UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-K
 
 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934
 
 FOR THE YEAR ENDED DECEMBER 31, 2010
 
 COMMISSION FILE NUMBER 000-27467
 
 ERF WIRELESS, INC.
 (Exact name of registrant as specified in its charter)
 
 Nevada

000-27467

76-0196431(State or other jurisdiction of incorporation)

(Commission File Number)

(IRS Employer Identification No.)
 
 2911 SOUTH SHORE BOULEVARD, SUITE 100, LEAGUE CITY, TEXAS 77573
 (Address of principal executive offices) (Zip Code)
 
 Registrant's telephone number, including area code: (281) 538-2101
 
 Securities registered under Section 12(b) of the Exchange Act:
 
 None
 
 Securities registered under Section 12(g) of the Exchange Act:
 
 $.001 PAR VALUE COMMON STOCK
 
 Check whether the issuer is not required to file report pursuant to Section 13
 or 15(d) of the Exchange Act o
 
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ̈ No x
 
 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ̈ No x
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes x No
 
 Indicate by check mark that disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer  ̈

Accelerated filer oNon-accelerated filer  ̈ (Do not check if a smaller reporting company)

Smaller reporting company x
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes  ̈ No x
 
 ERF Wireless, Inc.'s revenue for its most recent fiscal year was $5,915,000.
 
 As of March 30, 2011 the aggregate market value of the shares of common stock held by non-affiliates (based on the closing price of $0.02 per share for the common stock as quoted on that date) was approximately $9,385,063.
 
 As of March30, 2011, the Company had outstanding 469,253,146 shares of its $.001 par value common stock.
 
 DOCUMENTS INCORPORATED BY REFERENCE
 
 None.
 
 
 2
 TABLE OF CONTENTS
 
 ITEMNUMBER
CAPTION
PAGEPART IITEM 1.
Business
5ITEM 1A.
Risk Factors
12ITEM 1B.
Unresolved Staff Comments
18ITEM 2.
Properties
18ITEM 3.
Legal Proceedings
19ITEM 4.
Removed and Reserved
19PART IIITEM 5.
Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
20ITEM 6.
Selected Financial Data
22ITEM 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
30ITEM 8.
Financial Statements and Supplementary Data
31ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
59ITEM 9A.
Controls and Procedures
59ITEM 9B.
Other Information
60PART IIIITEM 10.
Directors, Executive Officers and Corporate Governance
61ITEM 11.
Executive Compensation
62ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
64ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
65ITEM 14.
Principal Accountant Fees and Services
66ITEM 15.
Exhibits and Financial Statement Schedules
66
 
 3
 
 
 FORWARD LOOKING STATEMENTS
 
 Except for the historical information and discussions contained herein, statements contained in this Annual Report on Form 10-K, may constitute forward-looking statements. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed elsewhere in the ERF Wireless, Inc. ("Company" or "ERF"), filings with the U.S. Securities and Exchange Commission ("SEC"). The statements contained in this document that are not purely historical are forward-looking statements including without limitation statements regarding our expectations, beliefs, intentions or strategies regarding our business. This Annual Report on Form 10-K includes forward-looking statements about our business including, but not limited to, the level of our expenditures and savings for various expense items and our liquidity in future periods. We may identify these statements by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "potential," "predict," "project," "should," "will," "would" and other similar expressions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements, except as may otherwise be required by law. Our actual results could differ materially from those anticipated in these forward-looking statements.
























4
 ITEM 1. BUSINESS
 
 The Company
 
 ERF Wireless, Inc. (“Company” or “ERF Wireless”) provides secure, high-capacity wireless products and services to a broad spectrum of customers in primarily underserved, rural and suburban parts of the United States. We provide our customers with high quality broadband services and basic communications services to residential, oil and gas, educational and bank customers in the areas that otherwise would not be able to receive such services. We are also a comprehensive solutions provider to other enterprise customers, providing them with a wide array of communications services including high speed broadband, voice over Internet Protocol (VOIP) telephone and facsimile service, and video security.
 
 Historically, our revenues have been generated primarily from Internet and construction services. Our Internet revenues have resulted from our offering of broadband and basic communications services to residential and enterprise customers. Our construction revenues typically have consisted of revenues generated from the construction of bank networks and other services associated with providing wireless products and services to the regional banking industry.
 
 During 2010 we expanded our network coverage in Texas, Oklahoma, Arkansas, New Mexico, Louisiana, Colorado and Kansas to better serve our enterprise and oil and gas customers.  This focused expansion has contributed to an increase in revenues and establishment of Energy Broadband, Inc., our subsidiary, as a preferred choice in broadband service offerings to the oil and gas industry.  For the fiscal year 2011, we intend to use the funds from the recent divestiture of certain non-core assets to accelerate network expansion in Texas's Permian Basin and Eagle Ford Shale as well as North Dakota's Bakken Oil Shale. Oil and gas operators have accelerated their drilling programs in these areas by as much as 40%, according to recent rig data statistics, and are planning for additional increases in 2011 and 2012.  We intend to achieve this expansion through contractual partnerships for specific area coverages and internally built networks.  Additionally, we anticipate the commencement of services to additional vertical markets including purpose built educational networks for school districts.
 
 Our principal executive offices are located at 2911 South Shore Blvd., Suite 100, League City, Texas 77573, and our telephone number is (281) 538-2101. We maintain web sites at www.erfwireless.com and www.erfwireless.net. We make available free of charge through our web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such material with or to the SEC. You may access and read our SEC filings through the SEC's web site (:www.sec.gov). This site contains reports, proxy and information statements and other information regarding registrants, including us, that file electronically with the SEC.  All references to "we," "our," or "us" refer to ERF Wireless, Inc., a Nevada corporation, and our subsidiaries.
 
 The Company offers its services through its subsidiaries. Our wholly owned subsidiaries are ERF Wireless Bundled Services, Inc. (“WBS”), Energy Broadband, Inc. (“EBI”), ERF Wireless Messaging Services, Inc. (“WMS”) and ERF Enterprise Network Services (“ENS”)
 
 Wireless Bundled Services Subsidiary
 
 WBS provides wireless broadband products and services, including Internet, voice and data to serve private entities, cities, municipalities and the general public in rural markets. For the year ended December 31, 2010 and 2009, WBS contributed 78% and 86% of the revenues of the Company and 63% and 74% of the losses attributable to the Company's business segments, respectively.
 
 Energy Broadband, Inc.
  EBI provides wireless connectivity to rural oil and gas locations primarily via Mobile Broadband Trailers (MBTs). EBI provides wireless broadband products and services focusing primarily on commercial customers providing high speed bandwidth to rural North America to serve the oil and gas sector. All sales from external customers are located within the United States and Canada. For the year ended December 31, 2010 and 2009, EBI contributed 15 % and 5 % of the revenues of the Company and 14% and 1% of the losses attributable to the Company's business segments, respectively.
 5
 Enterprise Network Services Subsidiary
 
 ENS provides turnkey design and implementation service in the area of secure wireless broadband networks for regional banks. For the year ended December 31, 2010 and 2009 ENS contributed 5% and 6% of the revenues of the Company and 17% and 24% of the losses attributable to the Company's business segments, respectively.
 
 Wireless Messaging Services Subsidiary
 
 WMS provides wireless broadband and fiber-to-the-home system network design and implementation, manufacture and supply high-power infrastructure equipment to the paging and mobile industry and owns and operate a wide-area messaging service (paging retail).  For the year ended December 31, 2010 and 2009, WMS contributed 2 % and 3% of the revenues of the Company and 5% and 1% of the losses attributable to the Company's business segments, respectively.
 
 Our Industries
 
 Oil and Gas Industry
 
 ERF Wireless will market its oil and gas products and services through its oil and gas division and report such results in its segment reporting under EBI, a wholly owned subsidiary The demand for oil and gas continues to grow, and exploration and production consistently moves farther away from civilization and into more remote environments to meet this need. As a result, companies have been forced to change the way in how they operate. One approach is to achieve a “digital oilfield.” In a digital oilfield process digitization, real time data collection, and intelligent controls are combined to improve recovery, accelerate production, reduce downtime, and reduce the number of on-site engineers required to oversee the operation.
 
 At the heart of a digital oilfield is a reliable, fast, and cost-effective means of communications. Oil and gas companies have historically relied on cellular and satellite communications to transmit data from the wellsite to the home office. These technologies, however, can be expensive and often suffer from high latency (a delay due to the time to send the data to the satellite and back). This latency can interrupt the fluency of voice communications and make machine to machine communications complex and unreliable.
 
 We plan to utilize our existing and expanding wireless network to address this need by offering 1.5Mbps encrypted data communications using wireless and (WORLDWIDE INTEROPERABILITY for MICROWAVE ACCESS) WiMAX technologies. We believe this will enable real-time data collaboration between remote oil field operations. Our long term strategy is to be able to offer ongoing services to the operator of the well and to the owner of the gathering system or pipeline as we expand our offerings further downstream to the oil and gas industry.
 
 On January 13, 2009, the Company entered into exclusive reseller agreements with Schlumberger Technology Corporation and Schlumberger Canada Limited (Schlumberger).  Currently, the contract is in operation in its second year.  During the fourth quarter of 2010 the Company and Schlumberger entered into a contractual mediation to resolve various financial issues.  During 2011 the Company and Schlumberger were unable to resolve these financial issues through mediation and the Company will avail itself of binding arbitration as mandated in the contract.
 
 Regional Banking Industry
 
 ENS provides a turnkey design and implementation service in the area of secure wireless broadband networks for regional banks. ENS’ focus is on obtaining design and construction contracts with banks in conjunction with long-term maintenance and monitoring contracts. All monitoring contracts are managed by the Company's network operations services division. Additionally, once the Company has designed and constructed the wireless broadband networks for the banks, the Company may, through its WBS subsidiary, use the same network under a revenue sharing agreement with the banks to sell wireless broadband services to private entities, cities, municipalities and the general public in that region.
 
 ENS currently has long term maintenance contracts with four banking networks. For the twelve months ended December 31, 2010 and 2009 ENS contributed 5% and 6% of the revenues of the Company and 17% and 24% of the losses attributable to the Company's business segments.
 6
 Residential and Enterprise
 
 ERF Wireless markets its residential and enterprise services through its WBS subsidiary. Wireless broadband Internet systems consist of a radio transmitter that sends a signal on a combination of radio channels to receivers located at or in homes and businesses. Wireless broadband Internet networks can be roughly categorized based upon which wireless technology (e.g., standards or proprietary) they utilize and whether they utilize licensed or unlicensed spectrum.
 
 The wireless broadband sector has begun a new stage of growth in the rural residential and enterprise markets, fueled primarily by technology improvements and increased consumer demand. Rural areas in America, however, have experienced a lower Internet penetration rate, and substantially less access to broadband, than the more densely populated urban and suburban areas.
  We believe the rural and suburban markets are typically avoided or overlooked by other providers due to technical limitations and the high cost of providing broadband over terrestrial-based networks in densely populated areas. Our wireless broadband Internet services are offered utilizing fixed point-to-multipoint wireless technology in the licensed and unlicensed spectrums. We offer these services to both business and residential customers within our network footprint without the use of terrestrial lines. This allows our services to cover a rural or suburban geographical area at a fraction of the cost of terrestrial based broadband provided by cable modems or DSL lines. As a result of these savings, we are able to offer broadband Internet to communities and business that would otherwise be ignored by terrestrial based providers.
 
 Our current residential and enterprise market is focused in the South Central United States, where we have developed areas of wireless coverage through acquisitions and contracts in Texas, Oklahoma, Arkansas, New Mexico, Louisiana, Colorado and Kansas. Our existing network allows us to provide our high capacity wireless broadband offerings to the oil and gas industry, financial institutions, and our residential customer base. We plan to continue to expand our wireless broadband coverage through acquisitions, internal development and partnerships in specific rural areas.
 
 ERF Wireless’ Products and Services
 
 Wireless Services to Oil and Gas Customers
 
 We are able to provide low latency, high speed connections to both static and mobile drilling sites. We believe that our service is specifically designed to meet the oil and gas industries environmental, operational, and safety requirements in the land-based oilfield, and the compendium of services that we provide offers a compelling solution for the mobile oil platform. Our wireless service provides a 1.5Mbps or greater VOIP, facsimile and encrypted data transmission. These are the types of services that we believe oil and gas customers demand.
 
 Additionally, by using WiMAX-based equipment as an adjunct to its existing fixed-wireless networks, the Company intends to create a compelling service offering to the oil and gas industry, including enhanced nomadic and portable data and video services. The advantages of deploying WiMAX technology based on a global standard, include higher data speeds, greater spectral efficiency, advanced nomadic services with self-installation features, global economies of scale and forward compatibility with the mobile WiMAX (802.16 (e) standard). In addition, with the certification of network standards and profiles to standards, network equipment costs should continue to decrease. The resulting interoperability of hardware will not only accelerate downward pricing, but should also afford service providers greater vendor selection and potential roaming revenues.
 
 As opposed to the wireless communications service in an airport or home or office internet, there are few limitations on the amount of data that can be transferred in this area. Our data communications is non-contended, which means that every single individual site can receive the full 1.5Mbps. In addition, because our service uses a range of protocols, entire networks of data can be transported from the wellsite to the home office. We believe this will allow companies to reduce the number of personnel located at the wellsite, while providing fast, reliable, real time drilling and reservoir performance data to the home office.
 7
 We believe our services offered to the oil and gas industry are unique, and that we are in a position to be a provider of choice for high-speed Internet bandwidth for managing drilling rig operations, supporting remote field offices, and video surveillance for production facilities and pipelines.
 
 Wireless Services to Residential and Enterprise
 
 We also provide wireless broadband products and services, including Internet, voice and data to serve private entities, cities, municipalities and the general public. We offer these services primarily in the rural markets which tend to be underserved by the major telephone and cable companies and where wireless broadband can offer a distinct cost advantage over other forms of broadband connectivity. These services are provided to both commercial and retail customers throughout the coverage area where the Company owns wireless broadband networks or operates wireless broadband networks. The Company offers these services by acquiring established rural wireless broadband companies.
 
 Serving the Banking Industry
 
 We provide a turnkey design and implementation in the area of secure wireless broadband networks for regional banks located primarily in areas of southern Louisiana, as well as in areas of central and west Texas.
 
 This application of wireless broadband technology provides regional financial institutions, with between ten and one hundred branches, a cost-effective way to replace all of their recurring T1 and other telephone company costs. The resulting encrypted wireless broadband network connects all of their branches to the central bank and can provide up to 300 Mbps of continuous bandwidth as compared to the typical 1.4 Mbps of a T1 connection from the telephone company. In order to satisfy the security concerns of banking regulators, we have developed a proprietary encryption device (CryptoVueTM), consisting of hardware and software, as well as an integrated security protocol and 24x7 monitoring.
 
 Broadband System Design and Manufacturing
 
 We provide broadband system design and implementation services, manufacture and supply high-power infrastructure equipment to the paging and mobile industry, and own and operate a wide-area messaging service (paging retail). We also implement and construct new fiber-to-the-home broadband networks for third party customers. The wireless broadband system design and implementation function is a service that we provide to other outside organizations.
 
 Day-to-Day Monitoring Services
 
 We provide the overall day-to-day operation and 24/7 monitoring to all wireless broadband networks that we construct, acquire, maintain and administer. In addition, we may provide monitoring for other third parties. This service function is conducted from the state-of-the-art network operations center facility located at the ERF Wireless corporate headquarters in League City, Texas.
 
 Growth Strategy
 
 Background
 
 The market for rural wireless broadband products and services has grown dramatically and we believe it will continue to grow. Broadband wireless has been in use for several years, but only with the advent of industry standards has it been possible to link the many small systems that have grown up into a much more robust wide-area network that we believe will accelerate the growth of the wireless broadband industry.
 
 Wireless broadband provides a versatile broadband communication medium that we believe is more economical than a wired solution, is faster to implement and can be configured for multiple applications. Given the wireless technology gains and the Federal Communications Commission's ("FCC") adoption of an order to restructure frequencies within one of the several bands used for wireless broadband communication, we believe that wireless broadband will become a "third pipe" as both an alternative and extension to DSL and cable modem services, the two chief means of delivering high-speed Internet and data service today. In addition, we believe wireless broadband can replace costly telephone company T1 leased lines for many point to point data and voice applications as are generally utilized in the banking and healthcare industries.
 8
 Historically, the Company’s growth strategy involved expanding its offerings to provide wireless broadband product to banks and other vertical markets where high bandwidth and secure communications are needed (such as hospitals, schools and law enforcement). Over the past year, however, the oil and gas industry has become an increasingly important part of our business plan to further utilize the extensive wireless networks we have built and acquired over the past four years. The demand for wireless broadband connectivity, bandwidth and other wireless services to support oilfield activities has increased. Today, we believe the oil and gas industry is looking for a way to move from its traditional low bandwidth, high cost satellite-based connectivity model to one where true high-speed broadband can be purchased for field operations at a reasonable cost. We believe that our wireless technology and existing network can best serve this need.
 
 Continue to Acquire Networks
 
 Our strategy is to focus on the acquisition of Wireless Internet Service Providers (WISPs) in locations that enhance our geographic and strategic plans. We believe that this acquisition strategy offers two benefits.  First, we are able to acquire operations that provide immediate revenue. Secondly, we are able to leverage the acquired network to provide services to the oil and gas market at higher rates than we offer to residential users. Our acquisition targets are typically capital constrained with underutilized network capacity. While there is no assurance that we will make additional acquisitions, we believe that there are WISPs that currently meet our acquisition criteria. As of the date of this Annual Report, we have not entered into any arrangements or understandings with any potential acquisition targets.
 
 Competition
 
 The Internet services industry is extremely competitive. We compete for revenues with multiple companies providing Internet services on a nationwide basis, discount ISPs and smaller regional ISPs. We also compete with companies that provide Internet access via narrowband and broadband technologies, such as Internet access providers, cable companies and telephone companies, most of which offer the same Internet connectivity services.  While there is still significant competition, we are utilizing a strategy of focusing on marketing to underserved geographic areas (i.e. those areas where there is less competition or technically inferior services available). We believe competition in these areas is generally from locally owned wireless broadband operators who lack the operating scale and monitoring systems. These operators generally have significantly higher prices or inefficient operations.
 
 Incumbent Local Exchange Carrier (ILECs)
 
 We face competition from ILECs in our markets in Texas and Louisiana. In particular, the Company generally faces competition from companies such as AT&T Inc. and smaller regional or local phone companies. If the market has a significant population density, the larger ILECs have typically deployed DSL in the one central office in the market. DSL deployments by smaller regional and local phone companies vary; however, the Company believes that all providers of DSL are restricted by DSL's physical distance limitations.
 
 Wireless Broadband Service Providers
 
 We also face competition from other wireless broadband providers that use unlicensed or licensed spectrum. For example, there may be a locally owned "mom and pop" wireless broadband operator present in the market offering local services. The Company believes these operators lack the operating scale and thus are burdened with significant operating costs from inefficient operations.
 
 Wireless broadband competition may also come from local governments, universities, and municipalities that provide "WiFi" networks over unlicensed spectrum. These services are occasionally characterized as public-private partnerships and may be partially subsidized. In some cases, they are offered to subscribers at no cost at all.
 
 In addition, Sprint Nextel Corporation, which holds 2.5 GHz licenses throughout much of the United States, has announced plans to invest up to $5 billion in building out a nationwide WiMAX-based network.  Sprint Nextel Corporation intends to provide services under the "Xohm" brand. Clearwire Corporation, who has partnered with Sprint Nextel Corporation, also offers wireless high speed Internet access utilizing pre-WiMAX-based technology in 46 markets in the United States. In terms of both domestic deployments and subscribers, Clearwire Corporation is the largest company providing advanced data services. Both Sprint Nextel Corporation and Clearwire Corporation are focused on larger population centers, underscoring the significant market opportunity available to the Company in serving underserved rural markets.
 9
 Satellite
 
 Satellite providers also offer broadband data services in rural and underserved markets. Although satellite has the capability to serve a large geographic area, the service levels can be impaired by the distance the signal travels to and from the satellite. Communication delays, or latency, can significantly inhibit satellite providers' ability to offer advanced services, such as VOIP. We believe our services can be provided to target customers more efficiently and at more competitive prices than satellite broadband services and as a result, it does not compete effectively with fixed wireless broadband.
 
 Cellular and PCS Services
 
 Many of the major mobile wireless carriers offer higher data rate access plans, but these plans are either restricted to larger urban and suburban markets or the actual data transfer rate can be significantly less than our fixed broadband services. However, wireless carriers continue to expand their network coverage, allowing advanced data services to be offered to a broader subscriber base. Also, wireless carriers have continued to leverage data services by offering personal computer data card devices and providing customers with wireless access to the Internet. We believe that these nationwide players will continue to focus on larger metropolitan markets, and will continue to be limited in bandwidth relative to the fixed wireless providers.
 
 Third Party Products
 
 The Company also sells third-party licensed products and services into its customer base such as VOIP phone systems, check and deposit item imaging and bank branch capture systems, video conferencing systems, video surveillance systems, satellite systems and other high bandwidth-consuming products and services. This is a highly competitive market dominated by large, well-funded incumbent providers. These markets are also characterized by competition that includes smaller regional telecommunications providers.
 
 New Technology
 
 We face competition in developing technologies, and risks from potential new developments in distribution technologies and equipment in Internet access. In particular, we face competition from developments in the following types of Internet access distribution technologies or equipment: broadband distribution technologies used in cable Internet access services; advanced personal computer-based access services offered through DSL technologies and by local telecommunications companies; other advanced digital services offered by wireless companies; television-based interactive services; personal digital assistants or handheld computers; and enhanced mobile phones. We must attempt to monitor these developments and to ensure that we either have comparable and compatible technology or access to distribution technologies developed or owned by third parties.
 
 Intellectual Property, Proprietary Rights and Licenses
 
 With respect to our Internet services, we believe that our success is more dependent upon technical, marketing and customer service expertise than upon our proprietary rights. We do, however, file copyright and trademark applications as deemed necessary. In addition, we rely on laws protecting trade secrets, common law rights with respect to copyrights and trademarks, as well as non-disclosure and other contractual agreements to protect proprietary rights. There can be no guarantee that our intellectual property and those laws, and the procedures initiated to protect our business, will prevent misappropriation of our proprietary software and web site applications. In addition, those protections may not preclude competitors from developing products with similar features as those of ERF Wireless.
 
 The Company has received two patents and has three patents applications pending 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. Two of the five patent applications had been issued; however the Company can provide no assurance that the remaining three patents will be successfully obtained.
 
 All spectrum in the US and generally internationally is controlled by each country's equivalent of the FCC.  In some cases and some countries portions of the spectrum are set aside for general use such as license-free networks.  Part of the spectrum in most countries is controlled for military use, public safety and commercial services.  Only the entities so entitled may use the frequency bands they have rights to.  Considering the wide variety of International differences in other areas of public policy, radio spectrum is remarkably homogenous. 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.
 10
 Governmental Regulation
 
 Our wireless Internet access products currently operate in a combination of licensed and unlicensed spectrums.
 
 We provide Internet access, in part, using telecommunications services provided by third-party carriers. Terms, conditions and prices for telecommunications services are subject to economic regulation by state and federal agencies. As an Internet access provider, we are not currently subject to direct economic regulation by the FCC or any state regulatory body, other than the type and scope of regulation that is applicable to businesses generally. In April 1998, the FCC reaffirmed that Internet access providers should be classified as unregulated "information service providers" rather than regulated "telecommunications providers" under the terms of the 1996 Telecommunications Act (the "1996 Act"). As a result, we are not subject to federal regulations applicable to telephone companies and similar carriers merely because we provide our services using telecommunications services provided by third-party carriers. To date, no state has attempted to exercise economic regulation over Internet access providers.
 
 Governmental regulatory approaches and policies to Internet access providers and others that use the Internet to facilitate data and communication transmissions are continuing to develop and, in the future, we could be exposed to regulation by the FCC or other federal agencies or by state regulatory agencies or bodies. In this regard, the FCC has expressed an intention to consider whether to regulate providers of voice and fax services that employ the Internet, or IP, switching as "telecommunications providers," even though Internet access itself would not be regulated. The FCC is also considering whether providers of Internet-based telephone services should be required to contribute to the universal service fund, which subsidizes telephone service for rural and low-income consumers, or should pay carrier access charges on the same basis as applicable to regulated telecommunications providers. To the extent that we engage in the provision of Internet or Internet protocol-based telephony or fax services, we may become subject to regulations promulgated by the FCC or states with respect to such activities. We cannot assure you that these regulations, if adopted, would not adversely affect our ability to offer certain enhanced business services in the future. Due to the increasing popularity and use of the Internet by broad segments of the population, it is possible that laws and regulations may be adopted with respect to the Internet pertaining to content of Web sites, privacy, pricing, encryption standards, consumer protection, electronic commerce, taxation, and copyright infringement and other intellectual property issues. No one is able to predict the effect, if any, that any future regulatory changes or developments may have on the demand for our Internet access or other Internet-related services. Changes in the regulatory environment relating to the Internet access industry, including the enactment of laws or promulgation of regulations that directly or indirectly affect the costs of telecommunications access or that increase the likelihood or scope of competition from national or regional telephone companies, could materially and adversely affect our business, operating results and financial condition.
 
 Our future telecommunications business is subject to regulations under both state and federal telecommunications laws which are fluid and rapidly changing. On the state level, rules and policies are set by each state's Public Utility Commission or Public Service Commission (collectively, PUC). At the federal level, the Federal Communication Commission (FCC), among other agencies, dictates the rules and policies which govern interstate communications providers. The FCC is also the main agency in charge of creating rules and regulations to implement the 1996 Act. The 1996 Act opened the local telecommunications markets to competition by mandating the elimination of many legal, regulatory, economic and operational barriers to competitive entry. These changes provide us with new opportunities to provide local telephone services on a more cost-effective basis.
 
 The FCC has granted direct broadcast satellite (DBS) and multi-channel, multi-point distribution service (MMDS) operator rights on a national basis similar to the mandatory access provided to franchise cable operators in some state and local jurisdictions. The FCC has adopted rules prohibiting homeowners associations, manufactured housing parks and state and local governments from imposing any restriction on a property owner that impairs the owner's installation, maintenance or use of DBS and MMDS antennas one meter or less in diameter or diagonal measurement. We do not believe our business will be significantly impacted by these rights.
 
 Certain wireless broadband services are subject to regulation by the FCC. At the federal level, the FCC has jurisdiction over wireless transmissions over the electromagnetic spectrum, all interstate and foreign telecommunications services, and many aspects of intrastate telecommunications. State and municipalities also may regulate many aspects of intrastate telecommunications. Broadband Internet-related regulatory policies are continuing to develop and it is possible that our services could be subject to additional regulations in the future. The extent of regulations and their impact on its business and its ability to compete are currently unknown.
 
 Due to the increasing popularity and use of the Internet, it is possible that additional laws, regulations or legal precedent may be adopted with respect to the Internet, covering issues such as content, privacy, pricing, unsolicited email, encryption standards, consumer protection, electronic commerce, taxation, copyright infringement and other intellectual property issues. ERF Wireless cannot predict the impact, if any, that any future legal or regulatory changes or developments may have on its business, financial condition and results of operations. Changes in the legal or regulatory environment relating to the Internet access industry, including changes that directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition from regional telephone companies, cable operators or others, could have a material adverse effect on its business, financial condition and results of operations.
  11
 Employees
 
 As of March 16, 2011, we employ 51 full-time employees and 4 consultants. We have no collective bargaining agreements with our employees, and believe relationships are satisfactory.
 
 Customers
 
 The Company had one oil and gass customer that represented approximately 12% and 4% of gross sales for the years ended December 31, 2010 and 2009, respectively.
 
 Research and Development
 
 We provide internal research and development for our patented CryptoVue technology. Otherwise, we rely on the providers of the products we sell to upgrade their products through research and development. Consequently, we do not perform material research and development and we have not incurred any material research and development costs during the two previous fiscal years and do not anticipate incurring any such costs in the current fiscal year.
 
 ITEM 1A. RISK FACTORS
 
 Risks Related to Our Business
 
 The following factors affect our business and the industry in which we operate. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known or which we currently consider immaterial may also have an adverse effect on our business. If any of the matters discussed in the following risk factors were to occur, our business, financial condition, results of operations, cash flows, or prospects could be materially adversely affected.
 
 A prolonged economic recession or depression will have an adverse effect on our operating results.
 
 Continued adverse economic conditions will impact both business and residential customers that utilize our wireless services and products. It should be expected that adverse economic conditions will negatively impact our results of operations.
 
 We have a limited operating history with significant losses and expect losses to continue for the foreseeable future.
 
 We have incurred annual operating losses since our inception. As a result, at December 31, 2010, we had an accumulated deficit of $47,819,000. Our gross revenues for the year ended December 31, 2010 were $5,915,000, with a loss from operations of $7,273,000. As we pursue our business plan, we expect our operating expenses to increase, especially in the areas of sales, marketing and acquisitions. As a result of these expected cost increases, we may incur losses from operations in 2011.
 
 We have a limited cash and liquidity position and need to raise additional funds to fund operations.
 
 As of December 31, 2010, we had cash and cash equivalents balances of $43,000 and negative working capital of $2,649,000. As of December 31, 2010, we had long-term indebtedness of approximately (i) $5.22 million on our credit facility, (ii) $.79 million of capital leases, and (iii) $.68 million of outstanding notes. The Company has a $12.0 million unsecured revolving credit facility, bearing interest at an annum rate of 12%, which matures in December 2013, and as of December 31, 2010, there was approximately $6,775,000 available under that facility. During February, 2011, we sold certain non-core assets for cash of approximately $3 million. We believe our cash and available credit facilities afford us adequate liquidity for 2011, although we will likely need to raise additional capital during this period to fund our anticipated growth for our oil and gas wireless business. We have historically financed our operations through private equity and debt financings. We do not have any commitments for equity funding at this time, and equity funding may not be available to us on favorable terms, if at all. As such there is no assurance that we can raise equity capital from external sources when such need arises, the failure of which could cause us to curtail operations.
 12
 We may not be successful in acquiring other existing wireless companies, which could negatively affect our offerings and sales.
 
 Our business plan is dependent on acquiring existing companies that expand our business, augment our market coverage, enhance our technical capabilities, provide us with valuable customer contacts or otherwise offer growth opportunities, and we may not be able to make such acquisitions. These acquisitions are important to ensure that our products, services and technologies are compatible with third-party products and technologies, to enable us to sell or license our services and products to potential new customers and into potential new markets, and to enable us to continue with our existing customers. There can be no assurance that we will identify the best acquisitions for our business or enter into acquisitions of other companies on acceptable terms or at all. The failure to make strategic acquisitions could have a material adverse effect on our business or financial results. If we cannot make significant strategic acquisitions as our target markets and technology evolve, the sales opportunities for our services and products could deteriorate.
 
 A default of the terms of our significant debt obligations may subject us to the risk of foreclosure on certain of our assets.
 
 As of December 31, 2010, certain operating assets, inventory, furniture and accounts receivable are pledged as collateral on $1,231,000 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 might have a material adverse effect on our financial condition.
 
 The Company's revenue and operating results may fluctuate significantly from quarter to quarter, and fluctuations in operating results could cause its stock price to decline.
 
 The Company's revenue and operating results may vary significantly from quarter to quarter due to a number of factors. In future quarters, operating results may be below the expectations of investors, and the price of our common stock may decline. Factors that could cause quarterly fluctuations include:
 
 ·
The ability to raise the necessary capital to execute mergers, acquisitions and asset purchases, as needed to implement the Company's strategic plan;
 
 ·
The ability to keep current customers and secure new customers;
 
 ·
The ability to acquire existing rural wireless broadband networks throughout North America and the ability to secure customers in the rural regions in which the Company acquires these wireless broadband networks; and
 
 ·
The ability to secure new regional banking network customers for both the construction and design of new broadband networks and for the maintenance and monitoring of these broadband networks.
 
 Accordingly, the failure to obtain significant future revenue, lower than expected revenue in the future, increased losses in the future, and decreased working capital could adversely affect our stock price and liquidity.
 
 During 2010, the majority of our revenue was generated from short-term agreements.
 
 For the year ended December 31, 2010, the majority of our revenues resulted from short-term, terminable at will, arrangements. We had one customer that provided revenue in excess of 10%. There is no assurance that our customers will continue to conduct business with us in the future, the failure of which could have a material adverse effect on our business operations.
 We compete with many companies that are larger and better capitalized than us.
 
 We face competition from many entities with significantly greater financial resources, well-established brand names and larger customer bases. We may become subject to price competition for our services as companies seek to enter our industry or current competitors attempt to gain market share. We expect competition to intensify in the future and expect significant competition from traditional and new telecommunications companies including, local, long distance, cable modem, Internet, digital subscriber line, microwave, mobile and satellite data providers. If we are unable to make or keep our products competitively priced and attain a larger market share in the markets in which our products compete, our levels of sales and our ability to achieve profitability may suffer.
 13
 We utilize the unlicensed spectrum, which is subject to intense competition, low barriers of entry and potential interference from multiple competing users.
 
 We presently utilize unlicensed spectrum in connection with our broadband service offerings. While unlicensed spectrum is regulated by the FCC, it is available to multiple simultaneous users and may be subject to interference, which may reduce the quality of the service provided to subscribers. The availability of unlicensed spectrum is limited, and others do not need to obtain permits or licenses to utilize the same unlicensed spectrum used by the Company currently or which it may in the future utilize. Accordingly, utilization of unlicensed spectrum could threaten our ability to reliably deliver services.
 
 The licensing of additional spectrum in our markets by the FCC could introduce additional competition.
 
 The FCC regulates the spectrum bands in which the companies and their competitors operate. The FCC can make additional spectrum available for use or change the way existing spectrum is used, which may result in additional competitors entering our markets and providing services that may directly compete with our offerings. In particular, in January 2008, the FCC offered several blocks of spectrum in the 700 MHz frequency range as part of Auction 73. This frequency range has been determined to be suitable for offering data, voice and video services particularly in sparsely populated rural areas. As a result, the licensing and eventual build out of this spectrum may bring additional competition to the Company’s principal markets.
 
 A system failure could delay or interrupt our ability to provide products or services and could increase our costs and reduce our revenues.
 
 Our operations are dependent upon our ability to support a highly complex network infrastructure. Many of our customers are particularly dependent on an uninterrupted supply of services. Any damage or failure that causes interruptions in our operations could result in loss of these customers. To date, we have not experienced any significant interruptions or delays which have affected our ability to provide services to our clients and we believe that we have satisfactory back-up systems in place. Because our headquarters and infrastructure are located in the Texas Gulf Coast area, there is likelihood that our operations may be affected by hurricanes or tropical storms, tornados, or flooding. The occurrence of a natural disaster, operational disruption or other unanticipated problem could cause interruptions in the services we provide and significantly impair our ability to generate revenue and achieve profitability.
 
 Our industry changes rapidly due to evolving technology standards and our future success will depend on our ability to continue to meet the sophisticated needs of our customers.
 
 Our future success will depend on our ability to address the increasingly sophisticated needs of our customers. We will have to develop and introduce enhancements to our existing services and products on a timely basis to keep pace with technological developments, evolving industry standards and changing customer requirements. We expect that we will have to respond quickly to rapid technological change, changing customer needs, frequent new service and product introductions and evolving industry standards that may render existing products and services obsolete. As a result, our position in existing markets or potential markets could be eroded rapidly by new services or product advances. The life cycles of products utilizing our services are difficult to estimate. Our growth and future financial performance will depend in part upon our ability to enhance existing services and applications, develop and introduce new applications that keep pace with technological advances, meet changing customer requirements and respond to competitive products. We expect that our wireless service will continue to require substantial investments. We may not have sufficient resources to make the necessary investments. Any of these events could have a material adverse effect on our business, quarterly and annual operating results and financial condition.
 
 An inability to overcome competition from alternative communication systems could adversely affect our results of operations.
 
 We already face, and may increasingly encounter, competition from competing wireless technologies that are constantly improving. In addition, our technology competes with other high-speed solutions, such as wired DSL, cable networks, fiber optic cable and satellite technologies. Our service competes with alternative communications systems on the basis of reliability, price and functionality. For example, the performance and coverage area of our wireless systems are dependent on certain factors that are outside of our control, including features of the environment in which the systems are deployed, such as the amount of clutter (natural terrain features and man-made obstructions) and the radio frequency available. Depending on specific customer needs, these obstacles may make our technology less competitive in comparison with other technologies and make other technologies less expensive or more suitable. Our business may also compete in the future with products and services based on other wireless technologies and other technologies that have yet to be developed.
 14
 We may not be able to successfully upgrade our existing network infrastructure.
 
 If the number of subscribers using our network and the complexity of its services increase, it will require more infrastructure, network and customer service resources to maintain the quality of its services. We may experience quality deficiencies, cost overruns and delays in implementing network improvements and expansion, in maintenance and upgrade projects, including slower than anticipated technology migrations. If we do not implement necessary developments and network upgrades successfully, or if it experiences inefficiencies, operational failures, or unforeseen costs during implementation, we may lose customers or incur additional liabilities.
 
 If unauthorized persons gain access to our network, subscribers may perceive its network and services as not secure, which may adversely affect our ability to attract and retain subscribers and expose the Company to liability.
 
 Although we take certain measures to guard against unauthorized access to our network, we may be unable to anticipate or implement adequate preventive measures against unauthorized access. Unauthorized parties may overcome our encryption and security systems and obtain access to data on customers’ networks, including on a device connected to such network. In addition, because we operate and control our network and our subscribers' Internet connectivity, unauthorized access of our network could result in damage to customers’ networks and to the computers or other devices used by their subscribers. An actual or perceived breach of network security, regardless of whether the breach is the Company’s fault, could harm public perception of the effectiveness of its security measures, adversely affect the ability to attract and retain subscribers, expose the Company to significant liability and adversely affect its business prospects
 
 We are subject to extensive regulation that could limit or restrict our activities. If we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions, and past due fees and interest, which may adversely affect our financial condition and results of operations.
 
 Our business, including the acquisition, lease, maintenance, and use of spectrum licenses, is extensively regulated by federal, state and local governmental authorities. A number of federal, state and local privacy, security and consumer laws also apply to our business. These regulations and their application are subject to continual change as new legislation, regulations or amendments to existing regulations are adopted from time to time by governmental or regulatory authorities, including as a result of judicial interpretations of such laws and regulations. Current regulations directly affect the breadth of services we are able to offer and may impact the rates, terms and conditions of our services. Regulation of companies that offer competing services, such as cable and DSL providers and telecommunications carriers, also affects our business.
 
 Certain wireless broadband services are subject to regulation by the FCC. At the federal level, the FCC has jurisdiction over wireless transmissions over the electromagnetic spectrum, all interstate and foreign telecommunications services, and many aspects of intrastate telecommunications. Wireless broadband services may become subject to greater state or federal regulation in the future. ERF Wireless cannot predict the impact, if any, that any future legal or regulatory changes or developments may have on its business, financial condition and results of operations. Changes in the legal or regulatory environment relating to the Internet access industry, including changes that directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition from regional telephone companies, cable operators or others, could have a material adverse effect on its business, financial condition and results of operations.
 
 Much of the law related to the liability of Internet service providers remains unsettled. For example, many jurisdictions have adopted laws related to unsolicited commercial email or “spam” in the last several years. Other legal issues, such as the sharing of copyrighted information, transborder data flow, universal service, and liability for software viruses could become subjects of additional legislation and legal development. We cannot predict the impact of these changes on them. Regulatory changes could have a material adverse effect on our business, financial condition or results of operations.
 
 We depend upon our intellectual property and our failure to protect existing intellectual property or secure and enforce such rights for new proprietary technology could adversely affect our future growth and success.
 
 The Company has filed trademark and patent applications to protect intellectual property rights for technology that it develops. The Company's future success also may depend upon its ability to obtain additional licenses for other intellectual properties. The Company may not be successful in acquiring additional intellectual property rights with significant commercial value on acceptable terms. Even if the Company is successful in acquiring such rights, it can provide no assurance that it will be successful in adapting or deploying them as to the timing or cost of such development efforts or as to the commercial success of the resulting products or services.
 15
 Our competitors may develop non-infringing products or technologies that adversely affect our future growth and revenues.
 
 It is possible that our competitors will produce proprietary technologies similar to ours without infringing on our intellectual property rights. We also rely on unpatented proprietary technologies. It is possible that others will independently develop the same or similar technologies or otherwise obtain access to the unpatented technologies upon which we rely for future growth and revenues. Failure to meaningfully protect our trade secrets, know-how or other proprietary information could adversely affect our future growth and revenues.
 
 We may incur significant litigation expenses protecting our intellectual property or defending our use of intellectual property, which may have a material adverse effect on our cash flow.
 
 Significant litigation regarding intellectual property exists in our industry. Competitors and other third parties may infringe on our intellectual property rights. Alternatively, competitors may allege that we have infringed on their intellectual property rights, resulting in significant litigation expenses. Any claims, even those made by third parties who are without merit, could:
 
 ·
be expensive and time consuming to defend, resulting in the diversion of management's attention and resources;
 
 ·
require us to cease making, licensing or using products or systems that incorporate the challenged intellectual property; or
 
 ·
require us to spend significant time and money to redesign, re-engineer or re-brand our products or systems if feasible.
 
 If the wireless broadband market does not evolve as we anticipate, our business may be adversely affected.
 
 If we fail to properly assess and address the broadband wireless market or if our services fail to achieve market acceptance for any reason, our business and quarterly and annual operating results would be materially adversely affected. Since the market for our products is still evolving, it is difficult to assess the competitive environment or the size of the market that may develop. In addition, technologies, customer requirements and industry standards may change rapidly. If we cannot improve or augment our services and products as rapidly as existing technologies, customer requirements and industry standards evolve, our products or services could become obsolete. The introduction of new or technologically superior products by competitors could also make our services less competitive or obsolete. As a result of any of these factors, our position in existing markets or potential markets could be eroded.
 
 Future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and strain our resources.
 
 As part of our business strategy, we intend to acquire companies and technologies that we believe could complement or expand our business, augment our market coverage, enhance our technical capabilities, provide us with valuable customer contacts or otherwise offer growth opportunities. If we fail to achieve the anticipated benefits of any acquisitions we complete, our business, operating results, financial condition and prospects may be impaired. Acquisitions and investments involve numerous risks, including:
 
 ·
difficulties in integrating operations, technologies, services, accounting and personnel;
 
 ·
inability to manage our growth;
 
 ·
difficulties in supporting and transitioning customers of our acquired companies to our technology platforms and business processes;
 
 ·
ability to maintain sufficient internal controls;
 
 16
 ·
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
 
 Acquisitions also frequently result in recording of goodwill and other intangible assets, which are subject to potential impairments in the future that could harm our operating results. It is also possible that at some point in the future we may decide to enter new markets, thus subjecting ourselves to new risks associated with those markets.
 
 Risks Related to Our Securities
 
 There is currently a limited market for our securities, and any trading market that exists in our securities may be highly illiquid and may not reflect the underlying value of our net assets or business prospects.
 
 Although our common stock is traded on the OTC Bulletin Board, there is currently a limited market for our securities and there can be no assurance that an improved market will ever develop.  Investors are cautioned not to rely on the possibility that an active trading market may develop.
 
 The market price of our common stock is very volatile and the value of your investment may be subject to sudden decreases.
 
 The trading price for our common stock has been, and we expect it to continue to be, volatile. For example, the closing bid price of our stock has fluctuated between $.01 per share and $.04 per share since January 1, 2011. 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.
 
 As our share price is volatile, we may be or become the target of securities litigation, which is costly and time-consuming to defend.
 
 In the past, following periods of market volatility in the price of a company’s securities or the reporting of unfavorable news, security holders have often instituted class action litigation. If the market value of our securities experience adverse fluctuations and we become involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs and our management’s attention could be diverted from the operation of our business, causing our business to suffer.
 
 Our “blank check” preferred stock could be issued to prevent a business combination not desired by management or our current majority shareholders.
 
 Our articles of incorporation authorize the issuance of “blank check” preferred stock with such designations, rights and preferences as may be determined by our board of directors without shareholder approval. Our preferred stock could be utilized as a method of discouraging, delaying, or preventing a change in our control and as a method of preventing shareholders from receiving a premium for their shares in connection with a change of control.
 17
 Future sales of our common stock in the public market could lower our stock price.
 
 We may sell additional shares of common stock in subsequent public or private offerings. We may also issue additional shares of common stock to finance future acquisitions. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
 
 A significant number of shares of common stock may be issued during the next 12 months. The issuance of these shares will have a dilutive effect on our common stock and may lower our stock price.
 
 We have reserved for issuance the following as of December 31, 2010:
 
 ·
4,374,000 shares of common stock are eligible to be issued pursuant to the Company's Non-qualified stock option plan;
 
 ·
1,933,000 shares of common stock underlying outstanding common stock purchase warrants at prices between $.08 and $.45 per share;
 
 ·
86,146,000 shares of common stock issuable upon conversion of Series A Preferred Stock, for an effective purchase price of $0.02 per share of common stock.
 
 Further, we may issue shares to reduce our debt obligations. Accordingly, the issuance of these shares will have a dilutive effect from both a net tangible book value per share basis and from a number of shares of common stock outstanding basis. This overhang could have a depressive effect on our common stock price.
 
 We presently do not intend to pay cash dividends on our common stock.
 
 We currently anticipate that no cash dividends will be paid on the common stock in the foreseeable future. While our dividend policy will be based on the operating results and capital needs of the business, it is anticipated that any earnings will be retained to finance the future expansion of our business.
 
 ITEM 1B. UNRESOLVED STAFF COMMENTS
 
 Not applicable to smaller reporting companies.
 
 ITEM 2. PROPERTIES
 
 Our principal offices are located in League City and Lubbock Texas, pursuant to term leases believed to reflect market rates and terms, including the following:
 
 Approximate

LeaseLocation

Function

Size (square feet)

Monthly lease payment

ExpirationLeague City, TX

ERF Wireless Inc. Corporate Headquarters

24,700

$                                   20,583

August 2011Lubbock, TX

WBS West Texas Operational Division Headquarters

10,000

$                                     5,000

December 2011
 18
 Our interests in our communications sites are comprised of operating leases created by long-term lease agreements at market rates. A typical tower site consists of a compound enclosing the tower site, a tower structure, and an equipment shelter that houses a variety of transmitting, receiving and switching equipment.
 
 The Company occupies office and tower facilities under several non-cancelable operating lease agreements expiring at various dates through September 2018, and requiring payment of property taxes, insurance, maintenance and utilities.
 
 ITEM 3. LEGAL PROCEEDINGS
 
 We are not a party to any material legal proceedings.
 
 On January 13, 2009, the Company entered into exclusive reseller agreements with Schlumberger Technology Corporation and Schlumberger Canada Limited (Schlumberger).  Currently, the contract is in operation in its second year.  During the fourth quarter of 2010 the Company and Schlumberger entered into a contractual mediation to resolve various financial issues.  During 2011 the Company and Schlumberger were unable to resolve these financial issues through mediation and the Company will avail itself of binding arbitration as mandated in the contract.
 
 ITEM 4. (REMOVED AND RESERVED)
 
 None.
 
 
 
 19
 PART II
 
 ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 Market Price Information
 
 Our common stock trades on the OTC Electronic Bulletin Board under the symbol ERFW. The market for our common stock is limited, sporadic, and highly volatile. The following table sets forth the approximate high and low closing sales prices for our common stock for the last two fiscal years. The quotations reflect inter-dealer prices, without retail markups, markdowns, or commissions and may not represent actual transactions.




High Bid


Low BidYEAR 2010Quarter ended December 31

$
0.04


$
0.01Quarter ended September 30

$
0.09


$
0.03Quarter ended June 30

$
0.15


$
0.03Quarter ended March 31

$
0.27


$
0.15YEAR 2009Quarter ended December 31

$
0.36


$
0.21Quarter ended September 30

$
0.38


$
0.25Quarter ended June 30

$
0.39


$
0.25Quarter ended March 31

$
0.66


$
0.29
 Stockholders
 
 As of March 16, 2011 there were approximately 3,936 stock 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, 2010, concerning securities authorized for issuance under our plans;
  20
 Number of Securities to be Issued Upon Exercise of Outstanding Options,

Warrants & Rights

Weighted Averaged Exercise Price of Outstanding Options, Warrants & Rights


Number of Securities Remaining Available for Future Issuance Under Stock Option Plans (Excluding Securities Reflected in Column (a)(a)


(b)


(c)Equity compensation plans approved by security holders:None


-



-



-Equity compensation plans not approved by security holders:2010 Non-Qualified Stock Compensation Plan


700,000


$
0.23



4,049,409Total


700,000


$
0.23



4,049,409
 
 In June 2010, the Board of Directors adopted a Non-Qualified Stock Option Plan (the “Plan”) whereby 25,000,000 shares were reserved for issuance to key employees, officers, directors, and consultants of the Company and its affiliates. As of December 31, 2010, under the Plan, there were 20,625,591 shares issued to certain employees and consultants for services rendered and an outstanding option to purchase 325,000 shares of the Company’s common stock at a purchase price ranging from $.17 to $.43 per share. The Plan is administered by the Compensation Committee of the Company and if there is no Compensation Committee, by the entire board of directors. The Plan allows stock option grants, performance stock awards, restricted stock awards, and stock appreciation rights ("SAR") as determined by the Committee. No award may be granted pursuant to the Plan ten years after the effective date (June 1, 2010). The entire text of the Plan was filed with the Commission on June 24, 2010 as an exhibit to the Company's registration statement on Form S-8.
 
 During 2010, the Company issued Weed & Co., LLP $.25 and $.08 warrants convertible into 250,000 and 125,000 shares of common stock, respectively, as part of payment of services. Furthermore Weed & Co., LLP would be granted additional warrants every six months following the date of the initial agreement and as long as the agreement continues to remain in effect. ERFW shall grant Weed & Co., LLP a warrant to purchase 125,000 shares of ERFW common stock at a price equal to 125% of the average closing bid price for the 10 days immediately prior to the date of grant. All warrants will expire five years from date of grant.
 
 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 2010.
  Common Stock Issued for Cash Consideration
  ·
No shares were issued for cash consideration for the three months ended December 31, 2010.
  Common Stock Issued for Debt Conversions and Services Rendered
  ·
In October, 2010, 17,764,945 shares of common stock at average price of $.03 were issued for debt conversions and services rendered.
  21
  ·
In November, 2010, 28,883,054 shares of common stock at average price of $.02 were issued for debt conversions and services rendered.
 
  ·
In December, 2010, 26,777,991 shares of common stock at average price of $.02 were issued for debt conversions and services rendered.
  Common Stock Issued Upon Conversion of Series A Preferred Stock
  ·
On November 17, 2010, an accredited investor acquired 7,470,539 shares of common stock pursuant to Preferred A Conversions.
  The issuances referenced above were completed pursuant to either Section 4(2) of the Securities Act or Regulation D of the Securities Act Rules. With respect to issuances made pursuant to Section 4(2) of the Securities Act, the transactions did not involve any public offering and were sold to a limited group of persons. Each recipient either received adequate information about ERF Wireless or had access, through employment or other relationships, to such information, and ERF Wireless determined that each recipient had such knowledge and experience in financial and business matters that they were able to evaluate the merits and risks of an investment in the Company.
  With respect to issuances made pursuant to Regulation D of the Securities Act, ERF Wireless determined that each purchaser was an "accredited investor" as defined in Rule 501(a) under the Securities Act, or if such investor was not an accredited investor, that such investor received the information required by Regulation D.
  Except as otherwise noted, all sales of the Company's securities were made by officers of the Company who received no commission or other remuneration for the solicitation of any person in connection with the respective sales of securities described above. The recipients of securities represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions.
 
 Equity Repurchases by Issuer
 
 The Company did not affect any common stock repurchases during fiscal 2010.
 
 ITEM 6.SELECTED FINANCIAL DATA
 
 Not applicable to smaller reporting companies.
 
 
 ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the other sections of this annual report on Form 10-K, including the financial statements.
 
 Overview
 
 Historically, our revenues have been generated primarily from Internet and construction services. Our Internet revenues result from our offering of broadband and basic communications services to residential and enterprise customers. Our construction revenues result from the construction of bank networks and other services associated with providing wireless products and services to the regional banking industry. During fiscal 2010, approximately 80% of our revenues were generated from internet services, 15% of our revenues were generated from providing broadband services to the energy industry and 5% of our revenues were generated from construction services. We expect that our internet services will experience a decline in 2011 as a result of our recent divestiture of certain wireless broadband assets and operations in territories that are not core to our oil and gas vertical market focus and that the most growth during fiscal 2011 will continue to come from devoting significant capital resources to developing the oil and gas market utilizing wireless services.
 
 22
 During the 2010 fiscal year and the first quarter of fiscal 2011, the Company made significant progress with its strategic business plan as evidenced by the completion and announcement of numerous agreements and business developments. These include:
  ·
The completion, closing and funding associated with the divestiture of certain wireless broadband assets and operations that were not core to the Company’s vertical market focus in oil and gas through its subsidiary, Energy Broadband, Inc.  ERF received $3 million in cash and 100,000 shares of KeyOn Communications Holdings, Inc. stock for two wireless networks that were sold, specifically the Central Texas network west of Austin and the smaller North Texas network in Granbury.  The primary allocation of the cash proceeds will be used to retire certain liabilities and to provide for aggressive growth for our oil and gas vertical subsidiary, Energy Broadband.
  ·
The completion of a Master Services Agreement with KeyOn Communications to deliver digital oilfield solutions in 4 of the 11 states where KeyOn has networks, with initial focus in Texas and Kansas.
  ·
The completion of a Master Services Agreement with Skybeam, Inc. to deliver digital oilfield solutions in Texas, Colorado and Oklahoma.  Specifically, the agreement allows Energy Broadband to serve oil and gas customers under existing contracts, as well as to other oil and gas companies active in areas such as Colorado’s Piceance Creek and Denver Basin, Texas’ Barnett Shale and locations near Oklahoma’s Anadarko and Arkoma Basins.
  ·
The completion of a Master Services Agreement with Bluebird Broadband Services to deliver digital oilfield solutions in the Haynesville Shale market covering northwest Louisiana and northeast Texas.
  ·
The completion of a Master Services Agreement with Advanced Data Technologies to deliver digital oilfield solutions in the western Eagle Ford Shale formation in South Texas.
  ·
The Company opened a new office in Odessa, Texas to support the growth of the oil and gas business in that region and completed the first phase of a new terrestrial wireless network that will cover more than 5,000 square miles of new coverage for our oil and gas customers to the west and south of the Midland/Odessa area.
  ·
The Company completed the design of   a new wireless broadband network in the Eagle Ford Shale covering approximately 25,000 square miles of territory.
  ·
The Company announced that it ranked number 137 on Deloitte's 2010 Technology Fast 500TM, an annual ranking by Deloitte LLP of the 500 fastest growing technology, media, telecommunications, life sciences and clean technology companies in North America. ERF Wireless grew by 760% from 2005-2009.
  ·
The Company received correspondence from the U.S. Patent Office that the second patent previously applied for relating other aspects of the CryptoVue encrypted security device has been approved and that the patent will be issued as soon as the forms are submitted.
  ·
The Company announced that it has repaid all of its outstanding convertible debt as of close of business August 4, 2010. As reported in its 10-Q for the first quarter of 2010, the Company received approximately $600,000 USD in financing through convertible debentures with several institutional investors during the first quarter of 2010.
  ·
The Company entered into a contract with the world's leading oil and gas services company in support of BP and the U.S. Coast Guard. The Company was selected to provide its world-class integrated communications systems to provide bandwidth to the U.S. Coast Guard's Incident Command Center recently set up on Galveston Island to search for and respond to all reports of oil affecting the Texas Gulf Coast that may be associated with the BP Deepwater Horizon spill off the coast of Louisiana.
  ·
The Company completed deploying a BranchNet(TM) and BankNet(TM) encrypted enterprise-class wireless banking network for First Federal Bank of Louisiana that spans almost the entire western region of Louisiana from Lake Charles in the south to Natchitoches in the north. This network provides more than 280 miles of continuous network coverage with the most disparate branch locations being approximately 140 miles apart encompassing some of the most difficult rain and foliage regions in the United States. The construction of this network has been a real mix of engineering skill as well as perseverance since it has been under construction for more than two years and construction even continued with minor interruptions through two major hurricanes in the region. This high-speed broadband network connects all 14 of First Federal's current branch locations with their Operations Center and is ERF Wireless' largest bank project to date. The BankNet(TM) network backbone portion, which is owned by ERF Wireless and generates recurring revenue, provides speeds that range from 20 Mbps up to 100 Mbps delivered over the bank-owned BranchNet portion of the network going to each branch location.
  23
 ·
The Company launched a marketing campaign in support of its WiNet Agreement with West Texas State Bank in Monahans, Texas. This agreement calls for the utilization of the bank's excess bandwidth and wireless infrastructure to provide Internet products and services to the bank's commercial and retail customers in the Monahans and Kermit areas. ERF Wireless plans to operate and support its WiNet product offerings through its Wireless Bundled Services subsidiary. 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.
 
 Results of Operations
 
 Year Ended December 31, 2010, Compared to Year Ended December 31, 2009
 
 The following table sets forth summarized consolidated financial information for the years ended December 31, 2010 and 2009:
 
 Fiscal Year Ended December 31,($ in thousands)

2010


2009


$ Change


% ChangeTotal sales

$
5,915


$
5,533


$
382



7
%Cost of goods sold


3,910



3,254



656



20
%Gross profit


2,005



2,279



(274
)


-12
%Percent of total sales


34
%


41
%Operating expenses


9,278



9,921



(643
)


-6
%Loss from operations


(7,273
)


(7,642
)


369



-5
%Other income/(expense)


(1,238
)


(1,230
)


(8
)


1
%Net loss

$
(8,511
)

$
(8,872
)

$
361



-4
%
  24
 For the year ended December 31, 2010, the Company's business operations reflected an increase in sales for Energy Broadband, Inc. (EBI) with an offset of decreased sales for Wireless Bundled Services (WMS), Enterprise Network Services (ENS) and for Wireless Messaging Services (WMS) For the year ended December 31, 2010, the Company's consolidated operations generated net sales of $5,915,000 compared to prior-year net sales of $5,533,000 for the year ended December 31, 2009. The $382,000 increase in net sales is primarily attributable to $608,000 increased sales in EBI from deployment of our Mobile Broadband Trailers (MBTs) in the oil and gas regions, with an offset of $121,000 in decreased sales in WBS due to a reduction in our retail wireless and dialup customer base, $47,000 decreased sales in ENS are due to banking network installation and services and a $58,000 decrease in WMS attributable to decrease paging retail customer base and equipment sales.  Product sales decreased $72,000 and offset with increased service sales of $454,000. The $382,000 increased sales in EBI due primarily to our wireless broadband services from deployment of our Mobile Broadband Trailers (MBTs) in the oil and gas regions. For the year ended December 31, 2010, the Company had a gross profit margin of 34%, compared to a gross profit margin of 41% for the prior year. The $274,000 decrease in gross profit margin is primarily attributed to the following factors; (i) approximately $154,000 increase in gross margin in EBI attributable to our wireless broadband services from deployment of our Mobile Broadband Trailers (MBTs) in the oil and gas regions (ii) $75,000 increase in gross margins in WMS primarily related to wireless paging infrastructure sales and services (iii) offset with $177,000 decrease in gross margins in ENS primarily related to depreciation of our BankNet infrastructure with minimal customer base offsetting the expense at this time, and (iv) approximately $326,000 decrease in gross margin in WBS attributable to increased depreciation and tower rent due to prior year asset acquisitions; and decrease sales related to reduction in our retail wireless and dialup customer base.
 
 The Company incurred a net loss of $8,511,000 for the year ended December 31, 2010. The Company's principal components of the net loss for the year ended December 31, 2010, included approximately $2,938,000 in depreciation and amortization expenses, $1,513,000 of interest expense, $363,000 of derivative income, $1,318,000 of other general and administrative expense, $4,275,000 in employment expenses and $2,306,000 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, 2010 and 2009:
 
 ($ in thousands)

Fiscal Year Ended December 31,Business Segment

2010
% of Total

2009

% of Total

$ Change
% ChangeWireless Messaging Services

$
101

2%

$
159

3%

$
(58)

-36%Wireless Bundled Services


4,628

78%


4,749

86%


(121)

-3%Enterprise Network Services


270

5%


317

6%


(47)

-15%Energy Broadband, Inc.


916

15%


308

5%


608

197%Total Sales

$
5,915

100%

$
5,533

100%

$
382

7%
 
 For the year ended December 31, 2010, net sales increased to $5,915,000 from $5,533,000 for the year ended December 31, 2009. The overall increase of 7% was attributable to an increase of $608,000 of Energy Broadband, Inc., and offset with a decrease of $121,000 of Wireless Bundled Services, $47,000 decrease in Enterprise Network Services and a decrease in Wireless Messaging Services of $58,000. The $608,000 increased sales in EBI are from deployment of our Mobile Broadband Trailers (MBTs) in the oil and gas regions, with an offset of $121,000 decreased sales in WBS due to a reduction in our retail wireless and dialup customer base, $47,000 decreased sales in ENS due to banking network installation and services and a $58,000 decreased sales in WMS is attributable to a decline in our paging retail customer base.
  25
 Cost of Goods Sold
 
 The following tables set forth summarized cost of goods sold information for the years ended December 31, 2010 and 2009:
 
 ($ in thousands)

Fiscal Year Ended December 31,2010

% of Total


2009

% of Total

$ Change

% ChangeWireless Messaging Services

$
74

2%

$
207

6%

$
(133)

-64%Wireless Bundled Services


2,868

73%


2,577

79%


291

11%Enterprise Network Services


403

10%


274

8%


129

47%Energy Broadband, Inc.


565

15%


196

6%


369

188%Total cost of sales

$
3,910

100%

$
3,254

100%

$
656

20%
 Fiscal Year Ended December 31,($ in thousands)

2010


2009


$ Change


% ChangeProducts and integration service

$
1,403


$
1,439


$
(36
)


-3
%Rent and maintenance


524



475



49



10
%Depreciation


1,983



1,340



643



48
%Total cost of sales

$
3,910


$
3,254


$
656



20
%
 For the year ended December 31, 2010, cost of goods sold increased by $656,000, or 20%, to $3,910,000 from $3,254,000 as compared to the year ended December 31, 2009. The increase of $656,000 in cost of goods sold is primarily attributable to an increase of cost of goods sold of $129,000 in ENS due to depreciation of our BankNet infrastructure, $291,000 increase in WBS due to depreciation and tower rent as a result of prior year acquisitions, $369,000 increase in EBI due to increased depreciation and third party services for deployment of our Mobile Broadband Trailers (MBTs) in oil and gas regions, and offset with a decrease of cost of goods sold of $133,000 in WMS attributable to reduced revenue in wireless paging service and infrastructure construction.
 
 Operations Expenses
 
 The following table sets forth summarized operating expense information for the years ended December 31, 2010 and 2009:
 
 Fiscal Year Ended December 31,($ in thousands)

2010


2009


$ Change


% ChangeEmployment expenses

$
4,275


$
4,870


$
(595
)


-12
%Professional services


2,306



1,832



474



26
%Rent and maintenance


424



444



(20
)


-5
%Depreciation and amortization


955



1,364



(409
)


-30
%Other general and administrative


1,318



1,411



(93
)


-7
%Total operating expenses

$
9,278


$
9,921


$
(643
)


-6
%
 26
 For the year ended December 31, 2010, operating expenses decreased by 6% to $9,278,000, as compared to $9,921,000 for the year ended December 31, 2009. The changes that occurred, as evidenced by the immediately preceding table, are discussed below:
  ·
A $595,000 decrease in employment expense. The decrease is primarily attributable to the centralization of our operations;
  ·
A $474,000 increase in professional services. The increase is primarily attributable to settlement expenses.
  ·
A $20,000 decrease in rent and maintenance.
  ·
A $409,000 decrease in depreciation and amortization;
  ·
A $93,000 decrease in other general and administrative expense.
 
 Other (Income) Expense, Net
 
 For the year ended December 31, 2010, the decrease in other expense is primarily attributable to interest expense, net on debt obligations totaling $1,513,000, loss on extinguishment of debt of $63,000 and offset with a net derivative income of $363,000 as compared to interest expense, net of $1,293,000, and offset with derivative income of $50,000 for the year ended December 31, 2009. The derivative expense represents the net unrealized (non-cash) charge during the year ended December 31, 2010 and 2009, 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, 2010, our net loss was $8,511,000 compared to a loss of $8,872,000 for the year ended December 31, 2009. The deceased in the loss for the year ended December 31, 2010, as compared to the year ended December 31, 2009 is primarily attributable as evidenced by the immediately preceding table, are discussed above.
 
 Cash Flows
 
 The Company's operating activities decreased net cash used by operating activities to $2,081,000 in the year ended December 31, 2010, compared to net cash used of $2,959,000 in the year ended December 31, 2009. The decrease in net cash used by operating activities was primarily attributable to an improvement  in the company's net operating loss of $8,511,000, net of $5,313,000 non-cash charges combined with derivative income $363,000 to equal net non-cash charge of $4,950,000, combined together with $1,480,000 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.
 
 The Company's investing activities used net cash of $690,000 in the year ended December 31, 2010, compared to use of net cash of $1,306,000 in the year ended December 31, 2009. The decrease in investing activities is primarily attributable to no new acquisitions in 2010, as compared to the prior year.
  The Company's financing activities provided net cash of $2,586,000 in the year ended December 31, 2010, compared to $4,145,000 of cash provided in year ended December 31, 2009. The cash provided in the year ended December 31, 2009, was primarily associated with the proceeds from equity financings, convertible debt financing and the line of credit, net.
 
 27
 Liquidity and Capital Resources
 
 General
 
 At December 31, 2010, the Company's current assets totaled $919,000 (including cash and cash equivalents of $43,000) total current liabilities were $3,568,000, resulting in negative working capital of $2,649,000. The Company has funded operations to date primarily through a combination of utilizing cash on hand, borrowings and raising additional capital through the sale of its securities. The Company’s operations for the year ended December 31, 2010, were as primarily funded by proceeds from the Company's line of credit totaling $3,026,000, sale of restricted common stock, net to accredited investors of $432,000 and convertible debt financing of $759,000.
 
 Current Debt Facility
  In June 2010, the Company increased its unsecured revolving credit facility with Angus Capital Partners a related party from $10.5 million to $12.0 million maturing December 31, 2013. At December 31, 2010, the Company had approximately $6,775,000 available on a $12.0 million unsecured revolving credit facility with Angus Capital Partners, with an outstanding balance of $5,225,000. The terms of the 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, 2010, we issued to various accredited investors and third parties (i) 9,555,000 shares of restricted common stock for cash consideration of $432,000, (ii) 125,286,000 shares for services rendered and debt conversions, and (iii) 85,364,000 shares upon conversion of Series A Preferred Stock. We relied on Section 4(2) of the Securities Act in effecting these transactions. During the fiscal year ended December 31, 2010, we issued 26,621,000 shares of common stock to employees and business consultants, for aggregate consideration of $1,234,000 of services rendered, pursuant to a registration statement on Form S-8.
 
 Use of Working Capital
 
 We believe our cash and available credit facilities afford us adequate liquidity for the balance of fiscal 2011. We anticipate that we will need additional capital in the future to continue to expand our business operations, which expenditures may include acquisitions and capital expenditures. We have historically financed our operations through private equity and debt financings. We do not have any commitments for equity funding at this time, and additional funding may not be available to us on favorable terms, if at all. As such there is no assurance that we can raise additional capital from external sources, the failure of which could cause us to curtail operations.
 
 Contractual Obligations
 
 The following table sets forth contractual obligations as of December 31, 2010:
  Payments Due by PeriodTotal


Less than 1 Year


1-3 Years


3-5 Years


More than 5 YearsContractual obligations:Long-term debt obligations

$
8,660


$
1,399


$
7,261


$
-


$
-Capital lease obligations


931



524



269



138



-Operating lease obligations


631



465



126



24



16Total contractual obligations

$
10,222


$
2,388


$
7,656


$
162


$
16
 
 The Company's contractual obligations consist of long-term debt of $6,374,000 and interest expense of $2,286,000 as set forth in Note 12 to the company's financial statements, Notes Payable and Long-Term Debt. The capital lease obligations include interest as set forth in Note 12 in the future minimum lease payments schedule and certain obligations for operating leases requiring future minimal commitments under non-cancelable leases set forth in Note 14 - Commitments and Contingencies.
  28
 Off-Balance Sheet Arrangements
 
 As of December 31, 2010 the Company did not have any significant off-balance-sheet arrangements other than certain office and tower facility operating leases requiring minimal commitments under non-cancelable leases disclosed in the table above.
 
 Critical Accounting Policies and Estimates
 
 Property and Equipment
 
 Property and equipment are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations. Depreciation is computed by applying the straight-line method over the estimated useful lives which are generally three to seven years.
 
 Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. No impairment losses have been recorded since inception.
 
 Long-Lived Assets
 
 We review our long-lived assets, to include intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying amount of such long-lived asset or group of long-lived assets (collectively referred to as "the asset") may not be recoverable. Such circumstances include, but are not limited to:
 
 ·
a significant decrease in the market price of the asset;
 
 ·
a significant change in the extent or manner in which the asset is being used;
 
 ·
a significant change in the business climate that could affect the value of the asset;
 
 ·
a current period loss combined with projection of continuing loss associated with use of the asset;
 
 ·
a current expectation that, more likely than not, the asset will be sold or otherwise disposed of before the end of its previously estimated useful life;
 
 We continually evaluate whether such events and circumstances have occurred. When such events or circumstances exist, the recoverability of the asset's carrying value shall be determined by estimating the undiscounted future cash flows (cash inflows less associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset. To date, no such impairment has occurred. To the extent such events or circumstances occur that could affect the recoverability of our long-lived assets, we may incur charges for impairment in the future.
 
 29
 Derivative Instruments
 
 In connection with the sale of debt or equity instruments, the Company may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as embedded derivative features which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.
 
 The Company's derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. For options, warrants and bifurcated embedded derivative features that are accounted for as derivative instrument liabilities, the Company estimates fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option. Because of the limited trading history for our common stock, the Company estimates the future volatility of its common stock price based on not only the history of its stock price but also the experience of other entities considered comparable to the Company.
 
 Recent Accounting Pronouncements
 
 Management does not anticipate that the recently issued but not yet effective accounting pronouncements will materially impact the Company’s financial condition.
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
 Not applicable.
 
      
 30
 ITEM 8. FINANCIAL STATEMENTS
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Board of Directors
 ERF Wireless, Inc.
 League City, Texas
 
 We have audited the accompanying consolidated balance sheets of ERF Wireless, Inc., as of December 31, 2010 and 2009, 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, 2010 and 2009, and the results of its operations and its cash flows for each of the two years then ended in conformity with accounting principles generally accepted in the United States of America.
 
 /s/LBB & ASSOCIATES LTD., LLP
 
 LBB & ASSOCIATES LTD., LLP
 Houston, Texas
 March 29, 2011
 
 31
  ERF WIRELESS, INC.
 CONSOLIDATED BALANCE SHEETS
 DECEMBER 31, 2010 and 2009
 ($ in thousands except share data)
 
 December 31,


December 31,2010


2009ASSETSCurrent assetsCash and cash equivalents

$
43


$
228Accounts receivable, net


392



485Accounts receivable, other


124



87Inventories


255



222Costs and profits in excess of billings


-



17Prepaid expenses and other current assets


105



242Total current assets


919



1,281Property and equipmentProperty and equipment


10,001



9,347Less: accumulated depreciation


(5,987
)


(3,712
)Net property and equipment


4,014



5,635Goodwill


1,255



1,255Intangible assets, net


134



701Other assets


170



245Total assets

$
6,492


$
9,117LIABILITIES AND SHAREHOLDERS’ DEFICITCurrent liabilities:Notes payable and current portion of long-term debt

$
598


$
1,881Current portion of long-term capital leases


446



854Accounts payable


872



586Accrued expenses


1,139



486Derivative liabilities


13



269Deferred liability and revenue


500



585Total current liabilities


3,568



4,661Line of credit


5,225



5,449Long-term debt, net of current portion


78



442Long-term capital leases, net of current portion


343



789Deferred liability and revenue, net of current portion


-



150Total liabilities


9,214



11,491CommitmentsShareholders’ deficit:Preferred stock  -  $.001 par valueSeries A authorized 25,000,000 sharesIssued and outstanding at December 31, 2010, andDecember 31, 2009, 4,612,583 and 3,043,580, respectively


5



3Common stock  -  $.001 par valueAuthorized 975,000,000 sharesIssued and outstanding at December 31, 2010, andDecember 31, 2009, 392,402,346 and 145,575,735, respectively


392



146Additional paid in capital


44,700



36,785Accumulated deficit


(47,819
)


(39,308
)Total shareholders’ deficit


(2,722
)


(2,374
)Total liabilities and shareholders' deficit

$
6,492


$
9,117See accompanying notes to consolidated financial statements.
  32
  
 ERF WIRELESS, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 ($ in thousands except share data and loss per share)
 
 2010


2009Sales:Products

$
124


$
196Services


5,791



5,337Total sales


5,915



5,533Costs of goods sold:Products and integration services


1,403



1,439Rent, repairs and maintenance


524



475Depreciation


1,983



1,340Total costs of goods sold


3,910



3,254Gross profit


2,005



2,279Operating expenses:Selling, general and administrative


8,323



8,557Depreciation and amortization


955



1,364Total operating expenses


9,278



9,921Loss from operations


(7,273
)


(7,642
)Other income (expense):Interest expense, net


(1,513
)


(1,293
)(Loss) on extinguishment of debt


(63
)


-Sale of assets, net and other income


(25
)


13Derivative income


363



50Total other income (expense)


(1,238
)


(1,230
)Net loss

$
(8,511
)

$
(8,872
)Net loss per common share:Basic

$
(0.04
)

$
(0.07
)Diluted

$
(0.04
)

$
(0.07
)See accompanying notes to consolidated financial statements.
  
 33
 
 ERF WIRELESS, INC.
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 ($ and shares in thousands)
 
 TotalAdditional





Shareholders’Common Stock


Preferred Stock


Paid in


Accumulated


EquityShares


Value


Shares


Value


Capital


Deficit


(Deficit)Total shareholders’ equity (deficit as of December 31, 2008


101,884


$
102



4,086


$
4


$
31,084


$
(30,436
)

$
754Net loss


-



-



-



-



-



(8,872
)


(8,872
)New stock issued to shareholders:Conversion of preferred stock to common stock


28,796



29



(1,542
)


(1
)


(28
)


-



-For services rendered and interest


8,069



8



-



-



2,449



-



2,457For retirement of debt


1,636



2



-



-



473



-



475Asset acquisition


3,273



3



-



-



881



-



884For retirement of debt and conversion of convertiblepreferred stock


-



-



500



-



1,500



-



1,500Stock based compensation


-



-



-



-



-



-



-Derivative liability


-



-



-



-



39



-



39Warrant expense


-



-



-



-



55



-



55Proceeds from sale of common stock, net


1,918



2



-



-



332



-



334Total shareholders’ (deficit) as of December 31, 2009


145,576



146



3,044



3



36,785



(39,308
)


(2,374
)Net loss


-



-



-



-



-



(8,511
)


(8,511
)New stock issued to shareholders:Conversion of preferred stock to common stock


85,364



85



(4,571
)


(4
)


(81
)


-



-For services, compensation and interest


41,290



41



-



-



1,926



-



1,967For retirement of debt


51,049



51



-



-



1,713



-



1,764Conversion of LOC and interest to preferred stock


-



-



6,140



6



2,398



-



2,404Stock based compensation


-



-



-



-



40



-



40Derivative liability


-



-



-



-



3



-



3Conversion of LOC and interest to common stock


59,568



60



-



-



1,493



-



1,553Proceeds from sale of common stock, net


9,555



9



-



-



423



-



432Total shareholders’ (deficit) as of December 31,  2010


392,402


$
392



4,613


$
5


$
44,700


$
(47,819
)

$
(2,722
)See accompanying notes to consolidated financial statements.
 
 
 34
 ERF WIRELESS, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 ($ in thousands)
  2010


2009Cash flows from operating activitiesNet loss

$
(8,511
)

$
(8,872
)Adjustments to reconcile net loss to net cashused by operating activities:Loss on extinguishment of debt


63



-Loss on foreign exchange translation


1



-Loss on sale of assets


16



-Amortization of debt discount


162



228Depreciation and amortization


2,938



2,704Stock issued for services, compensation and interest


1,967



2,457Derivative (income) expense


(363
)


(50
)Stock base compensation


40



-Bad debt expense


126



105Changes in:Accounts receivable, net


(33
)


(318
)Accounts receivable, other


(37
)


(21
)Inventories


(33
)


(29
)Prepaid expenses and other current assets


150



276Costs and profits in excess of billings


17



410Accounts payable


285



(395
)Accrued expenses


1,366



364Deferred liability and revenue


(235
)


182Total adjustment


6,430



5,913Net cash used by operating activities


(2,081
)


(2,959
)Cash flows from investing activitiesProceeds from sale of assets


8



-Purchase of property and equipment


(773
)


(1,158
)Business acquisitions, net of cash acquired


-



(167
)Change in other assets


75



19Net cash used by investing activities


(690
)


(1,306
)Cash flows from financing activitiesNet proceeds from line of credit


3,026



3,618Proceeds from notes payable


-



150Proceeds from long-term debt obligations


759



1,390Payment of long-term debt obligations


(777
)


(465
)Payment on capital lease obligations


(854
)


(882
)Proceeds from sale of common stock, net


432



334Net cash provided by financing activities


2,586



4,145Net decrease in cash


(185
)


(120
)Cash and cash equivalents at the beginning of the period


228



348Cash and cash equivalents at the end of the period

$
43


$
228Supplemental disclosure of cash flow information:Net cash paid during the year for:Interest

$
241


$
361Income taxes

$
-


$
-Supplemental non-cash investing and financing activities:Conversion of debt through issuance of common stock

$
1,764


$
475Conversion of LOC and interest through issuance of Preferred stock

$
2,404


$
1,500Conversion of LOC and interest through issuance of Common stock

$
1,553


$
-Issuance of shares for asset acquisition

$
-


$
884Property acquired under capital lease

$
-


$
68Note payable for acquisition

$
-


$
444See accompanying notes to consolidated financial statements.
  35
  ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 1 - BASIS OF PRESENTATION
 
 Nature of the Company
 
 ERF Wireless, Inc. (“Company” or “ERF Wireless”) provides secure, high-capacity wireless products and services to a broad spectrum of customers in primarily underserved, rural and suburban parts of the United States. We provide our customers with high quality broadband services and basic communications services to residential, oil and gas, and bank customers in the areas that otherwise would not be able to receive such services. We are also a comprehensive solutions provider to other enterprise customers, providing them with a wide array of communications services including high speed broadband, voice over Internet Protocol (VOIP) telephone and facsimile service, and video security.
 
 Historically, our revenues have been generated primarily from Internet and construction services. Our Internet revenues have resulted from our offering of broadband and basic communications services to residential and enterprise customers. Our construction revenues typically have consisted of revenues generated from the construction of bank networks and other services associated with providing wireless products and services to the regional banking industry.
  Our internet revenues are recorded in “ERF Wireless Bundled Services, Inc. (WBS)”, construction of bank networks in our “ERF Enterprise Network Services, Inc. (ENS)” and other construction in “ERF Wireless Messaging Services, Inc. (WMS)” and wireless broadband products and services to rural oil and gas locations are recorded in “ERF Energy Broadband, Inc. (EBI)”. Please refer to segment footnote 16 for additional information regarding segment operations.
 
 Basis of Accounting
 
 The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America. The accompanying financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (SEC). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations have been reflected herein.
 
 Principles of Consolidation
 
 The consolidated financial statements include the accounts of the company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.
  Reclassification
  Certain amounts in the 2009 financial statements have been reclassified to conform to the 2010 financial presentation. These reclassifications have no impact on net loss.
 
 Use of Estimates
 
 The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates.
 
 Cash and Cash Equivalents
 
 Cash and cash equivalents include cash and all highly liquid financial instruments with original purchased maturities of three months or less at the date of purchase. 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.  The Company has not experienced any losses related to these deposits.
  36
 
 ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  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 2018. These leases are for office and radio tower facilities and are classified as operating leases. For leases that contain predetermined, fixed escalations of the minimum rentals, we recognize the rent expense on a straight-line basis and record the difference between the rent expense and the rental amount payable in liabilities.
 
 Leasehold improvements made at the inception of the lease are amortized over the shorter of the asset life or the initial lease term as described above. Leasehold improvements made during the lease term are also amortized over the shorter of the asset life or the remaining lease term.
 
 On December 15, 2006, the Company entered into an agreement with Southwest Enhanced Network Services, LP, a wireless broadband company, to assume multiple tower and office leases in the greater Lubbock, Texas area. As part of the agreement the Company received $825,000 in cash to offset certain of the future operating lease costs. The $825,000 is recorded as a deferred leased liability and recognized as a reduction to rent expense on a straight-line basis over the lease term as described above. At the end of December 2010 and 2009, this deferred lease liability balance was $150,000 and $313,000, respectively.
 
 Assets Held under Capital Leases
 
 Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease.
 
 Allowance for Doubtful Accounts
 
 The Company uses the allowance method to account for uncollectible accounts receivable. The Company's estimate is based on historical collection experience and a review of the current status of accounts receivable. The company reviews its accounts receivable balances by customer for accounts greater than 90 days old and makes a determination regarding the collectibility of the accounts based on specific circumstances and the payment history that exists with such customers. The company also takes into account its prior experience, the customer's ability to pay and an assessment of the current economic conditions in determining the net realizable value of its receivables. The company also reviews its allowances for doubtful accounts in aggregate for adequacy following this assessment. Accordingly, the company believes that its allowances for doubtful accounts fairly represent the underlying collectibility risks associated with its accounts receivable.
 
 Deferred Revenues
 
 Revenues that are billed in advance of services being completed are deferred until the conclusion of the period of the service for which the advance billing relates. Deferred revenues are included on the balance sheet in current and long-term liabilities until the service is performed and then recognized in the period in which the service is completed. The Company's deferred revenues consist of billings in advance for services being rendered for its wireless broadband and, accordingly, are deferred and recognized monthly as earned. The Company had deferred revenues in current liabilities of approximately $350,000 and $422,000 as of December 31, 2010, and December 31, 2009, respectively.
 
 Advertising Costs
 
 Advertising costs are expensed when incurred. For the periods ended December 31, 2010 and 2009, the Company expensed $65,000 and $118,000, respectively.
 
 Stock-Based Compensation
 
 Stock based compensation expense is recorded in accordance with FASB ASC Topic 718 formerly SFAS 123R (Revised 2004), Share-Based Payment , for stock and stock options awarded in return for services rendered. The expense is measured at the grant-date fair value of the award and recognized as compensation expense on a straight-line basis over the service period, which is the vesting period. The Company estimates forfeitures that it expects will occur and records expense based upon the number of awards expected to vest.
 37
  ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Derivative Instruments
 
 In connection with the sale of debt or equity instruments, the Company may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as embedded derivative features which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.
 
 The Company's derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. For options, warrants and bifurcated embedded derivative features that are accounted for as derivative instrument liabilities, the Company estimates fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option. Because of the limited trading history for our common stock, the Company estimates the future volatility of its common stock price based on not only the history of its stock price but also the experience of other entities considered comparable to the Company.
 
 Inventories
 
 Inventories are valued at the lower of cost or market. The cost is determined by using the average cost method. Inventories consist of the following items as of December 31, 2010 and 2009 in thousands:
 
 December 31,


December 31,2010


2009Raw material

$
48


$
63Finished goods


207



159$
255


$
222
  The Company has pledged all the inventory of WBS of $178,000 and $159,000 as collateral against outstanding notes and capital leases as of December 31, 2010 and December 31, 2009, respectively.
 
 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 businesses acquired over the fair value of their net assets at the dates of acquisition. Under current accounting pronouncements, 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.
 
 
 38
  ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 Long-Lived Assets
 
 We review our long-lived assets, which include intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying amount of such long-lived asset or group of long-lived assets (collectively referred to as "the asset") may not be recoverable. Such circumstances include, but are not limited to:
  ·
a significant decrease in the market price of the asset;
  ·
a significant change in the extent or manner in which the asset is being used;
  ·
a significant change in the business climate that could affect the value of the asset;
  ·
a current period loss combined with projection of continuing loss associated with use of the asset;
  ·
a current expectation that, more likely than not, the asset will be sold or otherwise disposed of before the end of its previously estimated useful life.
 
 We continually evaluate whether such events and circumstances have occurred. When such events or circumstances exist, the recoverability of the asset's carrying value shall be determined by estimating the undiscounted future cash flows (cash inflows less associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset. To date, no such impairment has occurred. To the extent such events or circumstances occur that could affect the recoverability of our long-lived assets, we may incur charges for impairment in the future.
 
 Revenue Recognition
 
 The Company's revenue is generated primarily from the sale of wireless communications products and services on a nationwide basis, including providing enterprise-class wireless broadband services. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable.
 
 The Company records revenues from its fixed-price, long-term contracts using the percentage-of-completion method. Revenues are recorded based on construction costs incurred to date as a percentage of estimated total cost at completion. The percentage-of-completion, determined by using total costs incurred to date as a percentage of estimated total costs at completion, reflects the actual physical completion of the project. If the current projected costs on a fixed fee contract exceed projected revenue, the entire amount of the loss is recognized in the period such loss is identified.
 
 The Company recognizes product sales generally at the time the product is shipped. Concurrent with the recognition of revenue, the Company provides for the estimated cost of product warranties and reduces revenue for estimated product returns. Sales incentives are generally classified as a reduction of revenue and are recognized at the later of when revenue is recognized or when the incentive is offered. Shipping and handling costs are included in cost of goods sold.
 
 Service revenue is principally derived from wireless broadband services, including internet, voice, and data and monitoring service. Subscriber fees are recorded as revenues in the period during which the service is provided.
 
 Warranty
 
 The Company's suppliers generally warrant the products distributed by the Company and allow returns of defective products, including those that have been returned to the Company by its customers. The Company does not independently warrant the products that it distributes, but it does provide warranty services on behalf of the supplier.
 
 Income Taxes
 
 Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
  39
 ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Fair Value of Financial Instruments
 
 The Company's financial instruments consist of cash and cash equivalents, inventory, accounts receivable and debt. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.
 
 Beneficial Conversion
 
 Equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible equity instruments. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value of the underlying common stock less the proceeds that have been received for the equity instrument limited to the value received. The beneficial conversion amount is recorded as a deemed dividend or interest expense and an increase to additional paid-in-capital.
 
 Basic and Diluted Loss per Share
 
 The Company is required to provide basic and dilutive earnings (loss) per common share information.
 
 The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding.
 
 Diluted net loss per common share is computed by dividing the net loss, adjusted on an "as if converted" basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the periods ended December 31, 2010, and December 31, 2009, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of fully diluted net loss per common share.
 
 Recent Accounting Pronouncements
 
 Management does not anticipate that the recently issued but not yet effective accounting pronouncements will materially impact the Company’s financial condition.
 
 NOTE 2 - ACCOUNTS RECEIVABLE
 
 Accounts Receivable consists of the following (in thousands):
 
 December 31,


December 31,2010


2009Accounts receivable

$
508


$
614Allowance for doubtful accounts


(116
)


(129
)Accounts receivable, net

$
392


$
485
 
 The Company has pledged $233,000 of 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 31,2010


2009Automobiles

$
326


$
297Operating equipment


8,342



7,526Office furniture and equipment


253



243Leasehold improvements


67



71Computer equipment


376



358Building


29



29Land


37



37Construction in progress


571



786Total property and equipment


10,001



9,347Less accumulated depreciation


(5,987
)


(3,712
)Net property and equipment

$
4,014


$
5,635
  40
  ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Depreciation expense was $2,370,000 and $2,063,000 for the twelve months ended December 31, 2010 and 2009, respectively.
 
 Operating equipment under construction in progress is primarily due to the build out of our wide area network of WiNet constructed by our subsidiary ENS.
 
 The Company has pledged substantially all the operating equipment and some furniture and vehicles as collateral against outstanding notes and capital leases.
 
 NOTE 4 - GOODWILL
 
 At December 31, 2010 and 2009, goodwill totaled $1,255,000 for both years respectively. The goodwill is attributable to the following acquisitions:
  ·
On June 1, 2009, the Company acquired assets from Frontier Internet, LLC and iTEXAS Net and recognized goodwill of $819,000, which is not subject to amortization.
  ·
On January 11, 2008, the Company acquired assets from Crosswind, Inc. and recognized goodwill of $176,000, which is not subject to amortization.
  ·
On November 30, 2007, the Company acquired assets from TStar, Inc. and recognized goodwill of $35,000, which is not subject to amortization.
  ·
On October 31, 2007, the Company acquired assets from Momentum, Inc. and recognized goodwill of $225,000, which is not subject to amortization.
 
 NOTE 5 - INTANGIBLE ASSETS, NET
 
 Intangible assets consist of the following (in thousands):
 
 December 31, 2010Useful Life

(in years)


Gross

Carrying

Amount


Accumulated

Amortization


Net

Carrying

AmountCustomer relationships


3.0


$
2,311


$
2,177



134Workforce in place


3.0



125



125



-Non-compete agreement


3.0



100



100



-Developed technology


3.0



20



20



-$
2,556


$
2,422


$
134December 31, 2009Useful Life

(in years)


Gross

Carrying

Amount


Accumulated

Amortization


Net

Carrying

AmountCustomer relationships


3.0


$
2,311


$
1,610


$
701Workforce in place


3.0



125



125



-Non-compete agreement


3.0



100



100



-Developed technology


3.0



20



20



-$
2,556


$
1,855


$
701
 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 are 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.
   41
 ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 On June 1, 2009, the Company acquired from Frontier Internet, LLC and iTEXAS Net, a customer list which was valued at $283,000 and is being amortized over three years.
 
 Total amortization of intangibles was $568,000 and $641,000 for the twelve months ended December 31, 2010 and 2009, respectively. The estimated amortization expense for the remaining years will be $94,000 for 2011 and $40,000 in 2012.
 
 NOTE 6 - DEBT CONVERSION
 
 (a) LINE OF CREDIT
 
 For the twelve months ended December 31, 2010, the Company has had several debt settlements of the unsecured revolving credit facility. See Note 12 for additional information on this facility.  The unsecured revolving credit facility provides financing for working capital requirements.  During the twelve months ended December 31, 2010 the Company issued 6,140,121 shares of its Series A Preferred Stock for the settlement of $1,982,688 of debt and $421,238 in accrued interest for a total amount of $2,403,926. The Company issued Preferred A Stock at an average price of $.3915 per share or $.0210 per share of common of the ERFW common stock the day the debt is settled and converted to Preferred A Stock.
 
 Also during twelve months ended December 31, 2010, the Company issued 59,567,775 shares of its Common Stock for the settlement of $1,266,861 of debt and $285,926 in accrued interest for a total amount of $1,552,787. The Company issued Common Stock at an average price of $.0261 per share of the ERFW common stock the day the debt was settled.
 
 As additional consideration for the settlement the Company agreed to amend the Series A convertible preferred stock designation to increase the voting rights of each preferred share from 50 votes to 100 votes on all matters in which the common stock holders and preferred stock holders vote together. Under current accounting standards ASC 470-50-40-2 the extinguishment of related party debt for equity securities is considered a capital transaction and, accordingly, no gain or loss on the extinguishment is recognized in the statement of operations. If this was not a related party transaction a gain of $66,671 would have been recognized for the twelve months ended December 31, 2010.
 
 The Company during the fourth quarter 2009 signed a debt conversion agreement to convert a portion of the unsecured revolving credit facility which provides financing for working capital requirements. The Company issued 500,000 shares of its Series A Preferred Stock for the conversion of $352,838 of debt and $1,147,162 in accrued interest for a total amount of $1,500,000. The Company issued one share of Series A Convertible Preferred Stock for every Three Dollars ($3.00) in claims converted.
 
 As additional consideration for the conversion, when the number of shares of outstanding common stock equals or exceeds 120 million shares, the Company agreed to amend the Series A convertible preferred stock designation to increase the voting rights of each preferred share from 20 votes to 50 votes on all matters in which the common stock holders and preferred stock holders vote together. The fair market value of the Series A stock was valued at $1,325,000 on the date of issuance, which was exchanged for $1,500,000 in debt and interest. Under current accounting standards ASC 470-50-40-2 the extinguishment of related party debt for equity securities is considered a capital transaction and, accordingly, no gain or loss on the extinguishment is recognized in the statement of operations. If this was not a related party transaction a gain of $175,000 would have been recognized in the fourth quarter and twelve months ended December 31, 2009.
 
 (b) OTHER DEBT
 
 During the twelve months ended December 31, 2010 the Company issued 58,908,430 shares of its Common Stock for the settlement of $1,764,000 of debt and $255,129 in accrued interest for a total amount of $2,019,129. The Company issued Common Stock at an average price of $.0343 per share of the ERFW common stock the day the debt was settled.
 
 During the twelve months ended December 31, 2009 the Company issued 1,958,182 shares of its Common Stock for the settlement of $475,465 of debt and $100,786 in accrued interest for a total amount of $576,251. The Company issued Common Stock at an average price of $.02948 per share of the ERFW common stock the day the debt was settled.
 
 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 1,000,000,000, of which 25,000,000 shall be shares of preferred stock with a par value of $.001 per share ("Preferred Stock"), and 975,000,000 shall be shares of common stock with a par value of $.001 per share ("Common Stock").  See Note 18-Subsequent Events.
  42
  ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 Common Stock
 
 As of December 31, 2010, there were 392,402,346 shares of its $.001 par value common stock issued and outstanding.
 
 During the twelve months ended December 31, 2010, the Company issued 151,907,000 shares of common stock which was valued at the closing market price on the date of issuance of such shares, which were issued in lieu of cash as payment for the following (in thousands):
 
 December 31, 2010

Supplemental Non-Cash DisclosureProfessional fees

$
620Settlements


329Services and compensation


651Interest expense


255Other services rendered


112Total for services, interest, and compensation

$
1,967Notes payable

$
1,764Line of credit and interest

$
1,553
 
 During the twelve months ended December 31, 2010, we issued to various accredited investors an aggregate of 9,555,000 shares of restricted common stock for cash consideration of $432,000. We relied on Section 4(2) of the Securities Act in effecting this transaction.
 
 As of December 31, 2009, there were 145,575,735 shares of its $.001 par value common stock issued and outstanding.
 
 During the twelve months ended December 31, 2009, the Company issued 9,705,000 shares of common stock which was valued at the closing market price on the date of issuance of such shares, which were issued in lieu of cash as payment for the following (in thousands):
  December 31, 2009

Supplemental Non-Cash DisclosureProfessional fees

$
1,292Settlements


36Services and compensation


804Interest expense


101Other services rendered


227Total for services, interest, and compensation

$
2,457Notes payable

$
475
  During the twelve months ended December 31, 2009, the Company issued 3,273,000 shares of common stock in lieu of cash for asset acquisitions of $884,000.  The value of the 3,273,000 common shares was based on the average market price of the Company’s common shares over the 2-day period before and after the terms of the acquisition were agreed to and announced.
  During the twelve months ended December 31, 2009, we issued to various accredited investors an aggregate of 1,918,000 shares of restricted common stock for net consideration of $334,000. We relied on Section 4(2) of the Securities Act in effecting this transaction.
 
 Preferred Stock
 
 The Company has 25,000,000 shares of Preferred Stock of which 5,000,000 shares had been designated as Series A Preferred Stock. 4,612,583 and 3,043,580 Series A preferred shares were issued and outstanding at December 31, 2010 and 2009, respectively. With respect to the Series A Preferred Stock outstanding at December 31, 2010, the Company would be required to issue 86,146,201 shares of its common stock upon conversion. During the twelve months ended December 31, 2010, 4,571,119 Series A Preferred Stock was converted into net amount of 85,364,715 shares of common stock.
 
 Each share of Series A Preferred Stock is convertible at holder's option for 18.676347 shares common stock. The holder of Series A Preferred Stock is required to give a 65-day notice of conversion to the Company.  The holders of the Series A Preferred Stock are entitled to receive out of funds of the Company legally available therefore, dividends at the same rate as dividends are paid with respect to outstanding shares of common stock.
  43
 ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Holders of shares of the Series A Preferred Stock are entitled to vote, together with the holders of our common stock, on all matters submitted to a vote of the Company’s stockholders. Each share of Series A Preferred Stock entitles the holder thereof to 100 votes on all matters submitted to a vote of the Company’s stockholders.
 
 Holders of the Series A Preferred Stock are also entitled to elect one director at any meeting of the Company’s stockholder at which such directors are to be elected.  The right of the holders of the Series A Preferred Stock to elect such additional director shall cease when all outstanding shares of Series A Preferred Stock have been converted or are no longer outstanding.  The shares of the Series A Preferred Stock are not redeemable by the Company.
 
 In the event of any liquidation, the holders of shares of the Series A Preferred Stock are entitled to receive out of the assets of the Company available for distribution to the Company’s stockholders, before any distribution of assets is made to holders of any other class of capital stock of the Company, an amount equal to the purchase price per share, plus accumulated and unpaid dividends thereon to the date fixed for distribution.
 
 Warrants
  The Company had warrants outstanding to third parties to purchase 1,933,297 shares of common stock as of December 31, 2010.
  During 2009, the Company issued promissory notes for $1,390,000 to accredited investors and issued warrants to purchase 1,558,297 shares of common stock at $.45 per share, which expires three years from issuance.
  During 2010, the Company issued Weed & Co., LLP $.25 and $.08 warrants convertible into 250,000 and 125,000 shares of common stock, respectively, as part of payment of services valued at approximately $27,000. Furthermore Weed & Co., LLP would be granted additional warrants every six months following the date of the initial agreement and as long as the agreement continues to remain in effect. ERFW shall grant Weed & Co., LLP a warrant to purchase 125,000 shares of ERFW common stock at a price equal to 125% of the average closing bid price for the 10 days immediately prior to the date of grant. All warrants will expire five years from date of grant.
 
 The following table summarizes warrants that are issued, outstanding and exercisable:
 
 Warrants OutstandingWeighted Average Exercise Price

Expiration Date

December 31,

2009


Issued


Exercised


Expired


December 31,

2010$
3.57

Sept10 thru Nove-10


389,999



-



-



389,999



-$
5.00

Oct-09 thru Dec-10


4,889,248



-



-



4,889,248



-$
0.45

Mar-12


1,558,297



-



-



-



1,558,297$
0.25

Feb-15


-



250,000



-



-



250,000$
0.08

Jul-15


-



125,000



-



-



125,0006,837,544



375,000



-



5,279,247



1,933,297
 
 The lattice methodology was used to value the warrants issued to Weed & Co., LLP with the following assumptions.
 
 Weed WarrantsAssumptions

2/18/2010

8/19/2010Dividend yield


0.00
%


0.00
%Risk-free rate for term


2.46
%


1.41
%Volatility


82
%


119
%Maturity date

5 years

5 years
 
 NOTE 8 – STOCK PLAN AND EMPLOYEE STOCK OPTIONS
  In June 2010, the Board of directors adopted a Non-Qualified Stock Option Plan whereby 25,000,000 shares were reserved for issuance. As of December 31, 2010, under the 2010 Non-Qualified Stock Option Plan, there were 20,625,591 shares issued to certain employees and consultants for services rendered.
  44
 ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Stock Plan activity was as follows for the twelve months ended December 31, 2010 and 2009, respectively:
  2010

PlanShares initially reserved


25,000,000Remaining shares January 1, 2010


-Shares issued during 2010


20,625,591Remaining shares available to be issued at December 31, 2010


4,374,409Shares issued and outstanding as of December 31, 2010


20,625,591
 
 In April 2008, the Board of Directors adopted a Non-Qualified Stock Option Plan whereby 15,000,000 shares were reserved for issuance. As of December 31, 2009, under the 2008 Non-Qualified Stock Option Plan, there were 9,004,622 shares issued to certain employees and consultants for services rendered. The remaining shares of 5,995,378 of the 2008 Non-Qualified Stock Option Plan were issued during the twelve months ended December 31, 2010.
  2008

PlanShares Initially Reserved


15,000,000Remaining shares January 01, 2010


5,995,378Shares issued during 2010


5,995,378Remaining shares available to be issued at December 31, 2010


-Shares issued and outstanding as of December 31, 2010


15,000,000
  The Company has granted to certain officers and employees 200,000 and 125,000 stock options which are currently exercisable. Option activity was as follows for the twelve months ended December 31, 2010 and 2009, respectively:
  Shares


Weighted-Average

Exercise PriceOutstanding at beginning of year


125,000


$
0.43Granted


200,000



0.17Exercised


-



-Forfeited/cancelled


-



-Outstanding at the end of period


325,000


$
0.27Exercisable at December 31, 2010


325,000


$
0.27Shares


Weighted-Average

Exercise PriceOutstanding at beginning of year


500,000


$
0.57Granted


-



-Exercised


-



-Forfeited/cancelled


(375,000
)


0.61Outstanding throughout the period


125,000


$
0.43Exercisable at December 31, 2009


125,000


$
0.43
   45
  ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 The weighted average fair value of the individual options granted during the twelve months ended December 31, 2010 and 2009, is estimated at $.06 and $.13 on the date of grant, respectively. The fair values were determined using a Lattice option-pricing model with the following assumptions at the date of grant:
  3/31/2010Assumptions

OptionsDividend yield


0.00
%Risk-free rate for term


0.20
%Volatility


57.00
%Expected Term


5.00
  Information about options outstanding was as follows at December 31, 2010:
  Exercise Price


Number

Outstanding


Remaining

Average Contractual

Life in Years


Number

Exercisable


Weighted Average

Exercise

Price$
0.17



200,000



4.25



200,000


$
0.17$
0.43



125,000



2.58



125,000


$
0.43325,000



3.42



325,000


$
0.27
 
 NOTE 9 - INCOME TAXES
 
 The Company adopted the provisions of ASC Topic 740, “Income Taxes." Implementation of ASC Topic 740 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, 2010


December 31, 2009U. S. Federal statutory tax rate
%
34


%
34U.S. valuation difference

(34)



(34)Effective U. S. 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, 2010


December 31, 2009Computed expected tax benefit

$
(2,894
)

$
(3,016
)Increase in valuation allowance


2,894



3,016Income 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, 2010, and December 31, 2009, are presented below (in thousands):
 
 December 31, 2010


December 31, 2009Deferred tax assets:Net operating loss carry forwards

$
(15,504
)

$
(12,610
)Less valuation allowance


15,504



12,610Net deferred tax assets

$
-


$
-
 The Company has determined that a valuation allowance of $15,504,000 at December 31, 2010, 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 2010 was approximately $2,894,000. As of December 31, 2010, the Company has a net operating loss carry-forward of $43,468,000, which is available to offset future federal taxable income, if any, with expiration beginning 2012 and ending 2030.
  46
 ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 10 - 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, 2010Income


Shares


Per-Share(Numerator)


(Denominator)

AmountBasic EPS:Loss available to common stockholders

$
(8,511
)


231,266


$
(0.04
)Effect of dilutive securities


-



-



-Diluted EPS:Loss available to common stockholders and assumed conversions

$
(8,511
)


231,266


$
(0.04
)For the twelve months ended December 31, 2009Income


Shares


Per-Share(Numerator)


(Denominator)

AmountBasic EPS:Loss available to common stockholders

$
(8,872
)


123,292


$
(0.07
)Effect of dilutive securities


-



-



-Diluted EPS:Loss available to common stockholders

$
(8,872
)


123,292


$
(0.07
)
 
 Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity, such as convertible preferred stock, stock options, warrants or convertible securities.
  The calculation of diluted earnings per share for the twelve months ended December 31, 2010 does not include 325,000 shares of common stock assuming all employee stock options were exercised; 1,933,297 shares of common stock assuming all warrants were exercised; 86,146,202 shares of common stock assuming all Series A Preferred Stock were converted due to their anti-dilutive effect.
 
 NOTE 11 - MAJOR CUSTOMERS
 
 The Company had gross sales of approximately $5,915,000 and $5,533,000 for the twelve months ended December 31, 2010 and 2009, respectively. The Company had one customer that represented 12% of gross sales for the twelve months ended December 31, 2010. The Company did not have any customer that represented 10% of the gross sales in the twelve months ended December 31, 2009.
   47
 
 ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 12 - NOTES PAYABLE, LONG-TERM DEBT, LINE OF CREDIT AND CAPITAL LEASES
 
 Notes payable, long-term debts and capital leases consist of the following as of December 31, 2010 (in thousand s):
 
 Terms

Maturity Date

Interest Rate


BalanceBancleasing, Inc.
$10,660 / Month including interest

October-14


11.62
%

$
414Agility Capital Lease
$54,246 / Month including interest

Various


18.82
%


372De Lage Landen Lease
$691 / Month including interest

April-11


19.12
%


3Centramedia
$56,342 / Quarterly including interest

December-11


7.50
%


215Frontier Internet LLC
$33,846 / Quarterly including interest

May-12


6.00
%


193Ronnie D Franklin
$6,054 / Quarterly including interest

May-12


6.00
%


34Bridge Financing
1 year

Demand


10.00
%


225Premium Assignment, Insurance notes
$2,434 / Month including interest

September-11


7.54
%


9Line of credit
2 years/ Quarterly interest (See below)

December-13


12.00
%


5,225Total debt









6,690Less current maturities









(1,044
)Long-term debt








$
5,646
  The gross maturities of these debts are $1,044,000, $185,000, $5,331,000, and $130,000 for the years ended December 31, 2011, 2012, 2013, and 2014, respectively.
 
 Notes payable, long-term debts and capital leases consist of the following as of December 31, 2009 (in thousand s):
 
 Terms

Maturity Date

Interest Rate


Gross Balance


Debt Discount


Net BalanceBancleasing, Inc.
$10,660 / Month including interest

October-14


11.62
%

$
489


$
-


$
489Agility Capital Lease
$86,968 / Month including interest

Various


18.82
%


1,143



-



1,143Balboa Lease
$225 / Month including interest

August-10


27.74
%


1



-



1De Lage Landen Lease
$691 / Month including interest

April-11


19.12
%


10



-



10Toyota
$517 / Month including interest

December-10


8.01
%


5



-



5Blanco National Bank
$3,913 / Month including interest

August-10


9.50
%


23



-



23Robert McClung, Momentum
$23,476 / Quarterly including interest

October-10


7.50
%


89



-



89George Kemper, TSTAR
$38,254 / Quarterly including interest

April-10


7.50
%


79



-



79Shane Griffths, Crosswind
$13,911 / Quarterly including interest

December-10


7.50
%


55



-



55Centramedia
$56,342 / Quarterly including interest

December-11


7.50
%


414



-



414Frontier Internet LLC
$33,846 / Quarterly including interest

May-12


6.00
%


312



-



312Ronnie D Franklin
$6,054 / Quarterly including interest

May-12


6.00
%


56



-



56Premium Assignment, Insurance notes
$2,434 / Month including interest

September-10


7.54
%


17



-



17Convertible Subordinated Financing
1 year

Demand


10.00
%


1,390



117



1,273Line of credit
2 years/ Quarterly interest (See below)

December-11


12.00
%


5,449



-



5,449Total debt








$
9,532


$
117



9,415Less current maturities

















(2,735
)Add back debt discount current maturities

















117Long-term debt
















$
6,797
 
 Investor Notes
 
 The following table summarizes the convertible debt activity for the period December 31, 2009, to December 31, 2010:
 
 Description

Investor Notes


Warrant Liabilities


Compound Derivative


TotalFair value at December 31, 2009

$
-


$
1


$
-


$
101-01-10 to 03-31-10 change in fair value


-



(1
)


-



(1
)Fair value at December 31, 2010

$
-


$
-


$
-


$
-
 
 For the year ended December 31, 2010 and 2009, net derivative income was $0 and $28,000, respectively.
   48
 ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 A Black-Scholes methodology was used to value the warrants, with the following assumptions.
 
 WarrantsAssumptions

3/31/2010Dividend yield


0.00
%Risk-free rate for term


0.24
%Volatility


120.00
%Maturity date

.44 yearsWarrantsAssumptions

3/31/2009


6/30/2009


9/30/2009


12/31/2009Dividend yield


0.00
%


0.00
%


0.00
%


0.00
%Risk-free rate for term


0.81
%


0.56
%


0.40
%


0.20
%Volatility


140.00
%


140.00
%


140.00
%


130.00
%Maturity date

1.43 years


1.19 years


0.93 years


0.68 years
 
 Line of Credit
  During June 2010, the Company increased its unsecured revolving credit facility with Angus Capital Partners, a related party, from $10.5 million to $12.0 million maturing December 31, 2013. The terms of the unsecured revolving credit facility allow the Company to draw upon the facility as financing requirements dictate and provide for quarterly interest payments at a 12% rate per annum. The payment of principal and interest may be paid in cash, common shares or preferred shares at the Company’s election. At December 31, 2010, the outstanding balance on the line of credit totaled $5,225,000 with a remaining line of credit availability of $6,775,000.
 
 For the twelve months ended December 31, 2010, the Company has had several debt settlements of the unsecured revolving credit facility. The unsecured revolving credit facility provides financing for working capital requirements.  During the twelve months ended December 31, 2010 the Company issued 6,140,121 shares of its Series A Preferred Stock for the settlement of $1,982,688 of debt and $421,238 in accrued interest for a total amount of $2,403,926. The Company issued Preferred A Stock at an average price of $.3915 per share or $.0210 per share of common of the ERFW common stock the day the debt is settled and converted to Preferred A Stock.
 
 Also during twelve months ended December 31, 2010, the Company issued 59,567,775 shares of its Common Stock for the settlement of $1,266,861 of debt and $285,926 in accrued interest for a total amount of $1,552,787. The Company issued Common Stock at an average price of $.0261 per share of the ERFW common stock the day the debt was settled.
 
 As additional consideration for the settlement the Company agreed to amend the Series A convertible preferred stock designation to increase the voting rights of each preferred share from 50 votes to 100 votes on all matters in which the common stock holders and preferred stock holders vote together. Under current accounting standards ASC 470-50-40-2 the extinguishment of related party debt for equity securities is considered a capital transaction and, accordingly, no gain or loss on the extinguishment is recognized in the statement of operations. If this was not a related party transaction a gain of $66,671 would have been recognized for the twelve months ended December 31, 2010. Certain family related trusts are participants in the Angus Capital revolving credit facility. H. Dean Cubley holds the investment and voting power over certain of these family related trusts while Scott Cubley and Brian Cubley, the sons of H. Dean Cubley, have the investment and voting power over other of the remaining family trusts.
 
 E-Series Bond Investor Note
  The Company issued to certain accredited investors a principal amount of $1,200,000 of E-series bonds (the "Bonds") between May 2006 and June 2009, as of December 31, 2009 all remaining principal and interest has been converted to common stock. For every Bond converted the Company will issue a warrant to purchase one additional share of common stock at a price of $5.00 for every share of common stock that has been received from the conversion of the Bond principal.
  The Bonds were determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature and the redemption option (compound embedded derivative liability). At the date of issuance the Bond, compound embedded derivative liabilities were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. These derivative liabilities will be marked-to-market each quarter with the change in fair value recorded in the income statement. The Company uses the effective interest method to record interest expense and related debt accretion which was $41,793 for the twelve months ended December 31, 2009.
   49
 
 ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  The following table summarizes the convertible debt activity during the period December 31, 2009:
 
 Description

E-Series

Bonds


Compound

Derivative

Liability


TotalFair value at December 31, 2008

$
165


$
49


$
214Fair value issuance at inception


118



-



11801-01-09 to 03-31-09 change in fair value


36



(1
)


3504-01-09 to 06-30-09 change in fair value


5



(41
)


(36
)07-01-09 to 09-30-09 change in fair value


-



-



-10-01-09 to 12-31-09 change in fair value


1



(7
)


(6
)Conversions during 2009


(325
)


-



(325
)Fair value at December 31, 2009

$
-


$
-


$
-
 
 For the year ended December 31, 2009, net derivative income was $42,000.
 
 A Black-Scholes methodology was used to value the warrants, with the following assumptions.
 
 WarrantsAssumptions

3/31/2009


6/30/2009


9/30/2009


12/31/2009Dividend yield


0.00
%


0.00
%


0.00
%


0.00
%Risk-free rate for term


0.81
%


0.56
%


0.40
%


0.20
%Volatility


140.00
%


140.00
%


140.00
%


130.00
%Maturity date average

1.39 years


1.14 years


.89 years


.67 years
 
 BRIDGE FINANCING
 
 During 2009, the Company borrowed $1,390,000 from certain accredited investors. These notes are unsecured, bear interest at 10% and are due within one year. In connection with the issuance of the promissory notes the investors will be issued common stock purchase warrants to purchase up to 1,558,297 shares of common stock that are exercisable at $.45, which expire three years from issuance and  is subject to reset provisions. The balance of these notes at December 31, 2010, is $225,000which has been repaid subsequent to December 31, 2010.
 Based on the guidance in ASC 815-10 and ASC 815-40-15, the Company concluded the warrants are required to be accounted for as derivatives as of the issue date due to a reset feature on the exercise price. At the date of issuance the convertible subordinated financing, warrant derivative liabilities were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The Company records the fair value of these derivatives on its balance sheet at fair value with changes in the values of these derivatives reflected in the consolidated statements of operations as “Gain (loss) on derivative liabilities.” These derivative instruments are not designated as hedging instruments under ASC 815-10 and are disclosed on the balance sheet under Derivative Liabilities.
 
 The Company uses the effective interest method to record interest expense and related debt accretion which was $117,000 and $186,000 for the twelve months ended December 31, 2010, and December 31, 2009, respectively.
  The following table summarizes the convertible debt activity for the period December 31, 2009 to December 31, 2010 (in thousands):
  Description

Bridge Note


Warrant Liabilities


TotalFair value at December 31, 2009

$
1,273


$
268


$
1,54101-01-10 to 03-31-10 change in fair value


77



(134
)


(57
)04-01-10 to 06-30-10 change in fair value


23



(85
)


(62
)07-01-10 to 09-30-10 change in fair value


17



(7
)


1010-01-10 to 12-31-10 change in fair value


-



(29
)


(29
)Conversions during period


(1,165
)


-



(1,165
)Fair value at December 31, 2010

$
225


$
13


$
238
 
 For the year to date ended December 31, 2010 and 2009, net derivative income was $255,000 and $35,000, respectively.
   50
 
 ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  The lattice methodology was used to value the warrants issued in the bridge financing, with the following assumptions.
 
 WarrantsAssumptions

3/31/2010


6/30/2010


9/30/2010


12/31/2010Dividend yield


0.00%



0.00%



0.00%



0.00%Risk-free rate for term


0.24%



0.22%



0.19%



0.20%Volatility


120.00%



103.00%



101.00%



130.00%Maturity date

2.43 years


2.18 years


1.93 years


1.68 yearsWarrantsAssumptions

3/31/2009


6/30/2009


9/30/2009


12/31/2009Dividend yield


0.00%



0.00%



0.00%



0.00%Risk-free rate for term


0.81%



0.56%



0.40%



0.20%Volatility


140.00%



140.00%



140.00%



130.00%Maturity date

2.97 years


2.75 years


2.58 years


2.33 years
  CONVERTIBLE NOTE
 
 In March 2010, the Company borrowed from certain accredited investors $605,000 for working capital and debt retirement purposes. During the twelve months ended December 31, 2010, the Company repaid the remaining principal and interest in full. These notes were unsecured, bear interest at 10% and were convertible into common stock within one year of the signed notes.
 
 At the Company's discretion principal and interest were to be repaid in cash or in shares of our common stock, which shares were valued at the 75% of the average of the three (3) lowest daily volume weighted average prices (VWAPs) during the twenty (20) trading days immediately preceding the applicable conversion date on which the holder elects to convert all or part of the note.
  These convertible notes were determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature, the redemption option, forced conversion and full reset feature (compound embedded derivative liability). At the date of issuance the convertible note, 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 $45,000 for the twelve months ended December 31, 2010, the remaining estimated debt accretion of $97,000 was recorded to loss on extinguishment of debt, which was netted against the remaining compound derivative liability of $34,000 when the note was repaid in full. The net loss on extinguishment of debt is $63,000.
  The following table summarizes the convertible debt activity for the period March 19, 2010, to December 31, 2010 (in thousands):
 
 Description

Convertible

Note


Compound

Derivative

Liability


TotalFair value issuance at inception

$
355


$
250


$
60503-19-10 to 03-31-10 change in fair value


33



(62
)


(29
)04-01-10 to 06-30-10 change in fair value


120



(154
)


(34
)07-01-10 to 09-30-10 change in fair value


97



(34
)


63Conversions during period


(605
)


-



(605
)Fair value at December 31, 2010

$
-


$
-


$
-
  For the twelve months ended December 31, 2010, net derivative income was $108,000.
 
 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. During the twelve months ended December 31, 2010 all remaining principal and interest has been repaid in full.
  51
 
 ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 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 is secured by all of the capital stock issued and outstanding of a subsidiary of the Company, payable in twelve quarterly payments of $23,476 including interest. During the twelve months ended December 31, 2010 all remaining principal and interest has been repaid in full.
 
 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 is secured by the equipment acquired, payable in ten quarterly payments of $38,254 including interest. During the twelve months ended December 31, 2010 all remaining principal and interest has been repaid in full.
 
 Shane Griffiths, Crosswind, Inc.
 
 On January 11, 2008, the Company issued a note to Crosswind, Inc., totaling $150,000 bearing interest at 7.5% and is secured by the equipment acquired, payable in twelve quarterly payments of $13,911 including interest. During the twelve months ended December 31, 2010 all remaining principal and interest has been repaid in full.
 
 Centramedia, Inc.
 
 On December 31, 2008, the Company issued a note to Centramedia, Inc., totaling $600,000 bearing interest at 7.5% and is secured by the equipment acquired, payable in twelve quarterly payments of $56,342 including interest.
  Frontier Internet, LLC.
 
 On June 1, 2009, the Company issued a note to Frontier Internet LLC., totaling $369,000 bearing interest at 6.0% and is secured by the equipment acquired, payable in twelve quarterly payments of $33,846 including interest. Subsequent to December 31, 2010 the remaining notes of principal and interest were repaid in full.
  Ronnie D. Franklin
 
 On June 1, 2009, the Company issued a note to Ronnie D. Franklin., totaling $66,000 bearing interest at 6.0% and is secured by the equipment acquired, payable in twelve quarterly payments of $6,054 including interest. Subsequent to December 31, 2010 the remaining notes of principal and interest were repaid in full.
 
 Capital Leases
 
 Agility Lease Fund, LLC Included in property and equipment at December 31, 2010, is $329,913 capitalized equipment, net of amortization. The equipment and one of the Company's bank accounts are the primary collateral securing the financing along with a guarantee by the Company.
 
 Banc Leasing Inc.included in property and equipment at December 31 2010, is $483,629 capitalized equipment, net of amortization. The equipment is the primary collateral securing the financing.
   52




ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 
 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, 2010 (in thousands):
  Year Ending  December 31,2011

$
5242012


1412013


1282014


1282015


10Total minimum lease payments


931Less amount representing interest


(142
)Present value of net minimum lease payments


789Current maturities of capital lease obligations


(446
)Long-term portion of capital lease obligations

$
343
  
 NOTE 13 - UNCOMPLETED CONTRACTS
 
 Costs, estimated earnings and billings on uncompleted contracts for the twelve months ended December 31, 2010 and December 31, 2009 are summarized as follows (in thousands):
  December 31,

December 31,2010


2009Costs incurred on uncompleted contracts

$
-


$
9Estimated profit


-



8Gross revenue


-



17Less: billings to date


-



-Costs and profit in excess of billings

$
-


$
17
  Such amounts are included in the accompanying balance sheets at December 31, 2010 and December 31, 2009 and are summarized as follows (in thousands):
  December 31,

December 31,2010



2009Cost and estimated earnings in excess of billings on uncompleted contracts

$
-


$
17Billings in excess of costs and estimated earnings on uncompleted contracts


-



-$
-


$
17
  NOTE 14 - COMMITMENTS
 
 Leases and License Agreements
 
 For the twelve months ended December 31, 2010 and 2009, rental expenses of approximately $893,000 and $845,000, 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 December 2018, and requiring payment of property taxes, insurance, maintenance and utilities.
   53
 ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Future minimum lease payments under non-cancelable operating leases at December 31, 2010 were as follows:
  Period Ending December 31,

Amount2011

$
4652012


932013


332014


152015


9Thereafter


16Total

$
631
 
 Banc Leasing Inc.
 
 During August 2007, the Company entered into a contract with Banc Leasing Inc., to fund the Company’s US-BankNet System to provide up to $10 Million into equipment financing. The funding is provided only after a contract is signed with financial institution. Each funding is collateralize by the equipment and normally is repaid over a seven year period with interest established at the date of the inception of the lease. Each lease has a $1 buyout provision. The details of the capital lease are included in footnote 12.
 
 Purchase Commitment – Mobile Broadband Trailers
 
 The Company has entered into an agreement to purchase 168 Mobile Broadband Trailers (MBTs) and inventory for $3,103,750 in cash. These MBTs and inventory  will paid for as delivered over thirty-one (31) months with the initial delivery of 53 MBTs and inventory in March and April 2011. The remainder of the units will be purchased along with replacement inventory over the next 27-month period commencing July 1, 2011.
 
 Employment Agreements
 
 Richard R. Royall
 
 Mr. Royall’s employment agreement was executed in March 2008 and expired January 2011. Currently employment contract is continuing month to month. During the term of his employment, Mr. Royall is entitled to the following compensation: (i) base salary of $200,000 per year (ii) standard benefits that are available to other Company executive officers and (iii) a stock grant of up to 3,000,000 shares, 1,000,000 shares will be awarded when the Company achieves positive EBITDA (as reported in an Exchange Act filing), 1,000,000 shares will be awarded when the Company closes a $25 million financing and 1,000,000 shares will be awarded when the Company lists on a national stock exchange.
 
 R. Greg Smith
 
 R. Greg Smith. On July 1, 2008, the Company entered into an executive employment agreement with R. Greg Smith that expired December 31, 2010. During the initial term of his employment, Mr. Smith was entitled to (i) a base salary of $200,000 per year, (ii) standard benefits that are available to other executive officers, and (iii) a stock grant of up to 2,550,000 shares, as follows. The ERF Wireless incentive targets up to 1,300,000 shares of common stock: (1) 500,000 shares if the Company achieves positive EBITDA; (ii) 500,000 shares upon cumulative funding of $25 million; and (3) 300,000 shares upon satisfaction of certain acquisition thresholds. The ENS incentive targets up to 500,000 shares of common stock: (i) 300,000 shares upon achieving 2009 positive EBITDA; and (ii) 200,000 shares upon obtaining 2009 ENS contract values of $1,000,000. The WBS incentive targets up to 750,000 shares of common stock: (i) 250,000 shares upon securing school district contracts within certain thresholds and (ii) 500,000 shares upon obtaining certain gross profit thresholds on these contracts. In the event Mr. Smith’s employment agreement is terminated without cause he is entitled to receive (i) the balance of this unpaid salary through the term of the agreement, (ii) a one year extension for vesting of stock grants, (iii) and the grant of an option to purchase 500,000 shares of Company common stock at an exercise price equal to the lesser of $.50 a share or the market price on the date of termination, provided that such option terminates on May 31, 2013.
 
 NOTE 15 - RELATED PARTY
 
 In March 2005, the Company entered into an annual professional services agreement with Synchton Incorporated for financial and business support services. The agreement required Synchton to provide one or more consultants for a total of 100 hours per month but as of March 2008 the agreement has been modified and requires a commitment of 50 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 $3,000 per month plus an additional $120 per hour that is greater than the required 25 hours per month in cash or shares of common stock. Synchton's President is Scott A. Cubley, son of our chief executive officer. For the period ended December 31, 2010 and 2009, total fees incurred by the Company under the agreement were $41,000 and $121,000, respectively.
   54
 ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Brian Cubley, son of our chief executive officer, entered into an employment agreement that expired December 31, 2010. Currently, his employment contract is continuing month to month. As of December 31, 2010, Brian Cubley has earned options to purchase a total of 200,000 shares of common stock at an average exercise price of $.17 expiring March 31, 2015. As of December 31, 2009, Brian Cubley had earned options to purchase a total of 125,000 shares of common stock at an average exercise price of $.43 expiring July 31, 2013. Mr. Cubley was compensated in cash and shares of common stock for services rendered for fiscal 2010and 2009 in the amount of $111,000 and $124,000, respectively.
 
 For the twelve months ended December 31, 2010, the Company has had several debt settlements of the Angus Capital unsecured revolving credit facility. The unsecured revolving credit facility provides financing for working capital requirements.  During the twelve months ended December 31, 2010 the Company issued 6,140,121 shares of its Series A Preferred Stock for the settlement of $1,982,688 of debt and $421,238 in accrued interest for a total amount of $2,403,926. The Company issued Preferred A Stock at an average price of $.3915 per share or $.0210 per share of common of the ERFW common stock the day the debt is settled and converted to Preferred A Stock. Certain family related trusts are participants in the Angus Capital revolving credit facility. H. Dean Cubley holds the investment and voting power over certain of these family related trusts while Scott Cubley and Brian Cubley, the sons of H. Dean Cubley, have the investment and voting power over other of the remaining family trusts.
 
 Also during twelve months ended December 31, 2010, the Company issued to Angus line of credit 59,567,775 shares of its Common Stock for the settlement of $1,266,861 of debt and $285,926 in accrued interest for a total amount of $1,552,787. The Company issued Common Stock at an average price of $.0261 per share of the ERFW common stock the day the debt was settled.
 
 As additional consideration for the settlement the Company agreed to amend the Series A convertible preferred stock designation to increase the voting rights of each preferred share from 50 votes to 100 votes on all matters in which the common stock holders and preferred stock holders vote together. Under current accounting standards ASC 470-50-40-2 the extinguishment of related party debt for equity securities is considered a capital transaction and, accordingly, no gain or loss on the extinguishment is recognized in the statement of operations. If this was not a related party transaction a gain of $66,671 would have been recognized for the twelve months ended December 31, 2010.
 
 The Company during the fourth quarter 2009 signed a debt conversion agreement to convert the unsecured revolving credit facility which provides financing for working capital requirements. The Company issued 500,000 shares of its Series A Preferred Stock for the conversion of $352,838 of debt and $1,147,162 in accrued interest for a total amount of $1,500,000. The fair market value of the Series A stock was valued at $1,325,000 on the date of issuance, which was exchanged for $1,500,000 in debt and interest. Under current accounting standards ASC 470-50-40-2 the extinguishment of related party debt for equity securities is considered a capital transaction and, accordingly, no gain or loss on the extinguishment is recognized in the statement of operations. If this was not a related party transaction a gain of $175,000 would have been recognized for the twelve months ended December 31, 2009. Certain family related trusts are participants in the Angus Capital revolving credit facility. H. Dean Cubley holds the investment and voting power over certain of these family related trusts while Scott Cubley and Brian Cubley, the adult sons of H. Dean Cubley, have the investment and voting power over other of the remaining family trusts.
 
 NOTE 16 - 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.
  55
  ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 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.
 
 Energy Broadband, Inc. (EBI)
 
 EBI provides wireless connectivity to rural oil and gas locations primarily via Mobile Broadband Trailers (MBTs). EBI provides wireless broadband products and services focusing primarily on commercial customers providing high speed bandwidth to rural North America to serve the Oil and Gas sector. All sales from external customers are located within the United States and Canada.
 
 For the twelve months ended December 31, 2010 (in thousands)
  WMS


WBS


EBI


ENS


TotalRevenue

$
101


$
4,628


$
916


$
270


$
5,915Segment (loss) income


(128
)


(1,558
)


(351
)


(426
)


(2,463
)Segment assets


3



3,941



1,072



1,278



6,294Capital expenditures


-



403



350



-



753Depreciation and amortization


13



2,427



190



218



2,848
  For the twelve months ended December 31, 2009 (in thousands)
 
 WMS


WBS


EBI


ENS


TotalRevenue

$
159


$
4,749


$
308


$
317


$
5,533Segment (loss) income


(18
)


(2,473
)


(40
)


(843
)


(3,374
)Segment assets


104



6,651



415



1,575



8,745Capital expenditures


-



1,185



87



237



1,509Depreciation and amortization


15



2,498



81



23



2,617




Twelve Months EndedReconciliation of Segment Loss from Operations to Net Loss

December 31, 2010

December 31, 2009Total segment loss from operations

$
(2,463
)

$
(3,374
)Total corporate overhead


(4,810
)


(4,268
)Consolidated loss from operations

$
(7,273
)

$
(7,642
)


Reconciliation of Segment Assets to Total Assets

December 31, 2010


December 31, 2009Total segment assets

$
6,294


$
8,745Total corporate assets


198



372Consolidated  assets

$
6,492


$
9,117
 The accounting policies of the reportable segments are the same as those described in footnote 1. 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.
  One customer accounts for $198,000 of ENS revenues and one customer accounts for $703,000 of EBI revenues at December 31, 2010. Also for the twelve months ended December 31, 2010, one customer accounted for $50,000 of EBI revenues from Canada. At December 31, 2009 one customer accounts for $165,000 of ENS revenues and one customer accounts for $200,000 of EBI Division revenues.
  56
  ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 17 – BUSINESS COMBINATIONS
 
 The following table summarizes significant acquisitions completed during the year ended December 31, 2009 (in thousands):
  December 31, 2009Purchase





AmortizablePrice


Goodwill


IntangiblesFrontier/itexas

$
1,485


$
819


$
283
  FRONTIER INTERNET, LLC, AND iTEXAS NET ACQUISITION
  PURCHASE PRICE
  On June 1, 2009, ERF Wireless, Inc completed the purchase of assets from Frontier Internet, LLC and iTexas net, which are related companies under an Asset Purchase Agreement dated June 1, 2009. Under the Asset Purchase Agreement, ERF Wireless, Inc acquired the wireless internet service provider ("WISP"), which includes all of the current customers, contract rights, inventory, equipment and network infrastructure equipment. The acquisition will increase the Company's footprint covering geographic areas in certain cities in North Texas within Hood, Somervell, Johnson and Parker Counties, Texas including portions of the Barnett Shale area that covers approximately 6,000 square miles of natural gas production territory. At the time of the transaction, there were no material relationships between the seller and ERF Wireless, Inc or any of its affiliates, or any director or officer of ERF Wireless, Inc, or any associate of any such officer or director. ERF Wireless, Inc paid $1,485,000 in cash, notes and securities and assumed $25,000 in note payables and capital leases.
  The purchase price allocation is as follows (in thousands):
  Frontier/iTexasAccounts receivable

$
33Note receivable


5Property and equipment


370Goodwill


819Identifiable intangible assets


283Note payable


(25
)Total adjusted purchase price

$
1,485
  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") issued ASC Topic 350 "Goodwill and Other Intangible Assets".
  Frontier/iTexasGoodwill

$
819Non-compete agreement


15Customer relationships


268Total identifiable intangible assets

$
1,102
 
  57
  ERF WIRELESS, INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Proforma (Unaudited)
 
 The results of operations for Frontier Internet, LLC and iTexas net have been included in the Company’s consolidated statements since the completion of the acquisitions during the year ended December 31, 2009. The following unaudited pro forma financial information presents the combined results of the Company and the 2009 acquisitions as if the acquisitions had occurred at the beginning 2009 for the respective acquisitions (in thousands, except per share amounts):
 
 Unaudited Proforma
 
 Year EndedDecember 31,2009Net Revenue

$
6,011Net income (loss)

$
(9,057
)Net income (loss) available to common shareholder

$
(9,057
)Net income (loss) per share-basic

$
(0.07
)Net income (loss) per share-diluted

$
(0.07
)
 The above unaudited pro forma financial information includes adjustments for depreciation and amortization of identifiable intangible assets.
 
 NOTE 18 - SUBSEQUENT EVENTS
  During the first fiscal quarter 2011, the Company issued 76,850,800 shares of common stock for services rendered, debt, exchange of liabilities, and conversion of preferred stock.
  On February 14, 2011, the Company sold its North and Central Texas operations for $3,000,000 in cash and 100,000 common shares of a third party, a public company.
 
 On March 15, 2011, the Company entered into a settlement agreement with the current manufacturer of mobile broadband trailers (MBTs). Under the terms of this settlement the Company agreed to purchase an additional 168 MBTs and replacement inventory on a delivery schedule which commences March 15th 2011 and terminates October 1st 2013.  Additionally the Company agreed to reimburse the manufacturer for underpayments associated with the original MBT purchase order contract which has been superseded by this settlement agreement. These underpayments of $284,000 had been accrued as of December 31, 2010.
 
 The Company filed Form 14C Information Statement on March 8, 2011 that became effective on March 28, 2011, ratifying the following actions:
 
 1.
Amendment to the Company’s Articles of Incorporation to increase the authorized common stock from 475,000,000 shares of common stock to 975,000,000 shares of common stock.  The authorized amount of preferred stock will remain unchanged. The Company has retroactively reflected the change in authorized  shares at December 31, 2010
 
 2.
Amendment to the Company’s Articles of Incorporation at the Board of Director’s discretion, and based on conditions then existing, at any time within the next twelve months to effect a reverse stock split of the Company’s common stock at a reverse split ratio of between 1 for 2 and 1 for 500, pursuant to which any whole number of outstanding shares between and including 2 and 500 would be combined into one share of common stock, which ratio will be selected by the Company’s Board of Directors in their sole discretion. There will be no change to the authorized shares of common stock of the Company as a result of any reverse stock split and any fractional shares will be rounded up.
 
 3.
Reelection of H. Dean Cubley, Richard R. Royall, R. Greg Smith and Bartus H. Batson to the Company’s board of directors for the ensuing year and until the next annual meeting of shareholders or until their successors are duly elected.
 
 4.
Ratification and approval of LBB & Associates Ltd., LLP as independent auditors of the Company.
 
  58
  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
 None.
 
 ITEM 9A. CONTROLS AND PROCEDURES
 
 Evaluation of Disclosure Controls and Procedures
 
 We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance that the controls and procedures would meet their objectives.
 
 As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
 
 Management’s Annual Report on Internal Control over Financial Reporting
 
 Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
 
 (1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
 
 (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
 
 (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements.
 
 Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
 
 Management has used the framework set forth in the report entitled Internal Control-Integrated Framework published 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, 2010.
 
 This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permanently exempts non-accelerated filers (generally issuers with a public float under $75 million) from complying with Section 404(b) of the Sarbanes-Oxley Act of 2002.
 
 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.
 
 
 59
 ITEM 9B. OTHER INFORMATION
 
 None.
 
 
 60
 PART III
 
 ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
 
 Executive Officers and Directors
 
 Our directors and executive officers and their ages as of March 16, 2011, are shown below.
  Name
Age
PositionH. Dean Cubley
69
Chairman of the Board of Directors and CEORichard R. Royall
64
Director and Chief Financial OfficerR. Greg Smith
52
DirectorBartus H. Batson
68
Director
 
 Dr. H. Dean Cubley has served as chairman of ERF Wireless since May 2004 as chief executive officer since October 2006. Dr. Cubley has served as a director of Eagle Broadband, Inc. from March 1996 to September 2006 Dr. Cubley has been involved in forming, funding and opening wireless enterprises for over 31 years. This experience with wireless enterprises coupled with Dr. Cubley's experience with SEC reporting companies led to the conclusion that he should serve as a director of the Company.
 
 Richard R. Royall has served as chief financial officer since March 2008. Mr. Royall is a certified public accountant and has been engaged in the private practice of accounting since 1972 with concentration of expertise in accounting, mergers, acquisitions and SEC registrations and filings including implementation of SOX 404 compliance. Mr. Royall's extensive accounting backround and prior SEC experience led to the conclusion that he should serve as a director of the Company.
 
 Mr. R. Greg Smith has served as executive vice president of ERF Wireless from July 2008 to December 2010, as chief financial officer from August 2004 to March 2008, as the chief executive officer from August 2004 to October 2006, and as a director since August 2004. Mr. Smith's professional background includes 26 years of executive management experience. Mr. Smith's professional background includes 25 years of executive management experience, which supports his role as director of the Company.
 
 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.  Dr. Batson has over 40 years of experience in all fields of telecommunications with a major focus in satellite communications and wireless systems, which led to the conclusion that he should serve as a director of the Company.
 
 Independence of Directors
 
 Other than Dr. Batson, none of the directors are independent as defined by Rule 10A-3 of the Exchange Act. The board has established an audit committee and compensation committee, both of which are comprised of Dr. Cubley and Dr. Batson. The board serves as the nomination committee as it believes that the board, due to the size, can appropriately participate in the nominee identification and selection process. The board has determined that Dr. Cubley qualifies as an audit committee financial expert as defined in Item 407 of Regulation S-K and that he is not independent.
 
 Section 16(A) Beneficial Ownership Reporting Compliance
 
 Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own beneficially more than ten percent of the common stock of the Company, to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Based solely on the reports received by the Company and on written representations from certain reporting persons, the Company believes that the directors, executive officers, and greater than ten percent beneficial owners have complied with all applicable filing requirements.
 
 Code of Ethics
 
 Our Company has adopted a Code of Business Conduct and Ethics (the “Code”) applicable to our Company’s directors, officers (including the Chief Executive Officer and Chief Financial Officer and persons performing similar functions), employees, agents and consultants. Our Code satisfies the requirements of a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules issued by the Securities and Exchange Commission thereunder. Amendments to, or waivers from, a provision of our Code that apply to our Company’s directors or executive officers, including the Chief Executive Officer and Chief Financial Officer and persons performing similar functions, may be made only by the Company’s board of directors. Our Company has not amended the Code and has filed the Code as an exhibit to this Annual Report on Form 10-K.
  61
  
 ITEM 11. EXECUTIVE COMPENSATION
 
 Compensation Discussion and Analysis
 
 Objectives of Our Executive Compensation Program
 
 The compensation committee of our Board administers our executive compensation program. The general philosophy of our executive compensation program is to align executive compensation with the Company’s business objectives and the long-term interests of our stockholders. To that end, the compensation committee believes executive compensation packages provided by the Company to its executives, including the named executive officers should include both cash and stock-based compensation that reward performance as measured against established goals. In addition, the Company strives to provide compensation that is competitive with other peer group companies and that will allow us to attract, motivate, and retain qualified executives with superior talent and abilities. Our executive compensation is designed to reward achievement of the Company’s corporate goals.
 
 The Role of the Compensation Committee
 
 The compensation committee has the primary authority to determine the Company’s compensation philosophy and to establish compensation for the Company’s executive officers. The compensation committee oversees the Company’s compensation and benefit plans and policies; administers the Company’s stock option plans; reviews the compensation components provided to officers, employees, and consultants; grants equity compensation to our officers, employees, and consultants; and reviews and makes recommendations to the Board regarding all forms of compensation to be provided to the members of the Board.
 
 The compensation committee generally sets the initial compensation of each executive. The compensation committee annually reviews and in some cases adjusts compensation for executives. Although, the chief executive officer provides recommendations to the compensation committee regarding the compensation of the other executive officers, the compensation committee has full authority over all compensation matters relating to executive officers.
 
 Elements of Executive Compensation
 
 Although the compensation committee has not adopted any formal guidelines for allocating total compensation between equity compensation and cash compensation, it strives to maintain a strong link between executive incentives and the creation of stockholder value. Executive compensation consists of the following elements:
 
 Base Salary. Base salaries for our executives are generally established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions and recognizing cost of living considerations. Prior to making its recommendations and determinations, the compensation committee reviews each executive’s:
 
 ·
historical pay levels;·
past performance; and·
expected future contributions.
 
 The compensation committee does not use any particular indices or formulae to arrive at each executive’s recommended pay level.
 
 Equity Award. We also use long-term incentives primarily in the form of stock grants. Employees and executive officers generally receive stock grants at the commencement of employment, the majority of which, if not all, vest upon the attainment of corporate goals. We believe that stock grants are instrumental in aligning the long-term interests of the Company’s employees and executive officers with those of the stockholders.
  62
  
 Executive Officer Compensation
 
 Summary Compensation Table
 
 The following tables set forth certain information regarding our chief executive officer, chief financial officer, and three of our most highly-compensated executive officers whose total annual salary and bonus for the fiscal year ended December 31, 2010 exceeded $100,000.
  Name and Principal Position
Year
Salary and Consulting Payments ($)
Bonus

($)
Stock Awards

($)
All Other Compensation

($)
Total

($)H. Dean Cubley
2010
124,719
-
-
-
124,719Chairman of the Board and CEO
2009
135,000
-
-
13,500
148,500Richard R Royall
2010
211,781
-
-
-
211,781Director and CFO
2009
210,697
-
-
7,500
218,197R. Greg Smith
2010
130,039
-
-
-
130,039Director and EVP and CEO ENS  and Consultant
2009
200,004
7,500
-
7,500
215,004Michael R Jones *
2010
134,000
-
-
-
134,000Director and CTO
2009
140,000
-
-
7,500
147,500Robert McClung
2010
150,000
-
-
26,579
176,579Key employee
2009
150,000
-
-
26,579
176,579
 _________________
 *On September 28, 2010, Michael R. Jones resigned his position as director and CTO of the Company.
 
 Outstanding Equity Awards at December 31, 2010
 
 The table below sets forth information with respect to our named executive officers regarding the value of equity compensation as of December 31, 2010.
  Option Awards
Stock AwardsName

Number of Securities Underlying Unexercised Options      (#) Exercisable
Number of Securities Underlying Unexercised Options       (#) Unexercisable
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options      (#)
Option Exercised Price   ($)
Option Expiration Date
Number of Shares or Units of Stock That Have Not Vested
Market Value of          Shares or Units of Stock That Have Not Vested   ($) (2)
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other  Rights    That Have Not Vested
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other  Rights    That Have Not Vested         ($)H. Dean Cubley
-
-
-
-
-
-
-
-
-Richard R. Royall
(1)
-
-
-
$              -
-
3,000,000
30,000
-
-
  (1) Mr. Royall is entitled to receive a stock grant of up to 3,000,000 shares of common stock as follows: (i) 1,000,000 shares will be awarded when the Company achieves positive EBITDA (as reported in an Exchange Act filing); (ii) 1,000,000 shares will be awarded when the Company closes a $25 million financing; and (iii) 1,000,000 shares will be awarded when the Company lists on a national stock exchange.
 (2) Based on closing price of common stock on December 31, 2010.
   63
 
 Employment and Consulting Agreements
 
 We have entered into employment and consulting agreements with the following named executive officers:
 
 Richard Royall. Mr. Royall’s employment agreement expires January 2011. During the term of his employment, Mr. Royall is entitled to (i) base salary of $200,000 per year, (ii) standard benefits that are available to other Company executive officers, and (iii) a stock grant of up to 3,000,000 shares.
 
 R. Greg Smith. On July 1, 2008, the Company entered into an executive employment agreement with R. Greg Smith that expired December 31, 2010. During the initial term of his employment, Mr. Smith was entitled to (i) a base salary of $200,000 per year, (ii) standard benefits that are available to other executive officers, and (iii) a stock grant of up to 2,550,000 shares, as follows. The ERF Wireless incentive targets up to 1,300,000 shares of common stock: (1) 500,000 shares if the Company achieves positive EBITDA; (ii) 500,000 shares upon cumulative funding of $25 million; and (3) 300,000 shares upon satisfaction of certain acquisition thresholds. The ENS incentive targets up to 500,000 shares of common stock: (i) 300,000 shares upon achieving 2009 positive EBITDA; and (ii) 200,000 shares upon obtaining 2009 ENS contract values of $1,000,000. The WBS incentive targets up to 750,000 shares of common stock: (i) 250,000 shares upon securing school district contracts within certain thresholds and (ii) 500,000 shares upon obtaining certain gross profit thresholds on these contracts. In the event Mr. Smith’s employment agreement is terminated without cause he is entitled to receive (i) the balance of this unpaid salary through the term of the agreement, (ii) a one year extension for vesting of stock grants, (iii) and the grant of an option to purchase 500,000 shares of Company common stock at an exercise price equal to the lesser of $.50 a share or the market price on the date of termination, provided that such option terminates on May 31, 2013.
 
 Director Compensation
 
 No compensation was paid to our directors during 2010. Additionally, all travel and lodging expenses incurred by the directors will be reimbursed in connection with their attendance at board meetings.
 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 As of March 16, 2011, 469,253,146 shares of common stock were outstanding and 4,412,582 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.
  SHARES OF COMMON STOCK BENEFICIALLY

OWNED  (1)
SHARES OF SERIES A

PREFERREDSTOCK

BENEFICIALLY

OWNED
TOTAL PERCENTAGE OF VOTING POWER(2)NAME AND ADDRESS OF

BENEFICIAL OWNER
NUMBER

%

NUMBER

%

NUMBER

%Frances Cubley (3)

5,907,471
(4)
1.26%

4,256,231
(5)
96%

431,530,614

47.39%STJV Trust

3,609,753

0.77%

2,535,391

57%

257,148,808

28.24%Pauline Trust

541,783

0.12%

429,331

10%

43,474,883

4.77%Carson Family Trust

336,772

0.07%

458,068

10%

46,143,572

5.07%Leopard Family Trust

560,459

0.12%

266,305

6%

27,190,913

2.99%Jauquine Trust

535,172

0.11%

109,131

2%

11,448,272

1.26%Systom Trust

323,532

0.07%

458,006

10%

46,124,166

5.07%R. Greg Smith

2,278,398
(6)
0.49%

-

0%

2,278,398

0.25%Dr. H. Dean Cubley

910,300
(3)
0.19%

-

0%

910,300

0.10%Richard R. Royall

372,186
(7)
0.08%

-

0%

372,186

0.04%Dr Bartus H. Batson

142,997

0.03%

-

0%

142,997

0.02%All Executives Officers and Directors as a group

3,703,881

0.79%

-

0%

3,703,881

0.41%(4 persons)
  (1) This column does not include the shares of common stock issuable upon conversion of the Series A Preferred Stock.
 (2) This column includes the Series A Preferred Stock right to 100 votes on all matters in which the common stockholders and preferred stockholders vote together. For purposes of calculating the percentage of total voting power, we assumed voting of 4,412,582 shares of Series A (441,258,270 votes) plus 469,253,146 shares of common stock outstanding at 03/16/2011.
 (3) Dr. H. Dean Cubley has the sole investment and voting power over 5,907,471 shares owned by the Frances Cubley Trusts and 4,256,231 shares of Series A Preferred Stock held by the Frances Cubley Trusts as trustee for STJV Trust, Pauline Trust, Carson Trust, Leopard Family Trust, Jauquine Trust and Systom Trust (the "Frances Cubley Trusts").
 (4) Includes 5,907,471 shares owned by the Francis Cubley Trusts.
 (5) Includes 4,256,231 shares of Series A Preferred Stock held by the Francis Cubley Trusts.
 (6) Includes 2,278,398 shares held by Lariat Financial, Inc., a corporation controlled by Mr. Smith.
 (7) Includes 372,186 shares owned by Mr. Royall.
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 ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
 In March 2005, the Company entered into an annual professional services agreement with Synchton Incorporated for financial and business support services. The agreement required Synchton to provide one or more consultants for a total of 100 hours per month but as of March 2008 the agreement has been modified and requires a commitment of 50 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 $3,000 per month plus an additional $120 per hour that is greater than the required 25 hours per month in cash or shares of common stock. Synchton's President is Scott A. Cubley, son of our chief executive officer. For the period ended December 31, 2010 and 2009, total fees incurred by the Company under the agreement were $41,000 and $121,000, respectively.
 
 Brian Cubley, son of our chief executive officer, entered into an employment agreement that expired December 31, 2010. As of December 31, 2010, Brian Cubley has earned options to purchase a total of 200,000 shares of common stock at an average exercise price of $.17 expiring March 31, 2015. As of December 31, 2009, Brian Cubley has earned options to purchase a total of 125,000 shares of common stock at an average exercise price of $.43 expiring July 31, 2013. Mr. Cubley was compensated in cash and shares of common stock for services rendered for fiscal 2010and 2009 in the amount of $111,000 and $124,000, respectively.
 
 For the twelve months ended December 31, 2010, the Company has had several debt settlements of the Angus Capital unsecured revolving credit facility. The unsecured revolving credit facility provides financing for working capital requirements.  During the twelve months ended December 31, 2010 the Company issued 6,140,121 shares of its Series A Preferred Stock for the settlement of $1,982,688 of debt and $421,238 in accrued interest for a total amount of $2,403,926. The Company issued Preferred A Stock at an average price of $.3915 per share or $.0210 per share of common of the ERFW common stock the day the debt is settled and converted to Preferred A Stock. Certain family related trusts are participants in the Angus Capital revolving credit facility. H. Dean Cubley holds the investment and voting power over certain of these family related trusts while Scott Cubley and Brian Cubley, the sons of H. Dean Cubley, have the investment and voting power over other of the remaining family trusts.
 
 Also during twelve months ended December 31, 2010, the Company issued to Angus line of credit 59,567,775 shares of its common stock for the settlement of $1,266,861 of debt and $285,926 in accrued interest for a total amount of $1,552,787. The Company issued common stock at an average price of $.0261 per share of the ERFW common stock the day the debt was settled.
 
 As additional consideration for the settlement the Company agreed to amend the Series A convertible preferred stock designation to increase the voting rights of each preferred share from 50 votes to 100 votes on all matters in which the common stock holders and preferred stock holders vote together. Under current accounting standards ASC 470-50-40-2 the extinguishment of related party debt for equity securities is considered a capital transaction and, accordingly, no gain or loss on the extinguishment is recognized in the statement of operations. If this was not a related party transaction a gain of $50,979 would have been recognized in this quarter and $66,671 gain recognized for the twelve months ended December 31, 2010. The Company during the fourth quarter 2009 signed a debt conversion agreement to convert the unsecured revolving credit facility which provides financing for working capital requirements. The Company issued 500,000 shares of its Series A Preferred Stock for the conversion of $352,838 of debt and $1,147,162 in accrued interest for a total amount of $1,500,000. The fair market value of the Series A stock was valued at $1,325,000 on the date of issuance, which was exchanged for $1,500,000 in debt and interest. Under current accounting standards ASC 470-50-40-2 the extinguishment of related party debt for equity securities is considered a capital transaction and, accordingly, no gain or loss on the extinguishment is recognized in the statement of operations. If this was not a related party transaction a gain of $175,000 would have been recognized for this quarter and twelve months ended December 31, 2009. Certain family related trusts are participants in the Angus Capital revolving credit facility. H. Dean Cubley holds the investment and voting power over certain of these family related trusts while Scott Cubley and Brian Cubley, the adult sons of H. Dean Cubley, have the investment and voting power over other of the remaining family trusts.
 
 Director Independence
 
 Other than Dr. Batson, as determined by the Rules of the NASDAQ Stock Market, none of the Company’s other directors are independent as defined by Rule 10A-3 of the SEC Exchange Act.
  65
 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 General
 
 During the fiscal years ended December 31, 2010, and December 31, 2009, the aggregate fees billed by LBB & Associates Ltd., LLP, were as follows:
  December 31,


December 31,2010


2009Audit fees

$
105,000


$
128,969Audit related fees

$
-


$
-Tax fees

$
-


$
-All other fees

$
-


$
-
  Audit Fees
 
 Consist 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
 
 Consist 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
 
 Consist of fees billed for professional services for tax compliance, tax advice and tax planning.
 
 All Other Fees
 
 Consist of fees for products and services other than the services reported above.
 
 Audit Committee Pre-approval Policies and Procedures
 
 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, which is comprised of Dr. Cubley and Dr. Batson. The audit committee considers and has approval authority over all engagements of the independent auditors. All of the engagements resulting in the fees disclosed above for fiscal 2009-2010 were approved by the audit committee prior to the engagement.
 
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 (a) The following documents are filed as part of this Form 10-K:
 
 1.
Financial Statements
 
 The following financial statements are included in Part II, Item 8 of this Form 10-K:
 
 ·
Report of Independent Registered Public Accounting Firm
 ·
Consolidated Balance Sheets as of December 31, 2010 and 2009
 ·
Consolidated Statements of Operations for the Years Ended December 31, 2010 and 2009
 ·
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2010 and 2009
 ·
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2009
 ·
Notes to the Consolidated Financial Statements
 
 2.
Exhibits
 
 The exhibits listed in the Exhibit Index, which appears immediately following the signature page, are incorporated herein by reference, and are filed as part of this Form 10-K.
 
 3.  Financial Statement Schedules
 
 Financial statement schedules are omitted because they are not required or are not applicable, or the required information is provided in the consolidated financial statements or notes described in Item 15(a)(1) above.
 
 
 66
 
 
 
 SIGNATURES
 
 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 ERF WIRELESS, INC.By: /s/ H. Dean CubleyName: H. Dean Cubley

Title: Chief Executive Officer

Date: March 30, 2011
 Pursuant to the requirements of the Securities Exchange Act of 1934, this restated report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 SIGNATURE
TITLE
DATE/s/ Dr. H. Dean Cubley
Chairman of the Board of Directors
March 30, 2011Dr. H. Dean Cubley
Principal Executive Officer, and Director/s/ Richard R. Royall
Director, Chief Financial Officer,
March 30, 2011Richard R. Royall
Principal Financial Officer andPrincipal Accounting Officer/s/ R. Greg Smith
Director
March 30, 2011R. Greg Smith/s/ Dr. Bartus H. Batson
Director
March 30, 2011Dr. Bartus H. Batson
 
 
 67
 
 Exhibit Index
 Exhibit No.
Description of ExhibitExhibit 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 (6)Exhibit 4.3
Amended and Restated Designation of Series A Preferred Stock (9)Exhibit 4.4
Amended and Restated Designation of Series A Preferred Stock (13)Exhibit 10.2
Addendum to Debt Conversion and Funding Agreement effective September 30, 2004 between ERF Wireless, Inc., Eagle R.F. International and Investors. (5)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. (7)Exhibit 10.9
Form of Common Stock Purchase Warrant Agreement, by and between ERF Wireless, Inc. and Investor (8)Exhibit 10.10
Form of Convertible Term Note, by and between the ERF Wireless, Inc. and Investor (8)Exhibit 10.11
Form of Registration Rights Agreement, by and between the ERF Wireless, Inc., and Investor (8)Exhibit 10.12
Form of Stock Purchase Agreement, by and between ERF Wireless, Inc. and Investor.(8)Exhibit 10.15
Series A Preferred Conversion Restriction Agreement (9)Exhibit 10.19
Amendment of Angus Capital (10)Exhibit 10.21
Acquisition of Door (11)Exhibit 10.22
2010 Stock Option Plan (14)Exhibit 14.1
Code of Business Conduct and Ethics (12)Exhibit 21
List of Subsidiaries(12)Exhibit 31.1
Certification of Chief Executive officer and Chief Financial officer pursuant to Rulesand 31.2
13a-14 (a) and 15d-14 (a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (12)Exhibit 32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.and 32.2
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (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/A - Amendment No. 1 filed on August 29, 2005;(6)
Incorporated by reference from the Form 10-QSB for March 31, 2005;(7)
Incorporated by reference from the Form 10-QSB/A - Amendment No. 1;(8)
Incorporated by reference from the Form 8-K for September 19, 2005;(9)
Incorporated by reference from the Form SB-2 filed on December 12, 2005.(10)
Incorporated by reference from the Form 10-KSB filed April 17, 2007(11)
Incorporated by reference from the Form 8-K filed on December 21, 2006.(12)
Filed herewith.(13)
Incorporated by reference from the Form 8-K filed on December 10, 2010.(14)
Incorporated by reference from the Form S-8 filed on June 24, 2010.








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