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, 2009





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
$5,533,000.





As of
March 16, 2010 the aggregate market value of the shares of common stock held by
non-affiliates (based on the closing price of $0.15 per share for the common
stock as quoted on that date) was approximately $24,942,137.





As of
March 16, 2010, the Company had outstanding 162,172,112 shares of its $.001 par
value common stock.





DOCUMENTS
INCORPORATED BY REFERENCE





None.














TABLE
OF CONTENTS





ITEMNUMBER
            CAPTION
            PAGEPART
      IITEM
      1.
            Business
            4ITEM
      1A.
            Risk
      Factors
            11ITEM
      1B.
            Unresolved
      Staff Comments
            17ITEM
      2.
            Properties
            18ITEM
      3.
            Legal
      Proceedings
            18ITEM
      4.
            Submission
      of Matters to a Vote of Security Holders
            18PART
      IIITEM
      5.
            Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities
            19ITEM
      6.
            Selected
      Financial Data
            21ITEM
      7.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            22ITEM
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            28ITEM
      8.
            Financial
      Statements and Supplementary Data
            29ITEM
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            55ITEM
      9A.
            Controls
      and Procedures
            56ITEM
      9B.
            Other
      Information
            56PART
      IIIITEM
      10.
            Directors,
      Executive Officers and Corporate Governance
            57ITEM
      11.
            Executive
      Compensation
            58ITEM
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            61ITEM
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            62ITEM
      14.
            Principal
      Accountant Fees and Services
            63ITEM
      15.
            Exhibits
      and Financial Statement Schedules
            64





2





FORWARD LOOKING
STATEMENTS





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























































3





ITEM
1. BUSINESS





The
Company





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





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





For the
fiscal year 2010, in addition to our WISP and regional banking business, we
anticipate that the oil and gas industry will become an increasingly important
part of the ERF Wireless business plan. In January 2009, we entered into
contracts with Schlumberger, pursuant to which Schlumberger will exclusively
resell wireless broadband and WiMAX terrestrial communication products and
services from ERF Wireless in the North American oil and gas market. We
anticipate investing significant capital to further expand our offerings to the
oil and gas industry, using our wireless and WiMAX technologies to provide
1.5Mbps data communications to support drilling rig operations, supporting
remote field offices, video surveillance of production facilities and pipelines,
and monitoring of the highly-regulated Health, Safety and Environment (HSE) for
the oil and gas industry.   We believe that our partnership with
Schlumberger, along with our existing and growing network, will position us to
be a provider of choice to the oil and gas industry.





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





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





Wireless
Bundled Services Subsidiary





WBS
provides wireless broadband products and services, including Internet, voice and
data to serve private entities, cities, municipalities and the general public in
rural markets. As of the year ended December 31, 2009, WBS contributed 91% of
the revenues of the Company and 74% of the losses attributable to the Company's
business segments.





Oil
& Gas Division




O&G
provides wireless connectivity to rural oil and gas locations primarily via
Mobile Broadband Trailers (MBTs). O&G 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. The O&G division is
a division of WBS. The revenues in the O&G segment for the twelve
months ended December 31, 2009 and 2008, are $308,000 and $72,000,
respectively.





Enterprise
Network Services Subsidiary





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


4





Wireless
Messaging Services Subsidiary





WMS
provides wireless broadband and fiber-to-the-home system network design and
implementation, manufacture and supply high-power infrastructure equipment to
the paging and mobile industry and own and operate a wide-area messaging service
(paging retail). WMS contributed 3% of the Company's revenues for the year ended
December 31, 2009, and 1% of the losses attributable to the Company's business
segments.





Our
Industries





Oil
and Gas Industry





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





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





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





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





Regional
Banking Industry





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





ENS
currently has long term maintenance contracts with four banking networks. For
the twelve months ended December 31, 2009 ENS contributed 6% of the revenues of
the Company and 25% of the losses attributable to the Company's business
segments.





Residential and Enterprise





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





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





5


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





Our
current residential and enterprise market is focused in the South Central United
States, where we have developed areas of wireless coverage through acquisitions
and contracts in New Mexico, Texas and Louisiana. Our existing network allows us
to provide our high capacity wireless broadband offerings to the oil and gas
industry, financial institutions, and our 8,423 residential customer base. We
plan to continue to expand our wireless broadband coverage through acquisitions,
internal development and partnerships in specific rural areas.





ERF
Wireless’ Products and Services





Wireless
Services to Oil and Gas Customers





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





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





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





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





Wireless
Services to Residential and Enterprise





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





Serving
the Banking Industry





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





6


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.





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





Continue
to Acquire Networks





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


7





Grow
our Relationship with Schlumberger





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





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





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





Provides
wireless broadband and fiber-to-the-home system network design and
implementation, manufacture and supply high-power infrastructure equipment to
the paging and mobile industry and own and operate a wide-area messaging service
(paging retail). WMS contributed 3% of the Company's revenues for the year ended
December 31, 2009, and 1% of the losses attributable to the Company's business
segments.





Competition





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





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.





8


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





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





Governmental
Regulation





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


9





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.





10


Employees





As of
March 16, 2010, we employ 73 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 customer that represented approximately 4% of gross sales for
the year ended December 31, 2009. During the year ended December 31, 2008, the
Company had one customer that represented 11% of the Company's gross
sales.





Research
and Development





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





ITEM
1A. RISK FACTORS





Risks
Related to Our Business





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





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





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





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





We have
incurred annual operating losses since our inception. As a result, at December
31, 2009, we had an accumulated deficit of $39,133,000. Our gross revenues for
the year ended December 31, 2009 were $5,533,000, with a loss from operations of
$7,642,000. 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
2010.





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





As of
December 31, 2009, we had cash and cash equivalents balances of $228,000 and
negative working capital of $3,380,000. As of December 31, 2009, we had
long-term indebtedness of approximately (i) $5.5 million on our credit facility,
(ii) $1.6 million of capital leases, and (iii) $2.3 million of outstanding
notes. The Company has a $10.5 million unsecured revolving credit facility,
bearing interest at an annum rate of 12%, which matures in December 2011, and as
of December 31, 2009, there was approximately $5,051,000 available under that
facility. Additionally, we have available project and equipment financing of up
to $14,562,000. We believe our cash and available credit facilities afford us
adequate liquidity for 2010, 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.





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.





11


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, 2009, certain operating assets, inventory, furniture and accounts
receivable are pledged as collateral on $2,677,000 of outstanding notes and
capital leases. The occurrence of an event of default under any of our
obligations might subject us to foreclosure by the lenders to the extent
necessary to repay any amounts due. If a foreclosure were to happen, it would
have a material adverse effect on our financial condition.





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





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




·
              The
      ability to raise the necessary capital to execute mergers, acquisitions
      and asset purchases, as needed to implement the Company's strategic
      plan;
  ·
              The
      ability to keep current customers and secure new
  customers;
  ·
              The
      ability to acquire existing rural wireless broadband networks throughout
      North America and the ability to secure customers in the rural regions in
      which the Company acquires these wireless broadband networks;
      and
  ·
              The
      ability to secure new regional banking network customers for both the
      construction and design of new broadband networks and for the maintenance
      and monitoring of these broadband
networks.




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





During
2009, the majority of our revenue was generated from short-term
agreements.





For the
year ended December 31, 2009, the majority of our revenues resulted from
short-term, terminable at will, arrangements. We did not have any customers 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.





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.





12


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.





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





13


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





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





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





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, transporter data flow, universal service, and liability for
software viruses could become subjects of additional legislation and legal
development. We cannot predict the impact of these changes on them. Regulatory
changes could have a material adverse effect on our business, financial
condition or results of operations.





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





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





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





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





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





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




·
              be
      expensive and time consuming to defend, resulting in the diversion of
      management's attention and
resources;
  ·
              require
      us to cease making, licensing or using products or systems that
      incorporate the challenged intellectual property;
  or
  ·
              require
      us to spend significant time and money to redesign, re-engineer or
      re-brand our products or systems if
feasible.


14





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;
  ·
              diversion
      of financial and management resources from existing
      operations;
  ·
              difficulties
      in obtaining regulatory approval for technologies and products of acquired
      companies;
  ·
              potential
      loss of key employees;
  ·
              if
      we finance acquisitions by issuing convertible debt or equity securities,
      our existing stockholders may be diluted, which dilution could adversely
      affect the market price of our
stock;
  ·
              inability
      to generate sufficient revenues to offset acquisition or investment costs;
      and
  ·
                potential
      write-offs of acquired assets.


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





Risks
Related to Our Securities





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





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





15


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
$.15 per share and $.27 per share since January 1, 2010. 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.





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, 2009:


·
              5,995,000
      shares of common stock are eligible to be issued pursuant to the Company's
      option plans;
  ·
              6,838,000
      shares of common stock underlying outstanding common stock purchase
      warrants at prices between $0.45 and $5.00 per
  share;
  ·
              56,843,000
      shares of common stock issuable upon conversion of Series A Preferred
      Stock  The effective purchase price per share of common stock issued
      upon conversion will be determined at the date of
    conversion.


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.





16


ITEM
1B. UNRESOLVED STAFF COMMENTS





Not
applicable.






























































17





ITEM 2. PROPERTIES





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





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





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





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





ITEM
3. LEGAL PROCEEDINGS





We are
not a party to any material legal proceedings.





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





None.


18





PART II





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





Market
Price Information





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





High
              
              
              LowYEAR
      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
              
              
              $
              0.29YEAR
      2008Quarter
      ended December 31
              
              $
              0.45
              
              
              $
              0.21Quarter
      ended September 30
              
              $
              0.42
              
              
              $
              0.19Quarter
      ended June 30
              
              $
              0.71
              
              
              $
              0.31Quarter
      ended March 31
              
              $
              1.01
              
              
              $
              0.49






Stockholders





As of
March 16, 2010, we believe there were approximately 446 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, 2009,
concerning securities authorized for issuance under our plans;


19


Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      & Rights
              
              
              Weighted
      Averaged Exercise Price of Outstanding Options, Warrants &
      Rights
              
              
              Number
      of Securities Remaining Available for Future Issuance Under Equity
      Compensation Plans (Excluding Securities Reflected in Column
      (a)(a)
              
              
              (b)
              
              
              (c)Equity
      compensation plans approved by security holders:None
              
              
              -
              
              
              
              -
              
              
              
              -Equity
      compensation plans not approved by security holders:2008
      Non-Qualified Stock Compensation Plan
              
              
              125,000
              
              
              $
              0.43
              
              
              
              5,995,378Total
              
              
              125,000
              
              
              $
              0.43
              
              
              
              5,995,378




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 2009.




Common
Stock Issued for Cash Consideration




·
            No
      shares were issued for cash consideration for the three months ended
      December 31, 2009.




Common
Stock Issued for Debt Conversions and Services Rendered




·
            In
      October, 2009, 236,378 shares of common stock at average price of $.32
      were issued for debt conversions and services
  rendered.




·
            In
      December, 2009, 628,176 shares of common stock at average price of $.26
      were issued for debt conversions and services
  rendered.




Common
Stock Issued Upon Conversion of Series A Preferred Stock




·
            On
      October 2, 2009, an accredited investor acquired 1,867,634 shares of
      common stock pursuant to Preferred A
  Conversions.




·
            On
      October 30, 2009, an accredited investor acquired 7,470,540 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. 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.


20


Equity
Repurchases by Issuer





The
Company did not affect any common stock repurchases during fiscal
2009.





ITEM
6. SELECTED FINANCIAL DATA





Not
applicable.













































21





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





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





Overview





Historically,
our revenues have been generated primarily from Internet and construction
services. Our Internet revenues result from our offering of broadband and basic
communications services to residential and enterprise customers. Our
construction revenues result from the construction of bank networks and other
services associated with providing wireless products and services to the
regional banking industry. During fiscal 2009, approximately 91% of our revenues
were generated from internet services and 6% of our revenues were generated from
construction services. We expect that our internet services will experience the
most growth during fiscal 2010, as we expect to devote significant capital
resources to developing the oil and gas market utilizing wireless
services.





During
the 2009 fiscal year and the first quarter of fiscal 2010, the Company made
significant progress with its strategic business plan as evidenced by the
completion and announcement of numerous agreements. These include:





Ø
            The
      entry into two exclusive reseller agreements with Schlumberger to market
      our wireless services and products to the oil and gas industry in the
      United States, Canada and the Gulf of
Mexico.


Ø
            The
      integration of the Centramedia asset acquisition, providing the Company
      access to a large geographic area in the Panhandle of Texas with active
      oil and gas drilling activity.


Ø
            The
      acquisition and integration of two wireless companies in the oil and gas
      rich Barnett Shale; Frontier Internet LLC and
  iTexas.net.


Ø
            The
      announcement of a Master Services Agreement with Platinum Communications
      for the provisioning and delivery of bandwidth services to mobile and
      static oil and gas customers throughout the Canadian Province of
      Alberta.


Ø
            The
      announcement of a Master Services Agreement with Partnership Broadband to
      deliver digital oilfield solutions in north central Texas.  The
      network has some 160 towers and covers more than 15,000 square mile in the
      oil and gas rich Barnett Shale.


Ø
            The
      announcement of a Master Services Agreement with The Computer Works to
      deliver digital oilfield solutions in north central
      Arkansas.  The network has some 42 towers and covers more than
      3,000 square miles in the oil and gas rich Fayetteville
    Shale.


Ø
            The
      announcement of a Master Services Agreement with Southwestern Wireless to
      deliver digital oilfield solutions in West Texas and New
      Mexico.  The network added more than 37,000 square miles in
      these oil and gas rich territories.


Ø
            The
      Company registered and obtained FCC approval for nearly 90 WiMAX 3.665 GHz
      transmission locations in strategic oil and natural gas development and
      production areas in the United
States.


Ø
            The
      completion of a BranchNet encrypted enterprise-class wireless banking
      network for West Texas State Bank located in the oil and gas rich Permian
      Basin including the Midland and Odessa, Texas markets.  The
      network is comprised of FCC-licensed frequencies creating a 165Mbps
      backbone, delivering speeds in excess of 40Mbps to each branch bank
      location.  Additionally, the Company entered into a WiNet
      agreement with the bank and has begun reselling digital oilfield solutions
      off of this network to its oil and gas customers in this
      region.


Ø
            The
      announcement of energy sector expert, Douglas Gibson joining ERF Wireless
      as energy industry consultant.  In the mid-1990’s Gibson founded
      Petrosol, generating over $110 million in total sales through
      2002.  Petrosol, in 2000, became a partner of Sensa, which
      developed fiber optic sensing technologies for use within the oil and gas
      industry.  Schlumberger later acquired Sensa in
      2001.


Ø
            The
      announcement of the immediate start of design, development and
      construction of a new wireless network in the oil and gas rich Haynesville
      Shale in northwestern Louisiana and northeastern Texas; covering hundreds
      of natural gas drilling rigs in one of the fastest growing gas shale
      developments in North America.





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.





22


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, 2009, Compared to Year Ended December 31, 2008





The
following table sets forth summarized consolidated financial information for the
years ended December 31, 2009 and 2008:





Fiscal
      Year Ended December 31,($
      in thousands)
              
              2009
              
              
              2008
              
              
              $
      Change
              
              
              %
      ChangeTotal
      sales
              
              $
              5,533
              
              
              $
              5,155
              
              
              $
              378
              
              
              
              7%Cost
      of goods sold
              
              
              3,254
              
              
              
              3,121
              
              
              
              133
              
              
              
              4%Gross
      profit
              
              
              2,279
              
              
              
              2,034
              
              
              
              245
              
              
              
              12%Percent
      of total sales
              
              
              41%
              
              
              
              39%Operating
      expenses
              
              
              9,921
              
              
              
              9,653
              
              
              
              268
              
              
              
              3%Loss
      from operations
              
              
              (7,642
              )
              
              
              (7,619
              )
              
              
              (23
              )
              
              
              0%Other
      income/(expense)
              
              
              (1,230
              )
              
              
              (4,123
              )
              
              
              2,893
              
              
              
              -70%Net
      loss
              
              $
              (8,872
              )
              
              $
              (11,742
              )
              
              $
              2,870
              
              
              
              -24%








For the
year ended December 31, 2009, the Company's consolidated operations generated
net sales of $5,533,000 compared to prior-year net sales of $5,155,000 for the
year ended December 31, 2008. The $378,000 increase in net sales is primarily
attributable to $1,164,000 increase in WBS due to increase recurring wireless
broadband services growth through asset acquisitions and oil and gas revenue
from deployment of our Mobile Broadband Trailers (MBTs) in the oil patch
regions, offset with a $203,000 decrease in banking network installation and
services due to a slowdown in the banking industry resulting in reduced network
construction revenues in 2009, and a decrease of $583,000 in wireless paging
service and infrastructure construction revenue For the year ended December 31,
2009, the Company had a gross profit margin of 41%, compared to a gross profit
margin of 39% for the prior-year period ended December 31, 2008. The $245,000
increase in gross profit margin percentage is primarily due to net increase
sales volume which attributed to margins as follows; (i) approximately $462,000
increase in gross margin attributable to the increased wireless customer base
and strong margins as result of recent acquisitions (ii) an increase of
$133,000  in gross margins for banking network services primarily due
to efficient execution and timely completion of bank contracts, and (iii) offset
by approximately $350,000 decrease in gross margin due to a reduction in paging
and wireless infrastructure construction revenue.





The
Company incurred a net loss of $8,872,000 for the year ended December 31, 2009.
The Company's principal components of the net loss for the year ended December
31, 2009, included approximately $2,704,000 in depreciation and amortization
expenses, $1,293,000 of interest expense, $50,000 of derivative income,
$1,411,000 of other general and administrative expense, $4,870,000 in employment
expenses and $1,832,000 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, 2009 and 2008:





($
      in thousands)
              
              Fiscal
      Year Ended December 31,Business
      Segment
              
              
              2009
              
              %
      of Total
              
              
              2008
              
              %
      of Total
              
              
              $
      Change
              
              %
      ChangeWireless
      Messaging Services
              
              $
              159
              
              3%
              
              $
              742
              
              14%
              
              $
              (583)
              
              -79%Wireless
      Bundled Services
              
              
              5,057
              
              91%
              
              
              3,893
              
              76%
              
              
              1,164
              
              30%Enterprise
      Network Services
              
              
              317
              
              6%
              
              
              520
              
              10%
              
              
              (203)
              
              -39%Total
      Sales
              
              $
              5,533
              
              100%
              
              $
              5,155
              
              100%
              
              $
              378
              
              7%





For the
year ended December 31, 2009, net sales increased to $5,533,000 from $5,155,000
for the year ended December 31, 2008. The overall increase of 7% was primarily
attributable to increase sales of WBS of $1,164,000 in recurring wireless
broadband services growth through asset acquisitions and oil and gas revenue
from deployment of our Mobile Broadband Trailers (MBTs) in the oil patch
regions, offset with a decrease in WMS of $583,000 due to wireless paging
service and infrastructure construction revenue, and a decrease in sales of ENS
of $203,000 in banking network installation and services resulting in reduced
network construction revenues in 2009.





23


Cost of Goods
Sold





The
following tables set forth summarized cost of goods sold information for the
years ended December 31, 2009 and 2008:





($
      in thousands)
              
              Fiscal
      Year Ended December 31,2009
              
              %
      of Total
              
              
              2008
              
              %
      of Total
              
              
              $
      Change
              
              %
      ChangeWireless
      Messaging Services
              
              $
              207
              
              6%
              
              $
              440
              
              14%
              
              $
              (233)
              
              -53%Wireless
      Bundled Services
              
              
              2,773
              
              85%
              
              
              2,072
              
              66%
              
              
              701
              
              34%Enterprise
      Network Services
              
              
              274
              
              8%
              
              
              609
              
              20%
              
              
              (335)
              
              -55%Total
      cost of sales
              
              $
              3,254
              
              100%
              
              $
              3,121
              
              100%
              
              $
              133
              
              4%





Fiscal
      Year Ended December 31,($
      in thousands)
              
              2009
              
              
              2008
              
              
              $
      Change
              
              
              %
      ChangeProducts
      and integration service
              
              $
              1,317
              
              
              $
              1,511
              
              
              $
              (194
              )
              
              
              -13
              %Rent
      and maintenance
              
              
              475
              
              
              
              391
              
              
              
              84
              
              
              
              21
              %Salary
      and related cost
              
              
              23
              
              
              
              78
              
              
              
              (55
              )
              
              
              -71
              %Depreciation
              
              
              1,340
              
              
              
              900
              
              
              
              440
              
              
              
              49
              %Other
      costs
              
              
              99
              
              
              
              241
              
              
              
              (142
              )
              
              
              -59
              %Total
      cost of sales
              
              $
              3,254
              
              
              $
              3,121
              
              
              $
              133
              
              
              
              4
              %





For the
year ended December 31, 2009, cost of goods sold increased by $133,000, or 4%,
to $3,254,000 from $3,121,000 as compared to the year ended December 31, 2008.
The increase of $133,000 in cost of goods sold is primarily attributable to a
decrease of cost of goods sold of $233,000 in WMS due to reduced revenue in
wireless paging service and infrastructure construction, a decrease of cost of
goods sold of $335,000 in ENS due to slowdown in banking installations and
offset with an increase of $701,000 in cost of goods sold in WBS due to
increased recurring wireless broadband services growth through asset
acquisitions and deployment of our Mobile Broadband Trailers (MBTs) in oil and
gas regions.





Operations
Expenses





The
following table sets forth summarized operating expense information for the
years ended December 31, 2009 and 2008:





Fiscal
      Year Ended December 31,($
      in thousands)
              
              2009
              
              
              2008
              
              
              $
      Change
              
              
              %
      ChangeEmployment
      expenses
              
              $
              4,870
              
              
              $
              4,735
              
              
              $
              135
              
              
              
              3
              %Professional
      services
              
              
              1,832
              
              
              
              1,868
              
              
              
              (36
              )
              
              
              -2
              %Rent
      and maintenance
              
              
              444
              
              
              
              405
              
              
              
              39
              
              
              
              10
              %Research
      and development
              
              
              -
              
              
              
              25
              
              
              
              (25
              )
              
              
              0
              %Depreciation
      and amortization
              
              
              1,364
              
              
              
              876
              
              
              
              488
              
              
              
              56
              %Other
      general and administrative
              
              
              1,411
              
              
              
              1,744
              
              
              
              (333
              )
              
              
              -19
              %Total
      operating expenses
              
              $
              9,921
              
              
              $
              9,653
              
              
              $
              268
              
              
              
              3
              %





For the
year ended December 31, 2009, operating expenses increased by 3% to $9,921,000,
as compared to $9,653,000 for the year ended December 31, 2008. The increases
that occurred, as evidenced by the immediately preceding table, are discussed
below:




·
            A $135,000 increase in employment
      expense. The increase is primarily attributable to growth of the company
      through recent acquisitions;




·
            A $36,000 decrease in
      professional services. The decrease is primarily related to accounting
      expenses;


24




·
            A $39,000 increase in rent and
      maintenance. The increase is primarily attributable to growth of the
      company through recent
acquisitions;




·
            A $488,000 increase in
      depreciation and amortization; The increase is primarily attributable to
      growth of the company through recent acquisitions;
    and




·
            A
      $333,000 decrease in other general and administrative
    expense.





Other
(Income) Expense, Net





For the
year ended December 31, 2009, the decrease in other expense is primarily
attributable to interest expense, net on debt obligations totaling $1,293,000
and offset with a net derivative income of $50,000 as compared to interest
expense, net of $887,000, loss on extinguishment of related party debt of
$3,580,000 and offset with derivative income of $306,000 for the year ended
December 31, 2008. The derivative expense represents the net unrealized
(non-cash) charge during the year ended December 31, 2009 and 2008, 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, 2009, our net loss was $8,872,000 compared to a loss of
$11,742,000 for the year ended December 31, 2008. The deceased in the loss for
the year ended December 31, 2009, as compared to the year ended December 31,
2008 is primarily attributable to prior year loss on extinguishment of related
party debt of $3,580,000 and offset with an increase in employment and
depreciation and amortization expense.





Cash Flows





The
Company's operating activities increased net cash used by operating activities
to $2,959,000 in the year ended December 31, 2009, compared to net cash used of
$4,048,000 in the year ended December 31, 2008. The increase in net cash used by
operating activities was primarily attributable to  an increase in the
Company's net operating loss of $8,872,000, net of $5,494,000 non-cash charges
combined with derivative income $50,000 to equal net non-cash charge of
$5,444,000, combined together with $469,000 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 $1,306,000 in the year ended
December 31, 2009, compared to use of net cash of $974,000 in the year ended
December 31, 2008. The increase in investing activities is primarily growing as
a result wireless capabilities through asset acquisition and expansion of our
infrastructure in Texas, New Mexico, Oklahoma and Louisiana.




The
Company's financing activities provided net cash of $4,145,000 in the year ended
December 31, 2009, compared to $3,159,000 of cash provided in year ended
December 31, 2008. The cash provided in the year ended December 31, 2009, was
primarily associated with the proceeds from equity financings, subordinated
promissory financing, convertible debt financing and the line of credit,
net.





Liquidity and Capital
Resources





General





At
December 31, 2009, the Company's current assets totaled $1,281,000 (including
cash and cash equivalents of $228,000) total current liabilities were
$4,661,000, resulting in negative working capital of $3,380,000. 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, 2009, were
as primarily funded by proceeds from the Company's line of credit totaling
$3,618,000, subordinated promissory financing of $1,390,000, sale of restricted
common stock, net to accredited investors of $334,000 and convertible debt
financing of $150,000.





Current
Debt Facility





At
December 31, 2009, the Company had approximately $5,051,000 available on a $10.5
million unsecured revolving credit facility with Angus Capital Partners, which
matures in December 2011. The terms of the two-year unsecured revolving credit
facility will allow us to draw upon the facility as financing requirements
dictate and provides for quarterly interest payments at an annual 12% rate. The
loan may be prepaid without penalty or repaid at maturity.





25


Issuance
of Common Stock




During
the fiscal year ended December 31, 2009, we issued to various accredited
investors and third parties (i) 1,918,000 shares of restricted common stock for
net consideration of $334,000, (ii) 6,955,000 shares for services rendered and
debt conversions, and (iii) 28,796,000 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, 2009, we issued
6,023,000 shares of common stock to employees and business consultants, for
aggregate consideration of $1,857,000 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 2010. 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,
2009:





Payments
      Due by PeriodTotal
              
              
              Less
      than 1 Year
              
              1-3
      Years
              
              
              3-5
      Years
              
              
              More
      than 5 YearsContractual
      obligations:Long-term
      debt obligations
              
              $
              9,116
              
              
              $
              3,040
              
              
              $
              6,076
              
              
              $
              -
              
              
              $
              -Capital
      lease obligations
              
              
              1,984
              
              
              
              1,053
              
              
              
              793
              
              
              
              138
              
              
              
              -Operating
      lease obligations
              
              
              1,164
              
              
              
              616
              
              
              
              501
              
              
              
              24
              
              
              
              23Total
      contractual obligations
              
              $
              12,264
              
              
              $
              4,709
              
              
              $
              7,370
              
              
              $
              162
              
              
              $
              23





The
Company's contractual obligations consist of long-term debt of $7,772,000,
derivative liabilities of $269,000, unamortized debt discount of $117,000, and
interest expense of $958,000 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.





Off-Balance
Sheet Arrangements





As of
December 31, 2009 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:


26


·
              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.





Derivative
Instruments





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





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





Recent
Accounting Pronouncements







In July
2009, the FASB established the FASB Accounting Standards CodificationTM
(“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in accordance with generally accepted accounting principles
(“GAAP”) in the United States. This guidance was included in the Codification
under FASB Accounting Standard Codification (“ASC”) Topic 105, Generally
Accepted Accounting Principles. All prior accounting
standard documents were superseded by the Codification and any accounting
literature not included in the Codification is no longer authoritative. Rules
and interpretive releases of the SEC issued under the authority of federal
securities laws will continue to be sources of authoritative GAAP for SEC
registrants. The Codification became effective for the Company beginning with
the third quarter of 2009. Therefore, beginning with the third quarter of 2009,
all references made by the Company in its consolidated condensed financial
statements use the new Codification numbering system. The Codification does not
change or alter existing GAAP and, therefore, did not have a material impact on
the Company’s consolidated condensed financial statements.





In April
2008, the FASB issued a pronouncement on what is now codified as FASB ASC Topic
350, Intangibles Goodwill and Other. This pronouncement amends the factors to be
considered in determining the useful life of intangible assets accounted for
pursuant to previous topic guidance. Its intent is to improve the consistency
between the useful life of an intangible asset and the period of expected cash
flows used to measure its fair value. This pronouncement is effective for
financial statements issued for fiscal years beginning after December 15, 2008
and interim periods within those fiscal years, and its adoption had
no effect on the Company’s consolidated financial statements.





27


In March
2008, the FASB issued a pronouncement on what is now codified as FASB ASC Topic
815, Derivatives and Hedging. This pronouncement requires enhanced disclosure
about an entity’s derivative and hedging activities and thereby improves the
transparency of financial reporting. The objective of the pronouncement is to
provide adequate information about how derivative and hedging activities affect
an entity’s financial position, financial performance, and cash flows. This
pronouncement became effective in the first quarter of 2009, and its
adoption from January 1, 2009 had no effect on the Company’s consolidated
financial statements.





In
February 2008, the FASB issued ASC 820 — 10 (formerly “Financial Staff Position
SFAS No. 157-2”), which delayed the effective date of ASC 820 - 10 (formerly
“SFAS No. 157”) for all non-financial assets and non-financial liabilities
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until fiscal years
beginning after November 15, 2008. Nonfinancial assets and liabilities that the
Company measures at fair value on a non-recurring basis consist primarily of
property and equipment, goodwill, and intangible assets, which are subject to
fair value adjustments in certain circumstances (for example, when there is
evidence of impairment).The adoption of the provisions of ASC 820-10 did not
have a material impact on the Company’s consolidated financial position and
results of operations or cash flows.





Effective
June 30, 2009, the Company adopted guidance issued by the FASB and included in
ASC 855-10, “Subsequent Events,” which establishes general standards of
accounting for and disclosures of events that occur after the balance sheet date
through the date the financial statements are issued.





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





Not
applicable.






28





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, 2009 and 2008, 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, 2009 and 2008, 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,
2010
  29
 ERF
WIRELESS, INC.
 CONSOLIDATED
BALANCE SHEETS
 DECEMBER
31, 2009 and 2008
 ($
in thousands except share data)
 
 December
      31,
                
                December
      31,2009
                
                
                2008ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                228
                
                
                $
                348Accounts
      receivable, net
                
                
                494
                
                
                
                248Accounts
      receivable, other
                
                
                78
                
                
                
                52Inventories
                
                
                222
                
                
                
                193Costs
      and profits in excess of billings
                
                
                17
                
                
                
                427Prepaid
      expenses and other current assets
                
                
                242
                
                
                
                494Total
      current assets
                
                
                1,281
                
                
                
                1,762Property
      and equipmentProperty
      and equipment
                
                
                9,347
                
                
                
                7,751Less:
      accumulated depreciation
                
                
                (3,712
                )
                
                
                (1,649
                )Net
      property and equipment
                
                
                5,635
                
                
                
                6,102Goodwill
                
                
                1,255
                
                
                
                436Intangible
      assets, net
                
                
                701
                
                
                
                1,059Other
      assets
                
                
                245
                
                
                
                264Total
      assets
                
                $
                9,117
                
                
                $
                9,623LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Notes
      payable and current portion of long-term debt
                
                $
                1,881
                
                
                $
                702Capital
      leases and current portion of long-term capital leases
                
                
                854
                
                
                
                861Accounts
      payable
                
                
                586
                
                
                $
                981Accrued
      expenses
                
                
                486
                
                
                
                1,269Derivative
      liabilities
                
                
                269
                
                
                
                78Deferred
      liability and revenue
                
                
                585
                
                
                
                237Total
      current liabilities
                
                
                4,661
                
                
                
                4,128Long-term
      debt of line of credit, net of current portion
                
                
                5,449
                
                
                
                2,183Long-term
      debt, net of current portion
                
                
                442
                
                
                
                661Long-term
      capital leases, net of current portion
                
                
                789
                
                
                
                1,581Deferred
      liability and revenue, net of current portion
                
                
                150
                
                
                
                316Total
      liabilities
                
                
                11,491
                
                
                
                8,869CommitmentsShareholders’
      equity (deficit):Preferred
      stock  -  $.001 par valueSeries
      A authorized  25,000,000 sharesIssued
      and outstanding at December 31, 2009, andDecember
      31, 2008, 3,043,580 and 4,085,514, respectively
                
                
                3
                
                
                
                4Common
      stock  -  $.001 par valueAuthorized
      475,000,000 sharesIssued
      and outstanding at December 31, 2009, andDecember
      31, 2008, 145,575,735 and 101,884,119, respectively
                
                
                146
                
                
                
                102Additional
      paid in capital
                
                
                36,785
                
                
                
                31,084Accumulated
      deficit
                
                
                (39,308
                )
                
                
                (30,436
                )Total
      shareholders’ equity (deficit)
                
                
                (2,374
                )
                
                
                754Total
      liabilities and shareholders' equity (deficit)
                
                $
                9,117
                
                
                $
                9,623
  See
accompanying notes to consolidated financial statements.
  30
  ERF
WIRELESS, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
 ($
in thousands except share data and loss per share)
 
 2009
                
                
                2008Sales:Products
                
                $
                196
                
                
                $
                772Services
                
                
                5,337
                
                
                
                4,383Total
      sales
                
                
                5,533
                
                
                
                5,155Costs
      of goods sold:Products
      and integration services
                
                
                1,317
                
                
                
                1,511Rent,
      repairs and maintenance
                
                
                475
                
                
                
                391Salary
      and related cost
                
                
                23
                
                
                
                78Depreciation
                
                
                1,340
                
                
                
                900Other
      cost
                
                
                99
                
                
                
                241Total
      costs of goods sold
                
                
                3,254
                
                
                
                3,121Gross
      profit
                
                
                2,279
                
                
                
                2,034Operating
      expenses:Selling,
      general and administrative
                
                
                8,557
                
                
                
                8,777Depreciation
      and amortization
                
                
                1,364
                
                
                
                876Total
      operating expenses
                
                
                9,921
                
                
                
                9,653Loss
      from operations
                
                
                (7,642
                )
                
                
                (7,619
                )Other
      income (expenses):Interest
      expense, net
                
                
                (1,293
                )
                
                
                (887
                )Loss
      on extinguishment of related party debt
                
                
                -
                
                
                
                (3,580
                )Gain
      on sale of assets and other income
                
                
                13
                
                
                
                38Derivative
      income
                
                
                50
                
                
                
                306Total
      other income (expense)
                
                
                (1,230
                )
                
                
                (4,123
                )Net
      loss
                
                $
                (8,872
                )
                
                $
                (11,742
                )Net
      loss per common share:Basic
                
                $
                (0.07
                )
                
                $
                (0.15
                )Diluted
                
                $
                (0.07
                )
                
                $
                (0.15
                )
   See
accompanying notes to consolidated financial statements.
  31
 
 ERF
WIRELESS, INC.
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
 ($
and shares in thousands)
 
 Additional
                  
                  
                  
                  
                  
                  TotalCommon
      Stock
                  
                  
                  Preferred
      Stock
                  
                  
                  Paid
      in
                  
                  
                  Accumulated
                  
                  
                  Shareholders’Shares
                  
                  
                  Value
                  
                  
                  Shares
                  
                  
                  Value
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  Equity
      (Deficit)Total
      shareholders’ equity (deficit)
                  
                  
                  61,541
                  
                  
                  $
                  62
                  
                  
                  
                  3,312
                  
                  
                  $
                  3
                  
                  
                  $
                  19,098
                  
                  
                  $
                  (18,694
                  )
                  
                  $
                  469as
      of December 31, 2007Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (11,742
                  )
                  
                  
                  (11,742
                  )New
      stock issued to shareholders:Conversion
      of preferred stock to common stock
                  
                  
                  22,896
                  
                  
                  
                  24
                  
                  
                  
                  (1,226
                  )
                  
                  
                  (1
                  )
                  
                  
                  (23
                  )
                  
                  
                  -
                  
                  
                  
                  -For
      services rendered and interest
                  
                  
                  5,615
                  
                  
                  
                  5
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,370
                  
                  
                  
                  -
                  
                  
                  
                  2,375For
      retirement of debt
                  
                  
                  635
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  186
                  
                  
                  
                  -
                  
                  
                  
                  186Asset
      acquisition
                  
                  
                  5,171
                  
                  
                  
                  5
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,645
                  
                  
                  
                  -
                  
                  
                  
                  1,650For
      retirement of debt and conversion of convertiblepreferred
      stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,000
                  
                  
                  
                  2
                  
                  
                  
                  2,998
                  
                  
                  
                  -
                  
                  
                  
                  3,000Loss
      on extinguishment of related party debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,580
                  
                  
                  
                  -
                  
                  
                  
                  3,580Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  29
                  
                  
                  
                  -
                  
                  
                  
                  29Warrant
      expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  27
                  
                  
                  
                  -
                  
                  
                  
                  27Proceeds
      from sale of common stock, net
                  
                  
                  6,026
                  
                  
                  
                  6
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,174
                  
                  
                  
                  -
                  
                  
                  
                  1,180Total
      shareholders’ equityas
      of December 31, 2008
                  
                  
                  101,884
                  
                  
                  
                  102
                  
                  
                  
                  4,086
                  
                  
                  
                  4
                  
                  
                  
                  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’ equityas
      of December 31,  2009
                  
                  
                  145,576
                  
                  
                  $
                  146
                  
                  
                  
                  3,044
                  
                  
                  $
                  3
                  
                  
                  $
                  36,785
                  
                  
                  $
                  (39,308
                  )
                  
                  $
                  (2,374
                  )
  See
accompanying notes to consolidated financial statements.
  32
  ERF
WIRELESS, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
 ($
in thousands)
  2009
                
                
                2008Cash
      flows from operating activitiesNet
      loss
                
                $
                (8,872
                )
                
                $
                (11,742
                )Adjustments
      to reconcile net loss to net cashused by operating
      activities:Loss
      on extinguishment of related party debt
                
                
                -
                
                
                
                3,580Gain
      on sale of assets
                
                
                -
                
                
                
                (26
                )Amortization
      of debt discount
                
                
                228
                
                
                
                31Depreciation
      and amortization
                
                
                2,704
                
                
                
                1,776Stock
      issued for services rendered and interest
                
                
                2,457
                
                
                
                2,375Derivative
      (income)
                
                
                (50
                )
                
                
                (277
                )Bad
      debt expense
                
                
                105
                
                
                
                439Changes
      in:Accounts
      receivable, net
                
                
                (318
                )
                
                
                (279
                )Accounts
      receivable, other
                
                
                (21
                )
                
                
                62Inventories
                
                
                (29
                )
                
                
                (75
                )Prepaid
      expenses
                
                
                276
                
                
                
                50Costs
      and profits in excess of billings
                
                
                410
                
                
                
                (17
                )Accounts
      payable
                
                
                (395
                )
                
                
                (108
                )Accrued
      expenses
                
                
                364
                
                
                
                337Deferred
      liability and revenue
                
                
                182
                
                
                
                (174
                )Total
      adjustment
                
                
                5,913
                
                
                
                7,694Net
      cash used by operating activities
                
                
                (2,959
                )
                
                
                (4,048
                )Cash
      flows from investing activitiesProceeds
      from sale of assets
                
                
                -
                
                
                
                27Purchase
      of property and equipment
                
                
                (1,158
                )
                
                
                (558
                )Business
      acquisitions, net of cash acquired
                
                
                (167
                )
                
                
                (321
                )Change
      in other assets
                
                
                19
                
                
                
                (122
                )Net
      cash used by investing activities
                
                
                (1,306
                )
                
                
                (974
                )Cash
      flows from financing activitiesNet
      proceeds from line of credit
                
                
                3,618
                
                
                
                2,810Proceeds
      from notes payable
                
                
                150
                
                
                
                50Proceeds
      from long-term debt obligations
                
                
                1,390
                
                
                
                -Payment
      of long-term debt obligations
                
                
                (465
                )
                
                
                (314
                )Payment
      on capital lease obligations
                
                
                (882
                )
                
                
                (567
                )Proceeds
      from sale of common stock, net
                
                
                334
                
                
                
                1,180Net
      cash provided by financing activities
                
                
                4,145
                
                
                
                3,159Net
      decrease in cash
                
                
                (120
                )
                
                
                (1,863
                )Cash
      and cash equivalents at the beginning of the period
                
                
                348
                
                
                
                2,211Cash
      and cash equivalents at the end of the period
                
                $
                228
                
                
                $
                348Supplemental
      disclosure of cash flow information:Net
      cash paid during the year for:Interest
                
                $
                361
                
                
                $
                258Income
      taxes
                
                $
                -
                
                
                $
                -Supplemental
      non-cash investing and financing activities:Conversion
      of debt through issuance of common stock
                
                $
                475
                
                
                $
                186Conversion
      of debt and interest through issuance of Preferred stock
                
                $
                1,500
                
                
                $
                3,000Issuance
      of shares for asset acquisition
                
                $
                884
                
                
                $
                1,650Property
      acquired under capital lease
                
                $
                68
                
                
                $
                1,597Note
      payable for acquisition
                
                $
                444
                
                
                $
                750
  See
accompanying notes to consolidated financial statements.
 33
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
1 - BASIS OF PRESENTATION
 
 Nature
of the Company
 
 ERF
Wireless, Inc. (“Company” or “ERF Wireless”) provides secure, high-capacity
wireless products and services to a broad spectrum of customers in primarily
underserved, rural and suburban parts of the United States. We provide our
customers with high quality broadband services and basic communications services
to residential, oil and gas, and bank customers in the areas that otherwise
would not be able to receive such services. We are also a comprehensive
solutions provider to other enterprise customers, providing them with a wide
array of communications services including high speed broadband, voice over
Internet Protocol (VOIP) telephone and facsimile service, and video
security.
 
 Historically,
our revenues have been generated primarily from Internet and construction
services. Our Internet revenues have resulted from our offering of broadband and
basic communications services to residential and enterprise customers. Our
construction revenues typically have consisted of revenues generated from the
construction of bank networks and other services associated with providing
wireless products and services to the regional banking industry.
 
 Our
revenues are principally internet and construction. Our internet revenues are
recorded in our subsidiary, “Wireless Bundled Services, Inc. (WBS)”,
construction of bank networks in our subsidiary, “Enterprise Network Services,
Inc. (ENS)” and other construction in our subsidiary, “Wireless Messaging
Services, Inc. (WMS)” and Oil & Gas Division (O&G). Please refer to
segment footnote 16 for additional information regarding the Company’s operating
divisions.
 
 We have
evaluated subsequent events through the date the consolidated financial
statements were issued.
 
 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 2008 financial statements have been reclassified to conform to
the 2009 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.
 
 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.
  34
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 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 2009 and 2008, this
deferred lease liability balance was $313,000 and $476,000,
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,
banking network monitoring and maintenance and wireless messaging customers and,
accordingly, are deferred and recognized monthly as earned. The Company had
deferred revenues in current and long-term liabilities of approximately $422,000
and $77,000 as of December 31, 2009, and December 31, 2008,
respectively.
 
 Advertising
Costs
 
 Advertising
costs are expensed when incurred. For the periods ended December 31, 2009 and
2008, the Company expensed $118,000 and $111,000, 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.
 
 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.
  35
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  The
Company's derivative instrument liabilities are re-valued at the end of each
reporting period, with changes in the fair value of the derivative liability
recorded as charges or credits to income in the period in which the changes
occur. For options, warrants and bifurcated embedded derivative features that
are accounted for as derivative instrument liabilities, the Company estimates
fair value using either quoted market prices of financial instruments with
similar characteristics or other valuation techniques. The valuation techniques
require assumptions related to the remaining term of the instruments and
risk-free rates of return, our current common stock price and expected dividend
yield, and the expected volatility of our common stock price over the life of
the option. Because of the limited trading history for our common stock, the
Company estimates the future volatility of its common stock price based on not
only the history of its stock price but also the experience of other entities
considered comparable to the Company.
 
 Inventories
 
 Inventories
are valued at the lower of cost or market. The cost is determined by using the
average cost method. Inventories consist of the following items as of December
31, 2009 and 2008 in thousands:
 
 December
      31,
                  
                  
                  December
      31,2009
                  
                  
                  2008Raw
      material
                  
                  $
                  63
                  
                  
                  $
                  113Finished
      goods
                  
                  
                  159
                  
                  
                  
                  80$
                  222
                  
                  
                  $
                  193
  The
Company has pledged all the inventory of WBS of $159,000 and $56,000 as
collateral against outstanding notes and capital leases as of December 31, 2009
and December 31, 2008, 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.
 
 
 36
 ERF
WIRELESS, INC.
 NOTES
TO 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.
  37
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Fair
Value of Financial Instruments
 
 The
Company's financial instruments consist of cash and cash equivalents, inventory,
accounts receivable and debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or interest rates that
approximate prevailing market rates unless otherwise disclosed in these
consolidated financial statements.
 
 Beneficial
Conversion
 
 Equity
instruments that contain a beneficial conversion feature are recorded as a
deemed dividend to the holders of the convertible equity instruments. The deemed
dividend associated with the beneficial conversion is calculated as the
difference between the fair value of the underlying common stock less the
proceeds that have been received for the equity instrument limited to the value
received. The beneficial conversion amount is recorded as a deemed dividend or
interest expense and an increase to additional paid-in-capital.
 
 Basic
Loss per Share
 
 The
Company is required to provide basic and dilutive earnings (loss) per common
share information.
 
 The basic
net loss per common share is computed by dividing the net loss by the weighted
average number of common shares outstanding.
 
 Diluted
net loss per common share is computed by dividing the net loss, adjusted on an
"as if converted" basis, by the weighted average number of common shares
outstanding plus potential dilutive securities. For the periods ended December
31, 2009, and December 31, 2008, potential dilutive securities had an
anti-dilutive effect and were not included in the calculation of fully diluted
net loss per common share.
 
 Recent
Accounting Pronouncements
 
 In July
2009, the FASB established the FASB Accounting Standards CodificationTM
(“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in accordance with generally accepted accounting principles
(“GAAP”) in the United States. This guidance was included in the Codification
under FASB Accounting Standard Codification (“ASC”) Topic 105, Generally
Accepted Accounting Principles. All prior accounting
standard documents were superseded by the Codification and any accounting
literature not included in the Codification is no longer authoritative. Rules
and interpretive releases of the SEC issued under the authority of federal
securities laws will continue to be sources of authoritative GAAP for SEC
registrants. The Codification became effective for the Company beginning with
the third quarter of 2009. Therefore, beginning with the third quarter of 2009,
all references made by the Company in its consolidated condensed financial
statements use the new Codification numbering system. The Codification does not
change or alter existing GAAP and, therefore, did not have a material impact on
the Company’s consolidated condensed financial statements.
 
 In April
2008, the FASB issued a pronouncement on what is now codified as FASB ASC Topic
350, Intangibles Goodwill and Other. This pronouncement amends the factors to be
considered in determining the useful life of intangible assets accounted for
pursuant to previous topic guidance. Its intent is to improve the consistency
between the useful life of an intangible asset and the period of expected cash
flows used to measure its fair value. This pronouncement is effective for
financial statements issued for fiscal years beginning after December 15, 2008
and interim periods within those fiscal years, and its adoption had
no effect on the Company’s consolidated financial statements.
 
 In March
2008, the FASB issued a pronouncement on what is now codified as FASB ASC Topic
815, Derivatives and Hedging. This pronouncement requires enhanced disclosure
about an entity’s derivative and hedging activities and thereby improves the
transparency of financial reporting. The objective of the pronouncement is to
provide adequate information about how derivative and hedging activities affect
an entity’s financial position, financial performance, and cash flows. This
pronouncement became effective in the first quarter of 2009, and its
adoption from January 1, 2009 had no effect on the Company’s consolidated
financial statements.
 
 In
February 2008, the FASB issued ASC 820 — 10 (formerly “Financial Staff Position
SFAS No. 157-2”), which delayed the effective date of ASC 820 - 10 (formerly
“SFAS No. 157”) for all non-financial assets and non-financial liabilities
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until fiscal years
beginning after November 15, 2008. Nonfinancial assets and liabilities that the
Company measures at fair value on a non-recurring basis consist primarily of
property and equipment, goodwill, and intangible assets, which are subject to
fair value adjustments in certain circumstances (for example, when there is
evidence of impairment).The adoption of the provisions of ASC 820-10 did not
have a material impact on the Company’s consolidated financial position and
results of operations or cash flows.
 
 Effective
June 30, 2009, the Company adopted guidance issued by the FASB and included in
ASC 855-10, “Subsequent Events,” which establishes general standards of
accounting for and disclosures of events that occur after the balance sheet date
through the date  the financial statements are issued..
  38
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE
2 - ACCOUNTS RECEIVABLE
 
 Accounts
Receivable consists of the following (in thousands):
 
 December
      31,
                
                
                December
      31,2009
                
                
                2008Accounts
      receivable
                
                $
                623
                
                
                $
                731Allowance
      for doubtful accounts
                
                
                (129
                )
                
                
                (483
                )Accounts
      receivable, net
                
                $
                494
                
                
                $
                248
 
 The
Company has pledged substantially all the accounts receivables of WBS as
collateral against outstanding notes and capital leases.
 
 NOTE
3 - PROPERTY AND EQUIPMENT:
 
 Components
of property and equipment consist of the following items (in
thousands):
 
 December
      31,
                
                
                December
      31,2009
                
                
                2008Automobiles
                
                $
                297
                
                
                $
                201Operating
      equipment
                
                
                7,526
                
                
                
                5,393Office
      furniture and equipment
                
                
                243
                
                
                
                219Leasehold
      improvements
                
                
                71
                
                
                
                67Computer
      equipment
                
                
                358
                
                
                
                296Building
                
                
                29
                
                
                
                29Land
                
                
                37
                
                
                
                37Construction
      in progress
                
                
                786
                
                
                
                1,509Total
      property and equipment
                
                
                9,347
                
                
                
                7,751Less
      accumulated depreciation
                
                
                (3,712
                )
                
                
                (1,649
                )Net
      property and equipment
                
                $
                5,635
                
                
                $
                6,102
 
 Depreciation
expense was $2,063,000 and $1,088,000 for the twelve months ended December 31,
2009 and 2008, 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, 2009 and 2008, goodwill totaled $1,255,000 and $436,000
respectively. The goodwill increase during 2009 and 2008 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.
 
   39
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE
5 - INTANGIBLE ASSETS, NET
 
 Intangible
assets consist of the following (in thousands):
  December
      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
  December
      31, 2008Useful
      Life
                    (in
      years)
                  
                  
                  Gross
                    Carrying
                    Amount
                  
                  
                  Accumulated
      Amortization
                  
                  
                  Net
                    Carrying
                    AmountCustomer
      relationships
                  
                  3.0
                  
                  
                  $
                  2,028
                  
                  
                  $
                  969
                  
                  
                  $
                  1,059Workforce
      in place
                  
                  3.0
                  
                  
                  
                  125
                  
                  
                  
                  125
                  
                  
                  
                  -Non-compete
      agreement
                  
                  3.0
                  
                  
                  
                  100
                  
                  
                  
                  100
                  
                  
                  
                  -Developed
      technology
                  
                  3.0
                  
                  
                  
                  20
                  
                  
                  
                  20
                  
                  
                  
                  -$
                  2,273
                  
                  
                  $
                  1,214
                  
                  
                  $
                  1,059
 
 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.
 
 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.
 
 On
January 11, 2008, the Company acquired from Crosswind, Inc. a customer list
which was valued at $206,000 and is being amortized over three
years.
 
 Total
amortization of intangibles was $641,000 and $688,000 for the twelve months
ended December 31, 2009 and 2008, respectively. The estimated amortization
expense for the remaining years will be $568,000 for 2010, $94,000 for 2011 and
$39,000 in 2012.
 
 NOTE
6 - DEBT CONVERSION
 
 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 exchange for a
conversion of $1,500,000 in debt and interest. Thus a gain on extinguishment of
related party debt of $175,000 was recognized on the exchange as a credit to
paid in capital.
 
 The
Company during the fourth quarter 2008 signed a debt conversion agreement to
convert the unsecured revolving credit facility which provides financing for
working capital requirements. The Company issued 2,000,000 shares of its Series
A Preferred Stock for the conversion of $3,000,000 in debt. The Company issued
one share of Series A Convertible Preferred Stock for every One Dollar and Fifty
Cents ($1.50) in claims converted.  As additional consideration for
the conversion, when the number of shares of outstanding common stock equals or
exceeds 120 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 $6,580,000 on the date of issuance, which was exchange for a
conversion of $3,000,000 in debt.  Thus a loss on extinguishment of
related party debt of $3,580,000 was recognized on the exchange.
  40
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE
7 - COMMON STOCK, PREFERRED STOCK AND WARRANTS
 
 The total
number of shares of stock of all classes which the Company shall have the
authority to issue is 500,000,000, of which 25,000,000 shall be shares of
preferred stock with a par value of $.001 per share ("Preferred Stock"), and
475,000,000 shall be shares of common stock with a par value of $.001 per share
("Common Stock").
 
 Common
Stock
 
 As of
December 31, 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
                
                
                36Salary
      and compensation
                
                
                804Other
      services rendered
                
                
                325Total
      for services, interest, liabilities 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.
 
 During
the twelve months ended December 31, 2008, the Company issued 11,421,000 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, 2008
                
                Supplemental
                  Non-Cash
                  DisclosureProfessional
      fees
                
                $
                895Settlements
                
                
                311Salary
      and compensation
                
                
                943Other
      services rendered
                
                
                226Total
      for services, interest, liabilities and compensation
                
                $
                2,375Notes
      payable
                
                $
                186
  During
the twelve months ended December 31, 2008, the Company issued 5,171,000 shares
of common stock in lieu of cash for asset acquisitions of
$1,650,000.  The value of the 5,171,000 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, 2008, we issued to various accredited
investors an aggregate of 6,026,000 shares of restricted common stock for net
consideration of $1,180,000. We relied on Section 4(2) of the Securities Act in
effecting this transaction.
  41
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Preferred
Stock
 
 The
Company has 25,000,000 shares of Series A Preferred Stock authorized of which
3,043,580 shares were issued and outstanding as of December 31, 2009. With
respect to the Series A Preferred Stock outstanding at December 31, 2009, the
Company would be required to issue 56,842,956 shares of its common
stock. In December 2005, the holders of Series A Preferred Stock entered
into a conversion restriction agreement limiting the number of shares of Series
A Preferred Stock that can be converted into shares of Company common stock.
Compliance with this agreement is voluntary. During the fourth quarter of 2009,
the conversion restriction agreement limited the conversion of Series A
Preferred Stock to no more than 14,740,671 shares of common stock. During the
fourth quarter of 2009, Series A Preferred Stock was converted into 9,338,174
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.
 
 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 20 votes on all matters submitted to a vote of the Company’s
stockholders.  Additionally, as part of the December 2008 debt
reduction agreement the Company agreed to increase the Series A voting rights to
50 votes per share when the Company’s outstanding common stock exceeds
120,000,000 shares.
 
 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 6,837,544 shares
of common stock as of December 31, 2009.
  Warrants
to purchase 389,999 shares of common stock at a purchase price of $3.57 per
share were issued by the Company in September 2005 and November 2005.
Specifically, the Company issued convertible notes for $1,500,000 to accredited
investors and issued warrants to purchase 389,999 shares of common stock at
$3.57 per share, subject to adjustment, expiring September 2010, as additional
consideration.
  During
2009, The Company issued convertible subordinated notes for $1,390,000 to
accredited investors and issued warrants to purchase 1,558,297 shares of common
stock at $.45 per share, subject to adjustment if future equity financing is
below their exercise price, expiring three years from issuance, as additional
consideration.
  Warrants
to purchase 4,889,248 shares of Common stock at a purchase price $5.00 per share
were issued by the Company during 2006 thru 2009. For the twelve months ending
December 31, 2009, the Company has attributed $55,000 in warrant expense for the
fair value of these warrants.
  The
following table summarizes warrants that are issued, outstanding and
exercisable:
  Warrants
      OutstandingExercise
                
                Expiration
                
                December
      31,
                
                
                
                
                
                
                
                
                December
      31,Price
                
                Date
                
                2008
                
                
                Issued
                
                
                Exercised
                
                
                20093.57
                
                Sep-10
                
                
                389,999
                
                
                
                -
                
                
                
                -
                
                
                
                389,9990.45
                
                Mar-12
                
                
                -
                
                
                
                1,558,297
                
                
                
                -
                
                
                
                1,558,2975.00
                
                August-11
      thru May-14
                
                
                3,775,272
                
                
                
                1,113,976
                
                
                
                -
                
                
                
                4,889,2484,165,271
                
                
                
                2,672,273
                
                
                
                -
                
                
                
                6,837,544
  NOTE
8 – STOCK PLAN AND EMPLOYEE STOCK OPTIONS
  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 and 2008,
under the 2008 Non-Qualified Stock Option Plans, 9,004,622 and 2,981,459 shares
were issued and outstanding by certain employees and consultants for services
rendered, respectively.
  42
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  Stock
Plan activity was as follows for the twelve months ended December 31, 2009 and
2008, respectively:
  2008PlanShares
      initially reserved
                
                
                15,000,000Remaining
      shares January 01, 2009
                
                
                12,018,541Shares
      issued during 2009
                
                
                6,023,163Remaining
      shares available to be issued at December 31, 2009
                
                
                5,995,378Shares
      issued and outstanding as of December 31, 2009
                
                
                9,004,6222008PlanShares
      Initially Reserved
                
                
                15,000,000Remaining
      shares January 01, 2008
                
                
                15,000,000Shares
      issued during 2008
                
                
                2,981,459Remaining
      shares available to be issued at December 31, 2008
                
                
                12,018,541Shares
      issued and outstanding as of December 31, 2008
                
                
                2,981,459
  The
Company has granted to certain officers and employees 125,000 and 500,000 stock
options which are currently exercisable. Option activity was as follows for the
twelve months ended December 31, 2009 and 2008, respectively:
 
 Shares
                
                
                Weighted-Average
                  Exercise
      PriceOutstanding
      at beginning of year
                
                
                500,000
                
                
                $
                0.57Granted
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Forfeited/cancelled
                
                
                (375,000
                )
                
                
                0.61Outstanding
      at the end of period
                
                
                125,000
                
                
                $
                0.43Exercisable
      at December 31, 2009
                
                
                125,000
                
                
                $
                0.43
  Weighted-Average
      Exercise PriceSharesOutstanding
      at beginning of year
                
                
                3,302,000
                
                
                $
                2.98Granted
                
                
                125,000
                
                
                
                0.43Assumed
      through acquisitions
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Forfeited/cancelled
                
                
                (2,927,000
                )
                
                
                3.28Outstanding
      throughout the period
                
                
                500,000
                
                
                $
                0.57Exercisable
      at December 31, 2008
                
                
                500,000
                
                
                $
                0.57
 
 The
weighted average fair value of the individual options granted during the twelve
months ended December 31, 2009, is estimated at $.43 on the date of grant. The
fair values were determined using a Black-Scholes option-pricing model with the
following assumptions:
  9/30/2009Assumptions
                
                OptionsDividend
      yield
                
                0.00%Risk-free
      rate for term
                
                2.62%Volatility
                
                84.00%Remaining
      life
                
                1.08
  
 43
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Information
about options outstanding was as follows at December 31, 2009:
  Remaining
                
                
                
                AverageClass
                
                Number
                
                Average
      Contractual
                
                Number
                
                ExerciseExercise
      Price
                
                Outstanding
                
                Life
      in Years
                
                Exercisable
                
                Price$0.43
                
                125,000
                
                1.08
                
                125,000
                
                $         0.43125,000
                
                1.08
                
                125,000
                
                $         0.43
 
 NOTE
9 - INCOME TAXES
 
 The
Company adopted the provisions of ASC Topic 760 (formerly “SFAS No. 109”),
"Accounting for Income Taxes." Implementation of ASC Topic 760 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, 2009
                
                December
      31, 2008U.
      S. Federal statutory tax rate
                
                %
                34
                
                %
                34U.S.
      valuation difference
                
                
                (34)
                
                
                (34)Effective
      U. S. tax rate
                
                
                -
                
                
                -Foreign
      tax valuation
                
                
                -
                
                
                -Effective
      tax rate
                
                
                -
                
                
                -
 
 Income
tax expense (benefit) attributable to income from continuing operations differed
from the amounts computed by applying the U.S. Federal income tax of 34% to
pretax income from continuing operations as a result of the following (in
thousands):
 
 December
      31, 2009
                
                
                December
      31, 2008Computed
      expected tax benefit
                
                $
                (3,016)
                
                
                $
                (3,992)Increase
      in valuation allowance
                
                
                3,016
                
                
                
                3,992Income
      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, 2009, and
December 31, 2008, are presented below (in thousands):
 
 December
      31, 2009
                
                
                December
      31, 2008Deferred
      tax assets:Net
      operating loss carry forwards
                
                $
                (12,610)
                
                
                $
                (9,594)Less
      valuation allowance
                
                
                12,610
                
                
                
                9,594Net
      deferred tax assets
                
                $
                -
                
                
                $
                -
 
 The
Company has determined that a valuation allowance of $12,610,000 at December 31,
2009, 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
2009 was approximately $3,016,000. As of December 31, 2009, the Company has a
net operating loss carry-forward of $34,844,000, which is available to offset
future federal taxable income, if any, with expiration beginning 2012 and ending
2029.
   44
 ERF
WIRELESS, INC.
 NOTES
TO 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, 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
                )and
      assumed conversionsFor
      the twelve months ended December 31, 2008Income
                
                
                Shares
                
                
                Per-Share(Numerator)
                
                
                (Denominator)
                
                
                AmountBasic
      EPS:Loss
      available to common stockholders
                
                $
                (11,742
                )
                
                
                78,074
                
                
                $
                (0.15
                )Effect
      of dilutive securities
                
                
                -
                
                
                
                -
                
                
                
                -Diluted
      EPS:Loss
      available to common stockholders
                
                $
                (11,742
                )
                
                
                78,074
                
                
                $
                (0.15
                )
 
 For the
twelve months ended December 31, 2009, dilutive securities existed. Diluted
earnings per share reflect the potential dilution of security 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, 2009 does not include 125,000 shares of common stock assuming all employee
stock options were exercised; 6,837,544 shares of common stock assuming all
warrants were exercised; 14,740,671 shares of common stock assuming all Series A
Preferred Stock (1% per participating trust or 11% of the prior quarter
outstanding common shares based on 2005 restricted agreement) were converted due
to their anti-dilutive effect.
 
 NOTE
11 - MAJOR CUSTOMERS
 
 The
Company had gross sales of approximately $5,533,000 and $5,155,000 for the
twelve months ended December 31, 2009 and 2008, respectively. The Company did
not have any customer that represented 10% of the gross sales in the twelve
months ended December 31, 2009. The Company had one customer that represented
11% of gross sales for the twelve months ended December 31, 2008.
 
 NOTE
12 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES
 
 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
 
 
  45
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 The gross
maturities of these debts are $2,735,000, $6,259,000, $185,000, $106,000 and
$130,000 for the years ended December 31, 2010, 2011, 2012, 2013 and 2014, and
thereafter, respectively.
 
 Notes
payable, long-term debts and capital leases consist of the following as of
December 31, 2008 (in thousand s):
 
 Terms
                Maturity
      Date
                
                Interest
      Rate
                
                
                Gross
      Balance
                
                
                Debt
      Discount
                
                
                Net
      BalanceBancleasing,
      Inc.
                $10,660
      / Month including interest
                October-14
                
                
                11.62%
                
                
                $
                556
                
                
                $
                -
                
                
                $
                556Agility
      Capital Lease
                $91,457
      / Month including interest
                Various
                
                
                18.82%
                
                
                
                1,882
                
                
                
                -
                
                
                
                1,882Balboa
      Lease
                $225
      / Month including interest
                August-10
                
                
                27.74%
                
                
                
                4
                
                
                
                -
                
                
                
                4Liberty
      Finance
                $517
      / Month including interest
                September-09
                
                
                13.97%
                
                
                
                3
                
                
                
                -
                
                
                
                3Chase
      Bank
                $449
      / Month including interest
                November-09
                
                
                5.89%
                
                
                
                5
                
                
                
                -
                
                
                
                5Blanco
      National Bank
                $3,913
      / Month including interest
                August-10
                
                
                9.50%
                
                
                
                65
                
                
                
                -
                
                
                
                65Premium
      Assignment, Insurance notes
                $2,199
      / Month including interest
                September-09
                
                
                8.65%
                
                
                
                16
                
                
                
                -
                
                
                
                16Robert
      McClung, Momentum
                $23,476
      / Quarterly including interest
                October-10
                
                
                7.50%
                
                
                
                173
                
                
                
                -
                
                
                
                173George
      Kemper, TSTAR
                $38,254
      / Quarterly including interest
                April-10
                
                
                7.50%
                
                
                
                220
                
                
                
                -
                
                
                
                220Shane
      Griffths, Crosswind
                $13,911
      / Quarterly including interest
                December-10
                
                
                7.50%
                
                
                
                116
                
                
                
                -
                
                
                
                116Centramedia
                $56,342
      / Quarterly including interest
                December-11
                
                
                7.50%
                
                
                
                600
                
                
                
                -
                
                
                
                600Line
      of credit
                2
      years/ Quarterly interest (See below)
                March-11
                
                
                12.00%
                
                
                
                2,183
                
                
                
                -
                
                
                
                2,183E-bond
      investor notes
                3
      years/ Semiannual interest (See below)
                Various
                
                
                10.00%
                
                
                
                175
                
                
                
                10
                
                
                
                165Total
      debt
                
                
                
                
                
                
                
                $
                5,998
                
                
                $
                10
                
                
                
                5,988Less
      current maturities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,563
                )Less
      debt discount current maturities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                10Long-term
      debt
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                4,435
 
 Investor
Notes
 
 The following table
summarizes the convertible debt activity for the period December 31, 2008, to
December 31, 2009:
 
 Description
                
                Investor
      Notes
                
                
                Warrant
      Liabilities
                
                
                Compound
      Derivative Liability
                
                
                TotalFair
      value at December 31, 2008
                
                $
                -
                
                
                $
                29
                
                
                $
                -
                
                
                $
                2901-01-09
      to 03-31-09 change in fair value
                
                
                -
                
                
                
                (5
                )
                
                
                -
                
                
                
                (5
                )04-01-09
      to 06-30-09 change in fair value
                
                
                -
                
                
                
                (13
                )
                
                
                -
                
                
                
                (13
                )07-01-09
      to 09-30-09 change in fair value
                
                
                -
                
                
                
                (3
                )
                
                
                -
                
                
                
                (3
                )10-01-09
      to 12-31-09 change in fair value
                
                
                -
                
                
                
                (7
                )
                
                
                -
                
                
                
                (7
                )Fair
      value at December 31, 2009
                
                $
                -
                
                
                $
                1
                
                
                $
                -
                
                
                $
                1
 
 For the
year ended December 31, 2009 and 2008, net derivative income was $28,000 and
$271,000, respectively.
 
 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
                
                1.43
      years
                1.19
      years
                0.93
      years
                0.68
      yearsWarrantsAssumptions
                
                3/31/2008
                6/30/2008
                9/30/2008
                12/31/2008Dividend
      yield
                
                0.00%
                0.00%
                0.00%
                0.00%Risk-free
      rate for term
                
                1.62%
                2.91%
                2.00%
                0.76%Volatility
                
                180.00%
                170.00%
                155.00%
                150.00%Maturity
      date
                
                2.43
      years
                2.18
      years
                1.93
      years
                1.68
      years
 
 Line
of Credit
  December
2009, the Company increased its unsecured revolving credit facility with certain
private investors from $6.5 million to $10.5 million maturing December 30, 2011.
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 December 31, 2009,
the line of credit of totaled $5,449,000 with a remaining line of credit of
$5,051,000.
   46
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 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 at the time of the exchange, resulting in the
recognition of a gain on extinguishment of related party debt of $175,000 in
equity. 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.
 
 The
following table summarizes the convertible debt activity for the period December
31, 2008, to 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 and 2008, net derivative income was $42,000 and
$62,000, respectively.
 
 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
                3.38
      years
                3.20
      years
                3.05
      years
                2.95
      yearsWarrantsAssumptions
                
                3/31/2008
                6/30/2008
                9/30/2008
                12/31/2008Dividend
      yield
                
                0.00%
                0.00%
                0.00%
                0.00%Risk-free
      rate for term
                1.62%
                2.91%
                2.00%
                0.76%Volatility
                
                180.00%
                170.00%
                155.00%
                150.00%Maturity
      date average
                4.05
      years
                3.99
      years
                3.82
      years
                3.61
      years
   47
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 CONVERTIBLE
SUBORDINATED FINANCING
 
 During
2009, the Company entered into an agreement with an investment banking firm to
raise up to $3,000,000 in convertible subordinated promissory notes. These notes
are unsecured, bear interest at 10% and are due upon the earlier of one year or
completion of second private placement. The note holder has the option of
exchanging their notes for an equivalent amount of the subsequent funding
transaction or being repaid the principal and interest at this second funding
date. In connection with the issuance of the convertible subordinated 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 per share
subject to adjustment from future equity financing if below their exercise
price, and expire three years from issuance.
 
 Based on
the guidance in ASC 815-10 (formerly SFAS 133)  and ASC 815-40-15
(formerly EITF 07-05), 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 (formerly SFAS 133) 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 $186,000 for the twelve months ended December
31, 2009, and the estimated debt accretion for 2010 is $117,156.
  The
following table summarizes the convertible debt activity for the period March
18, 2009, to December 31, 2009 (in thousands):
  Description
                
                Bridge
      Note
                
                
                Warrant
      Liabilities
                
                
                TotalFair
      value issuance at inception
                
                $
                1,087
                
                
                $
                303
                
                
                $
                1,39003-18-09
      to 03-31-09 change in fair value
                
                
                4
                
                
                
                (3
                )
                
                
                104-01-09
      to 06-30-09 change in fair value
                
                
                44
                
                
                
                (37
                )
                
                
                707-01-09
      to 09-30-09 change in fair value
                
                
                60
                
                
                
                50
                
                
                
                11010-01-09
      to 12-31-09 change in fair value
                
                
                78
                
                
                
                (45
                )
                
                
                33Conversions
      from inception to date
                
                
                -
                
                
                
                -
                
                
                
                -Fair
      value at December 31, 2009
                
                $
                1,273
                
                
                $
                268
                
                
                $
                1,541
  
 For the
year to date ended December 31, 2009 and 2008, net derivative income was $35,000
and $0, respectively.
 
 The
lattice 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
                
                2.97
      years
                2.75
      years
                2.58
      years
                2.33
      years
 
 Blanco
National Bank
 
 In August
2007, the Company assumed a note from the purchase of certain assets from
Momentum Online Computer Services, Inc., that financed a 9.50% installment note
to a Blanco National bank, secured by operating equipment, inventory and
accounts receivable, payable in monthly installments of $3,913 including
interest and is guaranteed by a shareholder.
 
 Robert
McClung, Momentum Online Computer Services, Inc.
 
 On
October 17, 2007, the Company issued a note to Momentum Online Computer, Inc.,
totaling $250,000 that bear interest at 7.5% and are secured by all of the
capital stock issued and outstanding of a subsidiary of the Company, payable in
twelve quarterly payments of $23,476 plus interest.
   48
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 George
Kemper, TSTAR Internet, Inc.
 
 On
November 1, 2007, the Company issued a note to TSTAR, Inc., totaling $350,000
bearing interest at 7.5% and are secured by the equipment acquired, payable in
ten quarterly payments of $38,254 plus interest.
 
 Shane
Griffiths, Crosswind, Inc.
 
 On
January 11, 2008, the Company issued a note to Crosswind, Inc., totaling
$150,000 bearing interest at 7.5% and are secured by the equipment acquired,
payable in twelve quarterly payments of $13,911 plus interest.
 
 Centramedia,
Inc.
 
 On
December 31, 2008, the Company issued a note to Centramedia, Inc., totaling
$600,000 bearing interest at 7.5% and are secured by the equipment acquired,
payable in twelve quarterly payments of $56,342 plus interest.
  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 are secured by the equipment acquired, payable in
twelve quarterly payments of $33,846 plus interest.
  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 are secured by the equipment acquired, payable in
twelve quarterly payments of $6,054 plus interest.
 
 Capital
Leases
 
 Agility Lease Fund, LLC
Included in property and equipment at December 31, 2009, is $1,136,677
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 2009, is $605,809 capitalized equipment,
net of amortization. The equipment is the primary collateral securing the
financing.
 
 The
following is a schedule by years of future minimum lease payments under capital
leases together with the present value of the net minimum lease payments as of
December 31, 2009(in thousands):
 
 Year
      Ending  December 31,2010
                
                $
                1,0532011
                
                
                5242012
                
                
                1412013
                
                
                1282014
                
                
                128Thereafter
                
                
                10Total
      minimum lease payments
                
                
                1,984Less
      amount representing interest
                
                
                (341
                )Present
      value of net minimum lease payments
                
                
                1,643Current
      maturities of capital lease obligations
                
                
                (854
                )Long-term
      portion of capital lease obligations
                
                $
                789
 
 
 49
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
13 - UNCOMPLETED CONTRACTS
 
 Costs,
estimated earnings and billings on uncompleted contracts for the twelve months
ended December 31, 2009 and December 31, 2008 are summarized as follows (in
thousands):
 
 December
      31,
                
                
                December
      31,2009
                
                
                2008Costs
      incurred on uncompleted contracts
                
                $
                9
                
                
                $
                2,953Estimated
      profit
                
                
                8
                
                
                
                656Gross
      revenue
                
                
                17
                
                
                
                3,609Less:
      billings to date
                
                
                -
                
                
                
                3,182Costs
      and profit in excess of billings
                
                $
                17
                
                
                $
                427
 
 Such
amounts are included in the accompanying balance sheets at December 31, 2009 and
December 31, 2008 and are summarized as follows (in thousands):
 
 December
      31,
                
                
                December
      31,2009
                
                
                2008Cost
      and estimated earnings in excess of billings on uncompleted
      contracts
                
                $
                17
                
                
                $
                427Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                
                
                -
                
                
                
                -$
                17
                
                
                $
                427
 
 NOTE
14 - COMMITMENTS
 
 Leases
and License Agreements
 
 For the
twelve months ended December 31, 2009 and 2008, rental expenses of approximately
$845,000 and $642,000, 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.
 
 Future
minimum lease payments under non-cancelable operating leases at December 31,
2009 were as follows:
 
 Period
      Ending December 31,
                
                Amount2010
                
                $
                6172011
                
                
                4172012
                
                
                632013
                
                
                202014
                
                
                13Thereafter
                
                
                34Total
                
                $
                1,164
 
 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 contract is sign 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.
 
 Employment Agreements
 
 Richard
R. Royall
 
 Mr.
Royall’s employment agreement was executed in March 2008 and expires January
2011. During the term of his employment, Mr. Royall is entitled to the following
compensation: (i) base salary of $200,000 per year (ii) standard benefits that
are available to other Company executive officers and (iii) a stock grant of up
to 3,000,000 shares, 1,000,000 shares will be awarded when the Company achieves
positive EBITDA (as reported in an Exchange Act filing), 1,000,000 shares will
be awarded when the Company closes a $25 million financing and 1,000,000 shares
will be awarded when the Company lists on a national stock
exchange.
   50
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 R.
Greg Smith
 
 On July
1, 2008, the Company entered into an executive employment agreement with R. Greg
Smith, expiring December 31, 2010. During the term of his employment, Mr. Smith
is entitled to (i) a base salary of $200,000 per year, (ii) standard benefits
that are available to other executive officers, and (iii) a stock grant of up to
2,550,000 shares, as follows. The ERF Wireless incentive targets up to 1,300,000
shares of common stock: (1) 500,000 shares if the Company achieves positive
EBITDA; (ii) 500,000 shares upon cumulative funding of $25 million; and (3)
300,000 shares upon satisfaction of certain acquisition thresholds. The ENS
incentive targets up to 500,000 shares of common stock: (i) 300,000 shares upon
achieving 2009 positive EBITDA; and (ii) 200,000 shares upon obtaining 2009 ENS
contract values of $1,000,000. The WBS incentive targets up to 750,000 shares of
common stock: (i) 250,000 shares upon securing school district contracts within
certain thresholds and (ii) 500,000 shares upon obtaining certain gross profit
thresholds on these contracts. In the event Mr. Smith employment agreement is
terminated without cause he is entitled to receive (i) the balance of this
unpaid salary through the term of the agreement, (ii) a one year extension for
vesting of stock grants, (iii) and the grant of an option to purchase 500,000
shares of Company common stock at an exercise price equal to the lesser of $.50
a share or the market price on the date of termination, provided that such
option terminates on May 31, 2013.
 
 As of
December 31, 2009 and 2008, Mr. Smith did not earned any options for meeting any
milestones within his employment agreement.
 
 Michael
R. Jones
 
 Mr.
Jones’s employment agreement was executed in September 2009 and expires
September 2011. During the term of his employment, Mr. Jones is entitled to the
following compensation: (i) base salary of $180,000 per year (ii) standard
benefits that are available to other Company executive officers and (iii) a
stock grant of up to 1,150,000 shares plus an additional 50,000 shares for each
attainment of a certain licensing coverage in geographic areas , 250,000 shares
will be awarded when the Company achieves positive EBITDA (as reported in an
Exchange Act filing) and additional 1% of funding when Executive has a
significant role in completion of private or public funding , 900,000 shares
plus an additional 50,000 shares for each attainment of a certain licensing
coverage in geographic areas when achieving Technology Performance Milestones
and 1% to 1.5% when successful completion of funding for either loans or grants
from the government, respectively.
 
 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 $6,000 per month plus an
additional $120 per hour that is greater than the required 50 hours per month in
cash or shares of common stock. The Company at its discretion may issue up to
50% of the monthly fee in common stock at the market price on the date of
issuance; provided that if Synchton sells the stock within 30 days of issuance
the Company is obligated to pay Synchton any shortfall between the difference in
the market price on the issuance date and the market price on the sale date.
During December 2009, the Company amended the agreement to pay $3,000 per month
for a minimum of 25 hours.  Any hours in excess of the minimum are billable
at $120 per hour.  Synchton's President is Scott A. Cubley. For the period
ended December 31, 2009 and 2008, total fees incurred by the Company under the
agreement were $121,000 and $116,000, respectively.
 
 Brian Cubley, son of our chief executive
officer, entered into an employment agreement that expires December 31, 2010.
During the term of his employment, Mr. Cubley is entitled to the following
compensation: (i) base salary of $110,000 per year; (ii) standard benefits that
are available to other Company executive officers; and (iii) a stock grant of up
to 1,925,000 shares as follows: up to 525,000 shares of common stock will be
awarded when the Company achieves certain incremental market capitalization,
1,125,000 shares will be awarded when the Company attain certain incremental
cumulative revenue, and 125,000 shares will be awarded when the Company achieves
certain incremental recurring revenue streams. In the event Mr. Cubley’s
employment agreement is terminated without cause he is entitled to receive (i)
the balance of this unpaid salary through the term of the agreement, (ii) a one
year extension for vesting of stock grants, (iii) and the grant of an option to
purchase of 50,000 shares of Company common stock at an exercise price equal to
the average closing price during the six month period following the termination.
As of December 31, 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, 2011. Mr. Cubley was compensated in cash and shares of common stock for
services rendered for fiscal 2009 and 2008 in the amount of $124,000 and
$116,000, respectively.
 
 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 at the time of the exchange, resulting in the
recognition of a gain on extinguishment of related party debt of $175,000 in
equity. 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.
 
 The
Company during the fourth quarter 2008 signed a debt conversion agreement to
convert the unsecured revolving credit facility which provides financing for
working capital requirements. On December 31, 2008 the Company issued 2,000,000
shares of its Series A Preferred Stock for the conversion of $3,000,000 in debt.
The Series A Preferred shares were valued at $6,580,000 at the time of the
exchange, resulting in the recognition of a loss on extinguishment of related
party debt in the amount of $3,580,000 during 2008. 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.
   51
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 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.
 
 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.
 
 Oil & Gas Division
(O&G)
  O&G
provides wireless connectivity to rural oil and gas locations primarily via
Mobile Broadband Trailers (MBTs). O&G 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. The O&G division is
a division of WBS.
 
 For the twelve months
ended December 31, 2009 (in thousands)
 
 WMS
                
                
                WBS
                
                
                O&G
                
                
                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
 
 For the
twelve months ended December 31, 2008 (in thousands)
 
 WMS
                
                
                WBS
                
                
                O&G
                
                
                ENS
                
                
                TotalRevenue
                
                $
                742
                
                
                $
                3,821
                
                
                $
                72
                
                
                $
                520
                
                
                $
                5,155Segment
      (loss) income
                
                
                (165
                )
                
                
                (2,078
                )
                
                
                47
                
                
                
                (1,592
                )
                
                
                (3,788
                )Segment
      assets
                
                
                92
                
                
                
                6,794
                
                
                
                287
                
                
                
                1,918
                
                
                
                9,091Capital
      expenditures
                
                
                14
                
                
                
                3,239
                
                
                
                292
                
                
                
                855
                
                
                
                4,400Depreciation
      and amortization
                
                
                15
                
                
                
                1,574
                
                
                
                5
                
                
                
                113
                
                
                
                1,707
 Twelve
      Months EndedReconciliation
      of Segment Loss from Operations to Net Loss
                
                December
      31, 2009
                
                December
      31, 2008Total
      segment loss from operations
                
                $
                (3,374
                )
                
                $
                (3,788
                )Total
      corporate overhead including other, net
                
                
                (5,498
                )
                
                
                (7,954
                )Net
      loss
                
                $
                (8,872
                )
                
                $
                (11,742
                )
 
 52
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Reconciliation
      of Segment Assets to Total Assets
                
                December
      31, 2009
                
                
                December
      31, 2008Total
      segment assets
                
                $
                8,745
                
                
                $
                9,091Total
      corporate assets
                
                
                372
                
                
                
                532Consolidated  assets
                
                $
                9,117
                
                
                $
                9,623
 
 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.
 
 At
December 31, 2009 one customer accounts for $165,000 of ENS Division revenues
and one customer accounts for $200,000 of WBS Division revenues. One customer
accounts for $272,000 of ENS Division revenues and one customer accounts for
$550,000 of WMS Division revenues at December 31, 2008.
 
 NOTE
17 – BUSINESS COMBINATIONS
 
 The
following table summarizes significant acquisitions completed during the year
ended December 31, 2009 and 2008 (in thousands):
 
 December
      31, 2009Purchase
                
                
                
                
                
                AmortizablePrice
                
                
                Goodwill
                
                
                IntangiblesFrontier/Itexas
                
                $
                1,485
                
                
                $
                819
                
                
                $
                283
 
 December
      31, 2008Purchase
                
                
                
                
                
                AmortizablePrice
                
                
                Goodwill
                
                
                IntangiblesCrosswind
                
                $
                650
                
                
                $
                176
                
                
                $
                206Centramedia
                
                $
                2,000
                
                
                $
                -
                
                
                $
                -
   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
 
 
 
 53
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 The
amount allocated to identifiable intangible assets was determined by the
company's management. Other intangibles assets are being amortized over their
useful life in accordance with the guidance contained in the Financial
Accounting Standards Board ("FASB") issued ASC Topic 350 (formerly "SFAS 142")
"Goodwill and Other Intangible Assets".
 
 Frontier/ItexasGoodwill
                
                $
                819Non-compete
      agreement
                
                
                15Customer
      relationships
                
                
                268Total
      identifiable intangible assets
                
                $
                1,102
 
 CENTRAMEDIA,
INC., ACQUISITION
 
 Purchase
Price
 
 On
December 31, 2008, the Company completed the purchase of substantially all the
assets from Centramedia, Inc. The assets purchased include substantially all of
the assets associated with the Internet operations of Centramedia including the
current customer base, inventory, equipment, contract rights, vehicles, Internet
address space, general intangibles, certain real property and wireless broadband
equipment infrastructure. The acquisition will increase the Company's footprint
geographically area covering certain cities and counties in the Texas Panhandle,
this will lead to additional synergy with expansion of the WiNet and US-BankNet
System and expand our Oil and Gas coverage. At the time of the transaction,
there were no material relationships between the seller and the Company or any
of its affiliates, or any director or officer of the Company, or any associate
of any such officer or director. The Company paid $2,000,000 in cash, notes and
securities and assumed $61,000 in current liabilities.
 
 The
purchase price allocation is as follows (in thousands):
 
 Cash
              
              $
              1Accounts
      receivable
              
              
              40Property
      and equipment
              
              
              2,020Deferred
      revenue
              
              
              (61
              )Total
      adjusted purchase price
              
              $
              2,000
 
 CROSSWIND ENTERPRISES, INC.,
ACQUISITION
 
 Purchase
Price
 
 On
January 11, 2008, the Company completed the purchase of substantially all assets
from Crosswind Enterprises Inc. Under the asset purchase agreement, the Company
acquired the wireless internet service provider, which includes all of the
current customers, equipment and network infrastructure equipment. The
acquisition will also increase the Company's footprint in west Texas and Eastern
New Mexico. This will lead to additional synergy with expansion of the WiNet and
US-BankNet System and expand our Oil and Gas coverage. At the time of the
transaction, there were no material relationships between the seller and the
Company or any of its affiliates, or any director or officer of the Company, or
any associate of any such officer or director. The Company paid $650,000 in
cash, notes and securities and assumed $3,000 in current liabilities and assumed
$71,000 in note payables.
 
 The
purchase price allocation is as follows (in thousands):
 
 Accounts
      receivable
              
              $
              2Property
      and equipment
              
              
              340Goodwill
              
              
              176Identifiable
      intangible assets
              
              
              206Accounts
      payable and accrued expenses
              
              
              (3
              )Note
      payable
              
              
              (71
              )Total
      adjusted purchase price
              
              $
              650
 
 
 54
 ERF
WIRELESS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 The
amount allocated to identifiable intangible assets was determined by the
company's management. Other intangibles assets are being amortized over their
useful life in accordance with the guidance contained in the Financial
Accounting Standards Board ("FASB") issued ASC Topic 350 (formerly "SFAS 142")
"Goodwill and Other Intangible Assets".
 
 CrosswindGoodwill
              
              $
              176Non-compete
      agreement
              
              
              50Customer
      relationships
              
              
              156Total
      identifiable intangible assets
              
              $
              382
 
 Proforma
 
 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. Centramedia and Crosswind
have been included in the Company’s consolidated statements of operations since
the completion of the acquisitions during the year ended December 31, 2008. 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 and 2008 for the respective acquisitions (in
thousands, except per share amounts):
 
 Unaudited
Proforma
 
 Year
      Ended
                
                
                Year
      EndedDecember
      31,
                
                
                December
      31,2009
                
                
                2008Net
      Revenue
                
                $
                6,011
                
                
                $
                6,426Net
      income (loss)
                
                $
                (9,057
                )
                
                $
                (12,523
                )Net
      income (loss) available to common shareholder
                
                $
                (9,057
                )
                
                $
                (12,523
                )Net
      income (loss) per share-basic
                
                $
                (0.07
                )
                
                $
                (0.16
                )Net
      income (loss) per share-diluted
                
                $
                (0.07
                )
                
                $
                (0.16
                )
 
 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 2010, the Company issued 16,596,377 shares of common
stock for services rendered, debt, exchange of liabilities, and conversion of
preferred stock.
    The
Company intends to convert $3 million of line of credit into Series A preferred
stock over the next 120 days.
   55
 
 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, 2009.
 
 This
Annual Report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Our internal control over financial reporting was not subject to
attestation by our independent registered public accounting firm pursuant to
temporary rules of the SEC that permit us to provide only management’s report in
this Annual Report.
 
 There has
been no change in our internal controls over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
 
 ITEM 9B. OTHER
INFORMATION
 
 None.









56





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, 2010, are shown
below.





Name
              Age
              PositionH.
      Dean Cubley
              68
              Chairman
      of the Board of Directors and CEORichard
      R. Royall
              63
              Director
      and Chief Financial OfficerR.
      Greg Smith
              51
              Director
      and EVP and CEO of ENSMichael
      R. Jones
              55
              Director  and
      CTOBartus
      H. Batson
              67
              Director





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





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





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





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





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





Key
Employees





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





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








57





Independence
of Directors





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





Section
16(A) Beneficial Ownership Reporting Compliance





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





Code
of Ethics





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





ITEM
11. EXECUTIVE COMPENSATION





Compensation
Discussion and Analysis





Objectives
of Our Executive Compensation Program





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





The
Role of the Compensation Committee





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





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





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





58








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.





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, 2009 exceeded $100,000.





Name
      and Principal Position
              Year
              
              Salary
      and
                Consulting
                Payments
      ($)
              
              
              Bonus
                ($)
              
              
              Stock
                Awards
                ($)
              
              
              All
      Other
                Compensation
      ($)
              
              
              Total
                ($)H.
      Dean Cubley
              2009
              
              
              135,000
              
              
              
              -
              
              
              
              -
              
              
              
              13,500
              
              
              
              148,500Chairman
      of the Board and CEO
              2008
              
              
              135,000
              
              
              
              -
              
              
              
              -
              
              
              
              15,500
              
              
              
              150,500Richard
      R Royall
              2009
              
              
              210,697
              
              
              
              -
              
              
              
              -
              
              
              
              7,500
              
              
              
              218,197Director
      and CFO
              2008
              
              
              203,501
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              203,501R.
      Greg Smith
              2009
              
              
              200,004
              
              
              
              7,500
              
              
              
              -
              
              
              
              7,500
              
              
              
              215,004Director
      and EVP and CEO ENS
              2008
              
              
              190,502
              
              
              
              50,346
              
              
              
              -
              
              
              
              7,500
              
              
              
              248,348Michael
      R Jones
              2009
              
              
              140,000
              
              
              
              -
              
              
              
              -
              
              
              
              7,500
              
              
              
              147,500Director
      and CTO
              2008
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Robert
      McClung
              2009
              
              
              150,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              150,000Key
      employee
              2008
              
              
              150,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              150,000








59








Outstanding Equity Awards
at December 31, 2009





The table
below sets forth information with respect to our named executive officers
regarding the value of equity compensation as of December 31, 2009.





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 ($)
      (4)
              
              
              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
              
              
              
              750,000
              
              
              
              -
              
              
              
              -R.
      Greg Smith
              
              
              (2)
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              
              2,550,000
              
              
              
              637,500
              
              
              
              -
              
              
              
              -Michael
      R. Jones
              
              
              (3)
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              
              1,150,000
              
              
              
              287,500
              
              
              
              -
              
              
              
              -Robert
      McClung
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -




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


(3)
            Mr.
      Jones’s is entitled to receive a stock grant of up to 1,150,000 shares
      plus an additional 50,000 shares for each attainment of a certain
      licensing coverage in geographic areas as follows: (i) 250,000 shares will
      be awarded when the Company achieves positive EBITDA (as reported in an
      Exchange Act filing) and additional 1% of funding when Executive has a
      significant role in completion of private or public funding ,(ii) 900,000
      shares plus an additional 50,000 shares for each attainment of a certain
      licensing coverage in geographic areas when achieving Technology
      Performance Milestones and 1% to 1.5% when successful completion of
      funding for either loans or grants from the government,
      respectively.


(4)
            Based
      on closing price of common stock on December 31,
  2009.





Employment
and Consulting Agreements





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





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





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





Michael Jones.Mr. Jones
employment agreement expires September 2011. During the term of his employment,
Mr. Jones is entitled to: (i) base salary of $180,000 per year (ii) standard
benefits that are available to other Company executive officers and (iii) a
stock grant of up to 1,150,000 shares plus an additional 50,000 shares for each
attainment of a certain licensing coverage in geographic areas, 250,000 shares
will be awarded when the Company achieves positive EBITDA (as reported in an
Exchange Act filing) and additional 1% of funding when Executive has a
significant role in completion of private or public funding , 900,000 shares
plus an additional 50,000 shares for each attainment of a certain licensing
coverage in geographic areas when achieving Technology Performance Milestones
and 1% to 1.5% when successful completion of funding for either loans or grants
from the government, respectively.


.





60





Director
Compensation





Set forth
below is information regarding compensation paid to each director during 2009.
Additionally, we reimburse our directors for travel and lodging expenses in
connection with their attendance at board meetings.





Name
              
              Fees
      Earned
                or
      Paid in
                Cash ($)
              
              
              Stock
                Awards
                ($)
              
              
              Option
                Awards
                ($)
              
              
              Non-Equity
                Incentive
      Plan
                Compensation
                ($)
              
              
              Change
      in
                Pension
      Value
                and
                Nonqualified
                Deferred
                Compensation
                Earnings
                ($)
              
              
              All
      Other
                Compensation
      ($)
              
              
              Total
                ($)H.
      Dean Cubley
              
              
              13,500
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              13,500R.
      Greg Smith
              
              
              7,500
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,500Richard
      R. Royall
              
              
              7,500
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,500Bartus
      H. Batson
              
              
              10,500
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10,500Michael
      Jones
              
              
              7,500
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,500





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





As of
March 16, 2010, 166,280,910 shares of common stock were outstanding and
3,043,580 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.





61








SHARES
      OF COMMON STOCK
                BENEFICIALLY
                OWNED  (1)
              SHARES
      OF SERIES A
                PREFERRED
      STOCK
                BENEFICIALLY
                OWNED
              TOTAL
      PERCENTAGE OF
                VOTING
      POWER  (2)NAME
      AND ADDRESS OF BENEFICIAL OWNER
              NUMBER
              
              %
              
              NUMBER
              
              %
              
              NUMBER
              %Frances
      Cubley  (3)
              
              10,378,010
              (4)
              7.04%
              
              1,924,354
              (5)
              87%
              
              106,469,964
              41.66%STJV
      Trust
              
              8,080,292
              
              5.55%
              
              521,513
              
              24%
              
              34,155,942
              13.36%Pauline
      Trust
              
              541,783
              
              0.37%
              
              300,275
              
              14%
              
              15,555,533
              6.09%Carson
      Family Trust
              
              336,772
              
              0.23%
              
              269,124
              
              12%
              
              13,792,972
              5.40%Leopard
      Family Trust
              
              560,459
              
              0.38%
              
              266,305
              
              12%
              
              13,875,686
              5.43%Jauquine
      Trust
              
              535,172
              
              0.37%
              
              109,131
              
              5%
              
              5,991,722
              2.34%Systom
      Trust
              
              323,532
              
              0.22%
              
              458,006
              
              21%
              
              23,223,849
              9.09%Held
      in Escrow
              
              
              
              0.00%
              
              500,000
              
              21%
              
              25,000,000
              0.38%R.
      Greg Smith
              
              1,942,249
              (6)
              1.33%
              
              -
              
              0%
              
              1,942,249
              0.76%Dr.
      H. Dean Cubley
              
              610,300
              
              0.42%
              
              -
              
              0%
              
              610,300
              0.24%Richard
      R. Royall
              
              372,186
              (7)
              0.26%
              
              -
              
              0%
              
              372,186
              0.15%Dr
      Bartus H. Batson
              
              142,997
              
              0.10%
              
              -
              
              0%
              
              142,997
              0.06%Mike
      Jones
              
              352,967
              
              0.24%
              
              -
              
              0%
              
              352,967
              0.14%Robert
      McClung
              
              872,264
              
              0.60%
              
              -
              
              0%
              
              872,264
              0.34%John
      Nagel
              
              878,969
              
              0.60%
              
              -
              
              0%
              
              878,969
              0.34%All
      Executives Officers and Directors as a group
              
              5,171,932
              
              3.55%
              
              -
              
              0%
              
              5,171,932
              2.02%(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 50 votes on all
      matters in which the common stockholders and preferred stockholders vote
      together.


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


(4)
            Includes
      10,378,010 shares owned by the Francis Cubley
  Trusts.


(5)
            Includes
      1,924,354 shares of Series A Preferred Stock held by the Francis Cubley
      Trusts.


(6)
            Includes
      (i) 1,939,582 shares held by Lariat Financial, Inc., a corporation
      controlled by Mr. Smith.


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





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 $6,000 per month plus an
additional $120 per hour that is greater than the required 50 hours per month in
cash or shares of common stock. The Company at its discretion may issue up to
50% of the monthly fee in common stock at the market price on the date of
issuance; provided that if Synchton sells the stock within 30 days of issuance
the Company is obligated to pay Synchton any shortfall between the difference in
the market price on the issuance date and the market price on the sale date.
Synchton's President is Scott A. Cubley. For the period ended December 31, 2009
and 2008, total fees incurred by the Company under the agreement were $121,000
and $116,000, respectively.





Brian
Cubley, son of our chief executive officer, entered into an employment agreement
that expires December 31, 2010. During the term of his employment, Mr. Cubley is
entitled to the following compensation: (i) base salary of $110,000 per year;
(ii) standard benefits that are available to other Company executive officers;
and (iii) a stock grant of up to 1,925,000 shares as follows: up to 525,000
shares of common stock will be awarded when the Company achieves certain
incremental market capitalization, 1,125,000 shares will be awarded when the
Company attain certain incremental cumulative revenue, and 125,000 shares will
be awarded when the Company achieves certain incremental recurring revenue
streams. In the event Mr. Cubley’s employment agreement is terminated without
cause he is entitled to receive (i) the balance of this unpaid salary through
the term of the agreement, (ii) a one year extension for vesting of stock
grants, (iii) and the grant of an option to purchase of 50,000 shares of Company
common stock at an exercise price equal to the average closing price during the
six month period following the termination. As of December 31, 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, 2011. Mr. Cubley was
compensated in cash and shares of common stock for services rendered for fiscal
2009 and 2008 in the amount of $124,000 and $116,000, respectively.





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 at the time of the exchange, resulting in the
recognition of a gain on extinguishment of related party debt of $175,000 in
equity. 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.








62





The
Company during the fourth quarter 2008 signed a debt conversion agreement to
convert the unsecured revolving credit facility which provides financing for
working capital requirements. On December 31, 2008 the Company issued 2,000,000
shares of its Series A Preferred Stock for the conversion of $3,000,000 in debt.
The Series A Preferred shares were valued at $6,580,000 at the time of the
exchange, resulting in the recognition of a loss on extinguishment of related
party debt in the amount of $3,580,000 during 2008. 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.





ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





General





During
the fiscal years ended December 31, 2009, and December 31, 2008, the aggregate
fees billed by LBB & Associates Ltd., LLP, were as follows:




December
      31,
              
              
              December
      31,2009
              
              
              2008Audit
      fees
              
              $
              128,969
              
              
              $
              113,132Audit
      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.








63








ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





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





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








64














SIGNATURES





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











ERF
      WIRELESS, INC.By:
      /s/ H. Dean
      CubleyName:
      Dr. H. Dean Cubley
              Title:
      Chief Executive Officer
              Date:
      March 30, 2010


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/
      H. Dean Cubley
            Chairman
      of the Board of Directors
            March
      30, 2010Dr.
      H. Dean Cubley
            Principal
      Executive Officer, and Director/s/
      Richard R. Royall
            Director,
      Chief Financial Officer,
            March
      30, 2010Richard
      R. Royall
            Principal
      Financial Officer andPrincipal
      Accounting Officer/s/
      R. Greg Smith
            Director
            March
      30, 2010R.
      Greg Smith/s/
      Michael R. Jones
            Director
            March
      30, 2010Michael
      R. Jones/s/
      Dr. Bartus H. Batson
            Director
            March
      30, 2010Dr.
      Bartus H. Batson













65