotalFair
      value issuance at inception
                
                $
                508,018
                
                
                $
                470,702
                
                
                $
                521,281
                
                
                $
                1,500,00109-06-05
      to 09-30-05 change in fair value
                
                
                18,373
                
                
                
                2,389,132
                
                
                
                1,012,547
                
                
                
                3,420,05210-01-05
      to 12-31-05 change in fair value
                
                
                78,258
                
                
                
                (2,160,313
                )
                
                
                (1,090,630
                )
                
                
                (3,172,685
                )01-01-06
      to 03-31-06 change in fair value
                
                
                90,258
                
                
                
                (466,128
                )
                
                
                (276,615
                )
                
                
                (652,485
                )04-01-06
      to 06-30-06 change in fair value
                
                
                104,943
                
                
                
                (149,288
                )
                
                
                32,006
                
                
                
                (12,339
                )07-01-06
      to 09-30-06 change in fair value
                
                
                122,182
                
                
                
                73,005
                
                
                
                32,395
                
                
                
                227,58210-01-06
      to 12-31-06 change in fair value
                
                
                140,846
                
                
                
                (118,744
                )
                
                
                (26,162
                )
                
                
                (4,060
                )01-01-07
      to 03-31-07 change in fair value
                
                
                158,659
                
                
                
                (20,503
                )
                
                
                (2,478
                )
                
                
                135,67804-01-07
      to 06-30-07 change in fair value
                
                
                184,473
                
                
                
                113,377
                
                
                
                (4,843
                )
                
                
                293,00707-01-07
      to 09-30-07 change in fair value
                
                
                93,990
                
                
                
                116,109
                
                
                
                (197,501
                )
                
                
                12,59810-01-07
      to 12-31-07 change in fair value
                
                
                -
                
                
                
                52,413
                
                
                
                -
                
                
                
                52,413Conversions
      from inception to date
                
                
                (1,500,000
                )
                
                
                -
                
                
                
                -
                
                
                
                (1,500,000
                )Fair
      value at December 31, 2007
                
                $
                0
                
                
                $
                299,762
                
                
                $
                -
                
                
                $
                299,762
  39
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
  From
inception to date through December 31, 2007, the Company recorded a net
derivative income of $495,000 and for the twelve months ended December 31, 2007,
a net derivative loss of $254,000.
 
 ERF
Wireless, Inc., 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. As of
December 31, 2007, the Company recorded deferred financing cost in interest
expense of $178,500.
  WarrantsAssumptions
                
                3/31/2006
                6/30/2006
                9/30/2006
                12/31/2006Dividend
      yield
                
                0.00%
                0.00%
                0.00%
                0.00%Risk-free
      rate for term
                
                4.44%
                5.10%
                4.62%
                4.74%Volatility
                
                78.00%
                95.00%
                140.00%
                140.00%Maturity
      date
                
                4.44
      years
                4.19
      years
                3.93
      years
                3.68
      yearsWarrantsAssumptions
                
                3/31/2007
                6/30/2007
                9/30/2007
                12/31/2007Dividend
      yield
                
                0.00%
                0.00%
                0.00%
                0.00%Risk-free
      rate for term
                
                4.51%
                4.89%
                4.03%
                3.07%Volatility
                
                140.00%
                200.00%
                177.00%
                180.00%Maturity
      date
                
                3.44
      years
                3.39
      years
                2.93
      years
                2.68
      years
  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.
  LINE
OF CREDIT
  During
2007 the Company, amended its two-year unsecured revolving credit facility with
certain private investors that provides a $3 million dollar line of credit. The
terms of the secured revolving credit facility allow ERF Wireless to draw upon
the facility as financing requirements dictate and provide for quarterly
interest payments at a 12% rate. The loan is due February 28, 2009 and may be
prepaid without penalty or repaid at maturity. At December 31, 2007, the balance
of the credit line was $2,409,041. The lender has agreed to fund up to an
additional $1 million during 2008 under the same terms and
conditions.
  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.
  40
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
 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 was extended through December 31, 2007 and it terminated on December
31,, 2007, unless such date is extended at the Company's discretion. As of
December 31, 2007 the Company has sold $1,000,000 of E-Series Bonds and the
balance due at December 31, 2007 is $275, 000.
  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
$77,058 for the twelve months ended December 31, 2007, and the estimated debt
accretion for 2008 is $33,898.
  The
following table summarizes the convertible debt activity for the period May 31,
2006, to December 31, 2007:
 Description
                
                E-Series
      Bonds
                
                
                Compound
                  Derivative
                  Liability
                
                
                TotalFair
      value issuance at inception
                
                $
                866,174
                
                
                $
                133,826
                
                
                $
                1,000,00005-31-06
      to 06-30-06 change in fair value
                
                
                763
                
                
                
                (11,750
                )
                
                
                (10,987
                )07-01-06
      to 09-30-06 change in fair value
                
                
                5,847
                
                
                
                (3,971
                )
                
                
                1,87610-01-06
      to 12-31-06 change in fair value
                
                
                6,648
                
                
                
                (13,213
                )
                
                
                (6,565
                )01-01-07
      to 03-31-07 change in fair value
                
                
                9,065
                
                
                
                5,956
                
                
                
                15,02104-01-07
      to 06-30-07 change in fair value
                
                
                49,060
                
                
                
                (10,668
                )
                
                
                38,39207-01-07
      to 09-30-07 change in fair value
                
                
                2,965
                
                
                
                4,536
                
                
                
                7,50110-01-07
      to 12-31-07 change in fair value
                
                
                25,580
                
                
                
                (1,274
                )
                
                
                24,306Conversions
      from inception to date
                
                
                (725,000
                )
                
                
                -
                
                
                
                (725,000
                )Fair
      value at December 31, 2007
                
                $
                241,102
                
                
                $
                103,442
                
                
                $
                344,544
  For
inception to date through December 31, 2007, the Company recorded a net
derivative income of $30,384 and for the twelve months ended December 31, 2007,
a net derivative income of $1,450.
  BLANCO
NATIONAL BANK
  In August
2007, the company assumed a note from the purchase of certain assets from
Momentum Online Computer Services, Inc., that financed a 9.50% installment note
to a Blanco National bank, secured by operating equipment, inventory and
accounts receivable, payable in monthly installments of $3,913 including
interest and is guaranteed by a shareholder.
  ROBERT
MCCLUNG, MOMENTUM ONLINE COMPUTER SERVICES, INC.
  On
October 17, 2007, the Company issued a note to Momentum Online Computer, Inc.,
totaling $250,000 that bear interest at 7.5% and are secured by all of the
capital stock issued and outstanding of Network Operating Services, Inc.,( a
subsidiary of the Company), payable in twelve quarterly payments of $23,476 plus
interest.
  GEORGE
KEMPER, TSTAR INTERNET, INC.
  On
November 1, 2007, the Company issued a note to TSTAR, Inc., totaling $350,000
bearing interest at 7.5% and are secured by the equipment acquired, payable in
ten quarterly payments of $38,254 plus interest.
  CAPITAL
LEASES
  During
May 2007, ERF Wireless Bundled Services, Inc., entered into a master lease
agreement with Agility Lease Fund I, LLC, to fund up to $1,000,000 in equipment
financing. Each draw under this agreement will be treated as a separate capital
lease to be repaid over 36 months with an effective interest rate of 18%. During
October 2007 ERF Wireless Bundled Services, Inc. assumed an additional master
lease agreement for equipment financing in the amount of $500,000 with Agility
Lease Fund, LLC during an acquisition of certain assets from Momentum Online
Computer Services, Inc. Included in property and equipment at December 31, 2007,
is $1,423,000 capitalized equipment, net of amortization. The equipment and one
of the Company's bank accounts are the primary collateral securing the financing
with a guarantee of repayment by ERF Wireless, Inc.
  41
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
 Agility
and ERF Wireless Bundled Services, Inc., entered into a deposit control account
agreement. Under the terms of this agreement, the company will deposit the
monthly collections from its wireless customers into this account and Agility
will have the standby ability to withdraw funds from this account to pay its
monthly lease payment associated with the borrowings under the lease agreement
should the Company not make such payments in accordance with agreements. This
deposit account control agreement grants Agility a security interest in this
separate account.
  During
August 2007, ERF Enterprise Network Services, Inc., entered into a master lease
agreement with BancLeasing, Inc., to fund up to $10,000,000 in equipment
financing. Each draw under this agreement will be treated as a separate capital
lease to be repaid over 84 months with an effective interest rate of 11%.
Included in property and equipment at December 31, 2007, is $305,450 capitalized
equipment, net of amortization. The equipment is the primary collateral securing
the financing.
  The
following is a schedule by years of future minimum lease payments under capital
leases together with the present value of the net minimum lease payments as of
December 31, 2007 (in thousands):
  Year
      Ending  December 31,2007
                
                $
                6082008
                
                
                5882009
                
                
                3992010
                
                
                642011
                
                
                64Thereafter
                
                
                133Total
      minimum lease payments
                
                $
                1,856Less
      amount representing interest
                
                
                (444
                )Present
      value of net minimum lease payments
                
                
                1,412Current
      maturities of capital lease obligations
                
                
                (403
                )Long-term
      portion of capital lease obligations
                
                $
                1,009
  NOTE
12 - UNCOMPLETED CONTRACTS
  Costs,
estimated earnings and billings on uncompleted contracts for the twelve months
ended December 31, 2007, and December 31, 2006, are summarized as follows (in
thousands):
  December
      31,
                
                
                December
      31,2007
                
                
                2006Costs
      incurred on uncompleted contracts
                
                $
                2,284
                
                
                $
                854Estimated
      profit
                
                
                429
                
                
                
                62Gross
      revenue
                
                
                2,713
                
                
                
                916Less:
      billings to date
                
                
                2,303
                
                
                
                847Costs
      and profit in excess of billings
                
                $
                410
                
                
                $
                69
  Such
amounts are included in the accompanying balance sheets at December 31, 2007,
and December 31, 2006, and are summarized as follows (in
thousands):
  December
      31,
                
                
                December
      31,2007
                
                
                2006Cost
      and estimated earnings in excess of billings on uncompleted
      contracts
                
                $
                410
                
                
                $
                69Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                
                
                -
                
                
                
                -$
                410
                
                
                $
                69
  42
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
 NOTE
13 - COMMITMENTS AND CONTINGENCIES
  LEASES
AND LICENSE AGREEMENTS
  For the
twelve months ended December 31, 2007 and 2006, rental expenses of approximately
$413,000 and $299,000, 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,
2007 were as follows:
  Period
      Ending
                  December
      31,
                
                Amount
      ($000)2007
                
                $
                4432008
                
                
                3852009
                
                
                2862010
                
                
                1962011
                
                
                232012
                
                
                2Total
                
                $
                1,335
  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 and 2007, Mr. Smith converted all of
his Series A Convertible Preferred Stock into 1,196,070 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
2007, Mr. Smith's employment contract was renewed for one additional year by the
Board of Directors through August 1, 2008.
  As of
December 31, 2007, Mr. Smith earned options to purchase an additional 150,000
shares of common stock for attainment of certain cumulative revenue milestones
set forth in his employment agreement. These options are at an exercise price of
$0.10 and expire on July 31, 2010. 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 for December 31, 2007 and 2006 includes a compensation charge
of $56,793 and $91,596, respectively, 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. Mr. Burns resigned as director and officer
as of March 18, 2008 and this agreement was then terminated.
  43
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
 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:
  ·
              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
  ·
              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
  NOTE
14 - 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, 2007 and 2006, total fees incurred by the Company
under the agreement were $101,000 and $119,000, respectively.
  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.
  NOTE
15 - INDUSTRY SEGMENTS
  This
summary reflects the Company's current segments, as described
below.
  WIRELESS
BUNDLED SERVICES DIVISION (WBS)
  WBS
provides wireless broadband products and services to commercial and individual
customers throughout the wireless industry. The company is in the early stages
of building and acquiring a seamless wireless broadband network throughout North
America to serve private entities, cities, municipalities and the general
public. All sales from external customers are located within the United
States.
  WIRELESS
MESSAGING SERVICES DIVISION (WMS)
  WMS
principally provides wireless broadband system design and implementation,
manufactures paging equipment, repair and maintain paging infrastructure
equipment and supplies high-power infrastructure equipment to the wireless
messaging industry and owns and operates a wide-area messaging service. All
sales from external customers are located within the United States as well as
certain international locations.
  44
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
 NETWORK
OPERATING SERVICES DIVISION (NOS)
  NOS
provides the overall day-to-day 24/7 monitoring of all wireless broadband
networks that the Company constructs, acquires, maintains and administers. The
transactions in the NOS segment for the twelve months December 31, 2007 and
2006, 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.
  For
      the twelve months ended December 31, 2007 (in thousands)
  WMS
                  
                  
                  WBS
                  
                  
                  ENS
                  
                  
                  TotalRevenue
                  
                  $
                  2,432
                  
                  
                  $
                  1,873
                  
                  
                  $
                  1,264
                  
                  
                  $
                  5,569Segment
      (loss) income
                  
                  
                  (75
                  )
                  
                  
                  (729
                  )
                  
                  
                  (1,368
                  )
                  
                  
                  (2,172
                  )Segment
      assets
                  
                  
                  223
                  
                  
                  
                  4,799
                  
                  
                  
                  1,054
                  
                  
                  
                  6,076Capital
      expenditures
                  
                  
                  1
                  
                  
                  
                  1,847
                  
                  
                  
                  389
                  
                  
                  
                  2,237Depreciation
                  
                  
                  14
                  
                  
                  
                  286
                  
                  
                  
                  14
                  
                  
                  
                  314
  For
      the twelve months ended December 31, 2006 (in thousands)
  WMS
                  
                  
                  WBS
                  
                  
                  ENS
                  
                  
                  TotalRevenue
                  
                  $
                  570
                  
                  
                  $
                  132
                  
                  
                  $
                  1,014
                  
                  
                  $
                  1,716Segment
      loss
                  
                  
                  (668
                  )
                  
                  
                  (300
                  )
                  
                  
                  (1,378
                  )
                  
                  
                  (2,346
                  )Segment
      assets
                  
                  
                  120
                  
                  
                  
                  948
                  
                  
                  
                  505
                  
                  
                  
                  1,573Capital
      expenditures
                  
                  
                  14
                  
                  
                  
                  416
                  
                  
                  
                  (12
                  )
                  
                  
                  418Depreciation
                  
                  
                  24
                  
                  
                  
                  8
                  
                  
                  
                  4
                  
                  
                  
                  36
   Reconciliation
      of Segment Loss from
                  Operations
      to Net Loss
                
                December
      31,
                  2007
                
                
                December
      31,
                  2006Total
      segment loss from operations
                
                $
                (2,172
                )
                
                $
                (2,346
                )Total
      corporate overhead
                
                
                (4,895
                )
                
                
                (2,886
                )Net
      loss
                
                $
                (7,067
                )
                
                $
                (5,232
                )
   Reconciliation
      of Segment Assets to
                  Total
      Assets
                
                December
      31, 2007
                
                
                December
      31, 2006Total
      segment assets
                
                $
                6,076
                
                
                $
                1,573Total
      corporate assets
                
                
                2,290
                
                
                
                651Consolidated  assets
                
                $
                8,366
                
                
                $
                2,224
  The
accounting policies of the reportable segments are the same as those described
in the section titled Basis of Accounting. The Company evaluates the performance
of its operating segments based on income before net interest expense, income
taxes, depreciation and amortization expense, accounting changes and
non-recurring items.
  At
December 31, 2007 one customer accounts for $679,000 of Enterprise Network
Services Division revenues and one customer accounts for $2,033,000 of Wireless
Messaging Services Division revenues. Two customers accounts for $589,000 and
$333,000 of Enterprise Network Services Division revenues at December 31,
2006.
  45
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  NOTE
16 - SUPPLEMENTAL NON-CASH DISCLOSURES:
  During
2007, the Company issued stock in lieu of cash as payment for the following (in
thousands):
  December
      31, 2007
                
                Supplemental
      Non-Cash DisclosureProfessional
      fees
                
                $
                1,376Settlements
                
                
                457Salary
      and compensation
                
                
                657Other
      services rendered
                
                
                84Interest
      expense
                
                
                152Notes
      payable
                
                
                1,009Acquisition
                
                
                1,371Total
      non-cash settlements
                
                $
                5,106
   December
      31, 2006
                
                Supplemental
      Non-Cash DisclosureProfessional
      fees
                
                $
                739Settlements
                
                
                192Salary
      and compensation
                
                
                362Other
      services rendered
                
                
                137Interest
      expense
                
                
                84Loss
      on extinguishment of debt
                
                
                48Notes
      payable
                
                
                1,149Acquistion
                
                
                300Total
      non-cash settlements
                
                $
                3,011
  NOTE
17 - 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 Board of Directors adopted a Non-Qualified Stock Option Plan
under which an additional 10,000,000 shares were reserved for issuance. There
were 95,742 Series A preferred stock convertible to 1,788,111 common stock
shares granted to certain Officers and employees under employment agreements. As
of December 31, 2007, 359,501 common stock shares remain to be converted from
Series A preferred stock. Also the Company has granted to certain officers and
employees 375,000 stock options which are currently exercisable. As of December
31, 2007, under all Non-Qualified Stock Option Plans, 12,725,247 shares were
issued and exercised by certain employees and consultants for services
rendered.
  The
weighted average fair value of the individual options granted during the twelve
months ended December 31, 2007, is estimated at $2.98 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
                6/30/2007Assumptions
                
                Options
                Options
                Options
                Options
                Options
                OptionsDividend
      yield
                
                0.00%
                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%
                4.89%Volatility
                
                207.00%
                31.00%
                76.00%
                89.00%
                78.00%
                116.00%Remaining
      life
                
                5
                3
                1
                2.5
                3.3
                2.1
  Option
activity was as follows for the twelve months ended December 31, 2007, and
December 31, 2006:
 2007Shares
                
                
                Weighted-Average
      Exercise PriceOutstanding
      at beginning of year
                
                
                3,302,000
                
                
                $
                3.21Granted
                
                
                -
                
                
                
                -Assumed
      through acquisitions
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Forfeited/cancelled
                
                
                -
                
                
                
                -Outstanding
      throughout the period
                
                
                3,302,000
                
                
                $
                2.98Exercisable
      at December 31, 2007
                
                
                375,000
                
                
                $
                0.61
  46
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
  2006Shares
                
                
                Weighted-Average
      Exercise PriceOutstanding
      at beginning of year
                
                
                3,105,000
                
                
                $
                3.31Granted
                
                
                232,000
                
                
                $
                2.27Assumed
      through acquisitions
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Forfeited/cancelled
                
                
                (35,000
                )
                
                $
                2.91Outstanding
      throughout the period
                
                
                3,302,000
                
                
                $
                3.21Exercisable
      at December 31, 2006
                
                
                150,000
                
                
                $
                1.38
   Information
about options outstanding was as follows at December 31, 2007:
  Remaining
                
                
                Average
                
                
                
                
                
                AverageClass
                
                
                Number
                
                
                Average
      Contractual
                
                
                Exercise
                
                
                Number
                
                
                ExerciseExercise
      Price
                
                
                Outstanding
                
                
                Life
      in Years
                
                
                Price
                
                
                Exercisable
                
                
                Price$0.10
                
                
                
                225,000
                
                
                
                1.58
                
                
                $
                0.10
                
                
                
                225,000
                
                
                $
                0.10$1.38
                
                
                
                150,000
                
                
                
                1.58
                
                
                $
                1.38
                
                
                
                150,000
                
                
                $
                1.38$2.88
                
                
                
                750,000
                
                
                
                1.58
                
                
                $
                2.88
                
                
                
                -
                
                
                
                -$2.88
                
                
                
                375,000
                
                
                
                1.58
                
                
                $
                2.88
                
                
                
                -
                
                
                
                -$3.72
                
                
                
                1,570,000
                
                
                
                0.58
                
                
                $
                3.72
                
                
                
                -
                
                
                
                -$2.27
                
                
                
                232,000
                
                
                
                0.58
                
                
                $
                2.27
                
                
                
                -
                
                
                
                -3,302,000
                
                
                
                1.25
                
                
                $
                2.98
                
                
                
                375,000
                
                
                $
                0.61
 
 NOTE
18 – BUSINESS COMBINATIONS
 
 The following table summarizes
significant acquisitions completed during theyearended December 31, 2007 (inthousands):
  Purchase
                
                
                
                
                
                AmortizablePrice
                
                
                Goodwill
                
                
                IntangiblesMomentum
                
                $
                1,200,000
                
                
                $
                225
                
                
                $
                700TSTAR
                
                $
                1,100,000
                
                
                $
                35
                
                
                $
                826
 
 MOMENTUM
ONLINE COMPUTER SERVICES, INC., ACQUISITION
  PURCHASE
PRICE
  On
October 18, 2007, ERF Wireless, Inc. (ERFW) completed the purchase of assets
from Momentum Online Computer Services Inc. under the Asset Purchase Agreement
dated October 17, 2007. Under the Asset Purchase Agreement, ERFW acquired the
wireless internet service provider ("WISP"), which includes all of the current
customers and network infrastructure equipment of and approximately 33 tower
locations. The acquisition will also increase the Company's footprint in central
Texas and will lead to expansion of the Central Texas WiNet and US-BankNet
System reaching 36 regional and community bank charters aggregating 462 branch
locations. At the time of the transaction, there were no material relationships
between the seller and ERFW or any of its affiliates, or any director or officer
of ERFW, or any associate of any such officer or director. ERFW paid $1,200,000
in cash, notes and securities and assumed $148,000 in current liabilities and
$503,000 in note payables.
  47
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  The
purchase price allocation is as follows (in thousands):
 
 Cash
              
              $
              21Accounts
      receivable
              
              
              54Inventory
              
              
              8Deposits
              
              
              46Property
      and equipment
              
              
              797Goodwill
              
              
              225Identifiable
      intangible assets
              
              
              700Accounts
      payable and accrued expenses
              
              
              (101
              )Deferred
      revenue
              
              
              (47
              )Capital
      leases
              
              
              (376
              )Note
      payable
              
              
              (127
              )Total
      adjusted purchase price
              
              $
              1,200
 
 The
amount allocated to identifiable intangible assets was determined by the
company's management. Other intangibles assets are being amortized over their
useful life in accordance with the guidance contained in the Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standard
No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets".
 
 Goodwill
              
              $
              225Non-compete
      agreement
              
              
              85Customer
      relationships
              
              
              615Total
      identifiable intangible assets
              
              $
              925
  TSTAR
INTERNET, INC., ACQUISITION
  PURCHASE
PRICE
  On
October 31, 2007, ERFW Wireless, Inc (ERFW) completed the purchase of assets
from TSTAR INTERNET INC. under the Asset Purchase Agreement dated October 31,
2007. Under the Asset Purchase Agreement, ERFW acquired the wireless internet
service provider ("WISP"), which includes all of the current customers, network
infrastructure equipment and tower leases. The acquisition will also enhance and
increase the Company's footprint in central Texas covering the Llano and Burnet
counties. At the time of the transaction, there were no material relationships
between the seller and ERFW or any of its affiliates, or any director or officer
of ERFW, or any associate of any such officer or director. ERFW paid $1,100,000
in cash, notes and securities and assumed $17,000 in current liabilities and
$10,000 in note payables.
  The
purchase price allocation is as follows (in thousands):
  Cash
              
              $
              13Property
      and equipment FMV
              
              
              253Goodwill
              
              
              35Identifiable
      intangible assets
              
              
              826Accounts
      payable and accrued expenses
              
              
              (17
              )Note
      payable
              
              
              (10
              )Total
      adjusted purchase price
              
              $
              1,100
 
 The
amount allocated to identifiable intangible assets was determined by the
company's management. Other intangibles assets are being amortized over their
useful life in accordance with the guidance contained in the Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standard
No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets".
 
 Goodwill
              
              $
              35Non-compete
      agreement
              
              
              90Customer
      relationships
              
              
              736Total
      identifiable intangible assets
              
              $
              861
 
 The results of operations forMomentum and
TSTARhave been included in
the Company’s consolidated statements of operations since the completion of the
acquisitions during the year ended December 31, 2007. The following
unaudited pro forma financial information presents the combinedresults of the Company and the 2007
acquisitions as if the acquisitions had occurred at the beginning of 2006 (in
thousands, except per share amounts):
  48
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
  
 Unaudited
      pro formaYear
      Ended
                
                
                Year
      EndedDecember
      31,
                
                
                December
      31,2006
                
                
                2007Net
      Revenue
                
                $
                4,040
                
                
                $
                7,363Net
      income (loss)
                
                $
                (5,098
                )
                
                $
                (6,995
                )Net
      income (loss) applicable to common shareholder
                
                $
                (5,228
                )
                
                $
                (6,995
                )Net
      income (loss) per share-basic
                
                
                (0.36
                )
                
                
                (0.17
                )Net
      income (loss) per share-diluted
                
                
                (0.36
                )
                
                
                (0.17
                )
  
 The above unaudited pro forma financial
information includes adjustments fordepreciation andamortization of identifiable intangible
assets.
 
  49
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
  
 ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  Not
applicable.
  ITEM
8A. CONTROLS AND PROCEDURES
  Evaluation
of Disclosure Controls and Procedures
  We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Our disclosure controls and procedures were
designed to provide reasonable assurance that the controls and procedures would
meet their objectives.
  As
required by SEC Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of
the period covered by this report. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance level.
  Management’s
Annual Report on Internal Control over Financial Reporting
 
 Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those policies and
procedures that:
  (1) 
Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets;
  (2) 
Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorization of our management and
directors; and
 
 (3) 
Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, use or disposition of our assets that could have a
material effect on the financial statements.
  Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk. Management is responsible
for establishing and maintaining adequate internal control over financial
reporting for the Company.
   50
 ERF
WIRELESS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
  Management
has used the framework set forth in the report entitled Internal Control-Integrated
Frameworkpublished by the Committee of Sponsoring Organizations of the
Treadway Commission, known as COSO, to evaluate the effectiveness of our
internal control over financial reporting. Based on this assessment, management
has concluded that our internal control over financial reporting was effective
as of December 31, 2007.
  This
Annual Report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Our internal control over financial reporting was not subject to
attestation by our independent registered public accounting firm pursuant to
temporary rules of the SEC that permit us to provide only management’s report in
this Annual Report.
  There has
been no change in our internal controls over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
  ITEM
8B. OTHER INFORMATION
  Not
applicable
  51
  PART
III
  ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
CORPORATEGOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
  Our
directors and executive officers and their ages as of March 28, 2008, are shown
below.
 
 Name
                Age
                PositionH.
      Dean Cubley
                66
                Chairman
      of the Board of Directors and CEORichard
      R. Royall
                61
                Director
      and Chief Financial OfficerR.
      Greg Smith
                49
                Director
      and CEO of ENSBartus
      H. Batson
                65
                Director
  DR. H.
DEAN CUBLEY has served as chairman of ERF Wireless since May 2004, as acting
president, secretary and treasurer from May 2004 until August 2004 and as Chief
Executive Officer since October 2006. Dr. Cubley has served as a director of
Eagle Broadband, 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.
  Richard
R. Royall served as CFO since 2008. Mr. Royall Certified Public Accountant has
been engage in the private practice of accounting since 1972 with concentration
of expertise in accounting, mergers, acquisitions and Securities and Exchange
registrations and filings including implementation of SOX 404 compliance. Mr.
Royall served as Chief Financial Officer for the period of 1996 to 2004 for
Eagle Broadband, Inc.,
  MR. R.
GREG SMITH has served as the chief executive officer of the Company’s ENS
subsidiary since March 2008, as the Company’s chief financial officer from
August 2004 to March 2008, as the chief executive officer from August 2004 to
October 2006, and as a director since August 2004. Mr. Smith's professional
background includes 25 years of demonstrated executive management experience.
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 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.
  DR.
BARTUS H. BATSON has served as a director of ERF Wireless since January 2005.
Dr. Batson has served as president, chief executive officer and chairman of
X-Analog Communications, Inc., since March 1992. Dr. Batson has over 40 years of
experience in all fields of telecommunications with a major focus in satellite
communications and wireless systems.
  KEY
EMPLOYEES
  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 is responsible for all
operational aspects of the ENS subsidiary business.
  MR. JOHN
NAGEL is currently serving as vice president 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 and
compensation committee comprised of Dr. Cubley and Dr. Batson. The board serves
as the nomination committee as it believes that the board, due to the size, can
appropriately participate in the nominee identification and selection process.
The board has determined that Dr. Cubley qualifies as an audit committee
financial expert as defined in Item 407(d)(5) of Regulation S-B and that he is
not independent.
  53
  
   SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
  Section
16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own beneficially more than ten percent of the common
stock of the Company, to file reports of ownership and changes of ownership with
the Securities and Exchange Commission. Based solely on the reports received by
the Company and on written representations from certain reporting persons, the
Company believes that the directors, executive officers, and greater than ten
percent beneficial owners have complied with all applicable filing
requirements.
  CODE
OF ETHICS
  The
Company has not established a Code of Business Conduct and Ethics. We intend to
adopt a Code of Business Conduct and Ethics this fiscal year 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 from August 2004 through October
2006; at which time the board of directors appointed Dr. H. Dean Cubley as our
chief executive officer. Dr. Cubley has served as chief executive officer from
October 2006 to date. From October 2006 until March 2008, Mr. Smith served as
chief financial officer. Mr. John Burns served as an executive officer from
August 2005 to March 2008. 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.
  Name
      and Principal Position
                
                Year
                
                Salary
      and
                  Consulting
                  Payments
      ($)
                
                
                Bonus ($)
                
                
                Stock
      Awards ($)
                
                
                All
      Other Conpensation ($)
                
                
                Total ($)H.
      Dean Cubley
                
                2007
                
                
                157,995
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                157,995Chairman
      of the Board and CEO
                
                2006
                
                
                1,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,0002005
                
                
                15,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                15,000R.
      Greg Smith
                
                2007
                
                
                192,775
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                192,775Director
      and CEO ENS
                
                2006
                
                
                181,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                181,0002005
                
                
                195,000
                
                
                
                5,000
                
                
                
                -
                
                
                
                -
                
                
                
                200,000John
      Burns
                
                2007
                
                
                190,275
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                190,275Former
      Director
                
                2006
                
                
                182,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                182,0002005
                
                
                106,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                106,000Arley
      Burns
                
                2007
                
                
                150,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                150,000CTO
      of ENS
                
                2006
                
                
                153,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                153,0002005
                
                
                60,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                60,000John
      Nagel
                
                2007
                
                
                110,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                110,000Manager
      of Project Engineering
                
                2006
                
                
                100,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                100,0002005
                
                
                9,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9,000
 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,
2007.
  54
   Option
      Awards
                
                
                Stock
      AwardsName
                
                
                
                Number
      of Securties Underllying Unexercised Options (#)
      Exercisable
                
                
                Number
      of Securties Underllying Unexercised Options (#)
      Unexercisable
                
                
                Equity
      Incentive Plan Awards: Number of Securties Underllying Unexercised
      Unearned Options (#)
                
                
                Option
      Exercised Price ($)
                
                
                Option
      Expiration Date
                
                
                Number
      of Shares or Units of Stock That Have Not Vested
                
                
                Market
      Value of Shares or Units of Stock That Have Not
      Vested ($)
                
                
                Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or
      Other Rights That Have Not Vested
                
                
                Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or
      Other Rights That Have Not Vested ($)H.
      Dean Cubley
                
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -R.
      Greg Smith (1)
                
                
                
                
                250,000
                
                
                
                750,000
                
                
                
                -
                
                
                $
                0.61
                
                
                07/31/09
                
                
                
                750,000
                
                
                
                757,500
                
                
                
                -
                
                
                
                -John
      Burns (2)
                
                
                
                
                -
                
                
                
                1,050,000
                
                
                
                -
                
                
                $
                3.72
                
                
                07/31/08
                
                
                
                1,050,000
                
                
                
                1,060,500
                
                
                
                -
                
                
                
                -Arley
      Burns (3)
                
                
                
                
                -
                
                
                
                520,000
                
                
                
                -
                
                
                $
                3.72
                
                
                07/31/08
                
                
                
                520,000
                
                
                
                525,200
                
                
                
                -
                
                
                
                -John
      Nagel
                
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
 (1) 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, 2007 and
2006, Greg Smith has earned a total 250,000   options to purchase
250,000 common shares for attainment of certain cumulative revenue milestones
set forth in his employment agreement. These options are at an exercise price at
an average of $.61 and expire on July 31, 2009.
  (2)
Resigned as director and executive officer as of March 19, 2008. No options
vesting have been met for issuance to Mr. Burns through his termination
date.
  (3) 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:
  ·
              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
  ·
              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
 
  EMPLOYMENT
AND CONSULTING AGREEMENTS
  We have
entered into employment and consulting agreements with the following named
executive officers:
  Richard
Royall. Mr. Royall’s employment agreement was executed in March 2008 and expires
January 2011. During the term of his employment, Mr. Royall is entitled to the
following compensation: (i) base salary of $200,000 per year, (ii) standard
benefits that are available to other Company executive officers, and (iii) a
stock grant of up to 3,000,000 shares, 1,000,000 shares will be awarded when the
Company achieves positive EBITDA (as reported in an Exchange Act filing),
1,000,000 shares will be awarded when the Company closes a $25 million
financing, and (iii) 1,000,000 shares will be awarded when the Company lists on
a national stock exchange.
  55
  
   R. GREG
SMITH. Mr. Smith's employment agreement was executed in August 2004, and expires
August 2008. 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, 2007, Mr. Smith has earned 250,000 options to
purchase 250,000 common shares due to the attainment of certain revenue
milestone within his agreement. His agreement does not contain any change of
control provisions.
  ARLEY
BURNS. Mr. Burns entered into a three-year employment agreement with the Company
in August 2005. Mr. Burns is entitled to a base salary of $150,000 per year and
receive up to 520,000 stock options through attainment of certain future
cumulative financial milestone achievements. As of December 31, 2007, none of
the options to purchase common stock have vested. His agreement does not contain
any change of control provisions.
  DIRECTOR
COMPENSATION
  Set forth
below is information regarding compensation paid to each director during 2007.
Additionally, we reimburse our directors for travel and lodging expenses in
connection with their attendance at board meetings.
  Name
                Fees
      Earned
                  or
      Paid
                  in
      Cash
                  ($)
                Stock  Awards
                  ($)
                Option
      Awards
                  ($)
                Non-Equity
                  Incentive
      Plan
                  Compensation
                  ($)
                Change
      in
                  Pension
      Value
                  and
      Nonqualfied
                  Deferred
                  Compensation
                  Earnings
                  ($)
                All
      Other
                  Compensation
                  ($)
                Total
                  ($)H.
      Dean Cubley
                22,995
                -
                -
                -
                -
                -
                22,995R.
      Greg Smith
                12,775
                -
                -
                -
                -
                -
                12,775John
      Burns
                10,275
                -
                -
                -
                -
                -
                10,275Bartus
      H. Batson
                17,885
                -
                -
                -
                -
                -
                17,885
 ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
  As of
March 26, 2008, 72, 190, 054 shares of common stock were outstanding and
3,311,534 shares of Series A Preferred Stock were outstanding. The following
table sets forth, as of such date, information with respect to shares
beneficially owned by:
  ·
              each
      person who is known by us to be the beneficial owner of more than 5% of
      our outstanding shares of common
stock;
  ·
              each
      of our directors;
  ·
              each
      of our named executive officers;
and
  ·
              all
      of our directors and executive officers as a
  group.
  Beneficial
ownership has been determined in accordance with Rule 13d-3 of the Exchange Act.
Under this rule, shares may be deemed to be beneficially owned by more than one
person (if, for example, persons share the power to vote or the power to dispose
of the shares). In addition, shares are deemed to be beneficially owned by a
person if the person has the right to acquire shares (for example, upon exercise
of an option) within 60 days of the date of this table. In computing the
percentage ownership of any person, the amount of shares includes the amount of
shares beneficially owned by the person by reason of these acquisition rights.
As a result, the percentage of outstanding shares of any person does not
necessarily reflect the person's actual voting power.
  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.
  56
  
  SHARES
      OF COMMON STOCK BENEFICIALLY OWNED (1)
                
                
                SHARES
      OF SERIES A PREFERRED
    STOCK BENEFICIALLY OWNED
                
                
                TOTAL
      PERCENTAGE OF
                  VOTING
      POWER (2)NAME
      AND ADDRESS OF
                  BENEFICAL
      OWNER
                
                NUMBER
                
                
                
                
                %
                
                
                NUMBER
                
                
                
                
                
                %
                
                
                NUMBER
                
                
                %Frances
      Cubley  (3)
                
                
                3,932,345
                
                (4)
                
                
                
                6.39%
                
                
                
                3,212,328
                
                (5)
                
                
                
                
                
                97%
                
                
                
                68,178,905
                
                
                
                53.36%STJV
      Trust
                
                
                236,226
                
                
                
                
                
                0.38%
                
                
                
                1,809,487
                
                
                
                
                
                
                
                55%
                
                
                
                36,425,966
                
                
                
                28.51%Pauline
      Trust
                
                
                541,783
                
                
                
                
                
                0.88%
                
                
                
                300,275
                
                
                
                
                
                
                
                9%
                
                
                
                6,547,283
                
                
                
                5.12%Carson
      Family Trust
                
                
                1,485,174
                
                
                
                
                
                2.41%
                
                
                
                269,124
                
                
                
                
                
                
                
                8%
                
                
                
                6,867,654
                
                
                
                5.37%Leopard
      Family Trust
                
                
                560,459
                
                
                
                
                
                0.91%
                
                
                
                266,305
                
                
                
                
                
                
                
                8%
                
                
                
                5,886,559
                
                
                
                4.61%Jauquine
      Trust
                
                
                535,171
                
                
                
                
                
                0.87%
                
                
                
                109,131
                
                
                
                
                
                
                
                3%
                
                
                
                2,717,791
                
                
                
                2.13%Systom
      Trust
                
                
                573,532
                
                
                
                
                
                0.93%
                
                
                
                458,006
                
                
                
                
                
                
                
                14%
                
                
                
                9,733,652
                
                
                
                7.62%R.
      Greg Smith
                
                
                1,715,738
                
                (6)
                
                
                
                2.79%
                
                
                
                -
                
                
                
                
                
                
                
                0%
                
                
                
                1,715,738
                
                
                
                1.34%Dr.
      H. Dean Cubley
                
                
                490,155
                
                
                
                
                
                0.80%
                
                
                
                -
                
                
                
                
                
                
                
                0%
                
                
                
                490,155
                
                
                
                0.38%Dr
      Bartus H. Batson
                
                
                94,432
                
                
                
                
                
                0.15%
                
                
                
                -
                
                
                
                
                
                
                
                0%
                
                
                
                94,432
                
                
                
                0.07%John
      Burns
                
                
                261,695
                
                
                
                
                
                0.43%
                
                
                
                -
                
                
                
                
                
                
                
                0%
                
                
                
                261,695
                
                
                
                0.20%All
      Executives Officers and Directors as a group
                
                
                2,562,020
                
                
                
                
                
                4.16%
                
                
                
                -
                
                
                
                
                
                
                
                0%
                
                
                
                2,562,020
                
                
                
                2.01%(4
      persons)Arley
      Burns
                
                
                9,993
                
                
                
                
                
                0.02%
                
                
                
                -
                
                
                
                
                
                
                
                0%
                
                
                
                9,993
                
                
                
                0.01%John
      Nagel
                
                
                721,121
                
                
                
                
                
                1.17%
                
                
                
                -
                
                
                
                
                
                
                
                0%
                
                
                
                721,121
                
                
                
                0.56%
  (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 3,212,328 shares of Series A Preferred Stock held by the Francis Cubley
Trusts.
  (6)
Includes 1,463,071 shares held by Lariat Financial, Inc., a corporation
controlled by Mr. Smith. Also includes 250,000 shares vested under employment
contract. This does not include options to purchase 750,000 shares of common
stock that are exercisable upon cumulative revenue of the Company, which as of
December 2007, the Company does not believe such revenue's will be exceeded
during the next 60 days.
  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, 2007 and
2006, total fees incurred by the Company under the agreement were $101,000 and
$119,000, respectively.
  Brian
Cubley, son of H. Dean Cubley, served as an employee during 2007 and continues
to serve as an employee during current fiscal year. During fiscal 2007 Mr.
Cubley was paid $90,000 in cash and stock 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, 2007, Brian Cubley has earned options to purchase a total 125,000
shares of common stock at an average exercise price of $.61 and expire on July
31, 2009 and 2010. 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 2007 and 2006.
  The
Company received advances from related family trusts of Dr. Cubley 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 $4,000,000
revolving non convertible credit facility that bears interest at 12% per annum
that matures in February 2009.
  57
  
  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)
              Incorporated
      by reference from the Form 10-KSB filed April 17, 2007(13)
              Incorporated
      by reference from the Form 8-K filed on October 20,
  2006.(14)
              Incorporated
      by reference from the Form 8-K filed on December 21,
  2006.
 
   58
  ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  During
the fiscal years ended December 31, 2007, and December 31, 2006, the aggregate
fees billed by LBB & Associates LTD., LLP, were as follows:
  December
      31,
                
                
                December
      31,2007
                
                
                2006Audit
      fees
                
                $
                73,637
                
                
                $
                70,605Audit
      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.
  59
   
  
 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:
      March 31, 2008
   
  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
                Principal
      Executive Officer, and Director
              March
      31, 2008/s/
      Richard R. Royall
              Director
      and Chief Financial Officer,
                Principal
      Financial Officer
              March
      31, 2008/s/
      R. Greg Smith
              Director
      and CEO of ENS
              March
      31, 2008/s/
      Dr. Bartus H. Batson
              Director
              March
      31, 2008