Inphonic 10Q/A 2006 Q2 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q/A

(Amendment No. 1)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarter ended June 30, 2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number 000-51023

INPHONIC, INC.

(Exact name of Registrant as specified in its Charter)


Delaware		52-2199384
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer identification no.)


1010 Wisconsin Avenue, Suite 600, Washington, DC		20007
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (202) 333-0001

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 such filing requirements for the past 90 days. Yes x. No ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). Yes ¨. No x.

The registrant had 36,157,751 shares of common stock outstanding as of August 1, 2006.

EXPLANATORY NOTE

We filed our Quarterly Report on From 10-Q for the three and six months ended June 30, 2006 with the Securities and Exchange Commission (the “SEC”) on August 9, 2006. We are filing this Form 10-Q/A Amendment No. 1 to amend and restate our unaudited financial statements for the three and six months ended June 30, 2006 and related footnote disclosures to correct errors in our accounting for activations and services and cost of revenue identified during the 2006 year-end audit. These adjustments reduced our activation and services revenue by $3.7 and $4.1 million and increased our equipment cost of revenue by $0.6 and $0.6 million for the three and six months ended June 30, 2006 respectively. Our net loss per share for the three and six months ended June 30, 2006 increased by $0.12 and $0.13 to ($0.26) and ($0.39), respectively. Please refer to Note 1(c) to the unaudited condensed consolidated financial statements for further explanation.

All referenced amounts in this report as of and for the three and six months ended June 30, 2006 reflect balances and amounts on a restated basis. All of our future Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q and Form 10-Q/A will reflect the restated information in this Form 10-Q/A, as applicable.

This Amendment No. 1 to our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2006 amends only the following items:

Part I, Item 1 – Financial Statements

Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Part I, Item 4 – Controls and Procedures

Part II, Item 6 – Exhibits and reports on Form 8-K

INPHONIC, INC.

INDEX

FORM 10-Q


	PART I. – FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements	3

	Unaudited Condensed Consolidated Balance Sheets at December 31, 2005 and June 30, 2006	3

	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and June 30, 2006	4

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2006	5

	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and June 30, 2006	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 4.	Controls and Procedures	31
	PART II. – OTHER INFORMATION
Item 6.	Exhibits	32



SIGNATURES				33

PART I

ITEM 1.

FINANCIAL STATEMENTS

INPHONIC, INC.

Condensed Consolidated Balance Sheets

(in thousands, except per share and share amounts)


	December 31, 2005			June 30, 2006
				(restated) (unaudited)
Assets
Current assets:
Cash and cash equivalents	$	70,783		$	47,411
Short-term investments		—			5,000
Accounts receivable, net of allowance of $2,042 and $1,045, respectively		34,606			56,672
Inventory, net		17,693			21,147
Prepaid expenses		2,405			4,741
Deferred costs and other current assets		6,823			2,532
Current assets of discontinued operations		2,430			597

Total current assets		134,740			138,100
Restricted cash and cash equivalents		400			—
Property and equipment, net		12,121			16,154
Goodwill		31,140			34,124
Intangible assets, net		12,651			10,721
Deposits and other assets		3,058			6,568

Total assets	$	194,110		$	205,667


Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of long-term debt and capital leases	$	377		$	15,384
Accounts payable		29,556			51,524
Accrued expenses and other liabilities		31,588			25,489
Current portion of deferred revenue		13,851			9,858
Current liabilities of discontinued operations		3,130			1,601

Total current liabilities		78,502			103,856
Long-term debt and capital lease obligations, net of current maturities		15,474			406
Deferred revenue, net of current portion		284			599

Total liabilities		94,260			104,861

Stockholders’ equity:
Common stock, $0.01 par value
Authorized 200,000,000 shares at December 31, 2005 and June 30, 2006; issued and outstanding 35,232,869 and 36,106,153 shares at December 31, 2005 and June 30, 2006, respectively		353			360
Additional paid-in capital		264,155			278,993
Accumulated deficit		(164,658	)		178,547

Total stockholders’ equity		99,850			100,806

Total liabilities and stockholders’ equity	$	194,110		$	205,667

See accompanying notes to unaudited condensed consolidated financial statements

INPHONIC, INC.

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share and share amounts)


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2006			2005			2006
				(restated)						(restated)
Revenue:
Activations and services	$	55,452		$	74,216		$	105,203		$	140,958
Equipment		19,774			17,912			38,174			38,148

Total revenue		75,226			91,128			143,377			179,106
Cost of revenue, exclusive of depreciation and amortization:
Activations and services		286			1,065			1,459			1,325
Equipment		41,718			50,510			80,668			98,431

Total cost of revenue		42,004			51,575			82,127			99,756
Operating expenses:
Sales and marketing, exclusive of depreciation and amortization		19,827			27,408			37,325			54,130
General and administrative, exclusive of depreciation and amortization		12,299			16,908			28,577			30,139
Depreciation and amortization		2,142			3,960			3,919			7,443
Restructuring costs		245			1,906			394			1,906
Investment write-off		228			—			228			—

Total operating expenses		34,741			50,182			70,443			93,618

Operating loss		(1,519	)		(9,629	)		(9,193	)		(14,268	)

Other income (expense):
Interest income		545			547			1,027			1,174
Interest expense		(188	)		(288	)		(414	)		(624	)

Total other income		357			259			613			550

Loss from continuing operations		(1,162	)		(9,370	)		(8,580	)		(13,718	)
Discontinued operations:
Loss from discontinued operations		(490	)		(206	)		(66	)		(171	)

Net loss	$	(1,652	)	$	(9,576	)	$	(8,646	)	$	(13,889	)

Basic and diluted net loss per share:
Net loss from continuing operations	$	(0.04	)	$	(0.26	)	$	(0.26	)	$	(0.38	)
Net loss from discontinued operations		(0.01	)		(0.01	)		(0.00	)		(0.01	)

Basic and diluted net loss per share	$	(0.05	)	$	(0.27	)	$	(0.26	)	$	(0.39	)

Basic and diluted weighted average shares outstanding		33,847,007			35,856,253			33,380,156			35,529,454

See accompanying notes to unaudited condensed consolidated financial statements

INPHONIC, INC.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)


	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Total
	Shares		Amount			Additional Paid-in Capital			Accumulated Deficit			Total
									(restated)
Balance, December 31, 2005	35,232,869		$	353		$	264,155		$	(164,658	)	$	99,850
Stock-based compensation expense	—			—			7,511			—			7,511
Issuance of common stock in connection with the acquisition and earnouts of:
A1 Wireless, Inc.	15,408			—			235			—			235
VMC Satellite, Inc.	482,146			5			3,617			—			3,622
Issuance of common stock warrant	—			—			3,228			—			3,228
Repurchase and retirement of common stock	(62,761	)		(1	)		(502	)		—			(503	)
Exercise of common stock options, restricted stock awards and other	438,491			3			749			—			752
Net loss	—			—			—			(13,889	)		(13,889	)

Balance, June 30, 2006 (restated)	36,106,153		$	360		$	278,993		$	(178,547	)	$	100,806

See accompanying notes to unaudited condensed consolidated financial statements

INPHONIC, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)


	Six Months Ended June 30,
	2005			2006
				(restated)
Cash flows from operating activities:
Net loss	$	(8,646	)	$	(13,889	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		3,919			7,443
Non-cash sales and marketing expense related to common stock warrant		—			135
Non-cash interest expense, net		324			—
Stock-based compensation		9,796			7,110
Non-cash write-off of investment		228			—
Changes in operating assets and liabilities, net of assets and liabilities received from business acquisition:
Accounts receivable		(20,542	)		(21,925	)
Inventory		(6,931	)		(3,454	)
Prepaid expenses		(741	)		(2,336	)
Deferred costs and other assets		164			4,295
Deposits and other assets		(439	)		161
Accounts payable		7,376			21,037
Accrued expenses and other liabilities		4,117			(2,722	)
Deferred revenue		2,137			(3,678	)

Net cash used in operating activities		(9,238	)		(7,823	)
Cash flows from investing activities:
Capitalized expenditures, including internal capitalized labor		(6,026	)		(8,874	)
Cash paid for acquisitions		(6,269	)		(3,028	)
Cash paid for intangible assets		(2,439	)		(193	)
Purchase of short-term investments		(17,860	)		(5,000	)
Proceeds from the sale of assets of discontinued operations		—			1,110
Reduction in restricted cash and cash equivalents		—			400

Net cash used in investing activities		(32,594	)		(15,585	)
Cash flows from financing activities:
Principal repayments on debt		(146	)		(213	)
Cash paid for repurchase of common stock		—			(503	)
Proceeds from exercise of warrants and options		6,543			752
Net costs of initial public offering		(291	)		—

Net cash provided by financing activities		6,106			36

Net decrease in cash and cash equivalents		(35,726	)		(23,372	)
Cash and cash equivalents, beginning of the period		100,986			70,783

Cash and cash equivalents, end of the period	$	65,260		$	47,411

Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest	$	90		$	263
Income taxes		—			—
Supplemental disclosure of non-cash activities:
Issuance of common stock in business acquisitions		8,209			3,856
Issuance of common stock in intangible asset purchase		1,549			—
Release of funds in escrow related to A1 Wireless acquisition		10,700			—
Issuance of warrant to purchase common stock to vendor		—			3,228
Purchase consideration in accrued liabilities		3,000			—

See accompanying notes to unaudited condensed consolidated financial statements

INPHONIC, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

(1)

The Company and Basis of Presentation

(a)

Preparation of Interim Financial Statements

We have prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial reporting. The financial information included herein, other than the consolidated balance sheet as of December 31, 2005, has been prepared without audit. The consolidated balance sheet at December 31, 2005 has been derived from, but does not include all the disclosures contained in the audited financial statements for the year ended December 31, 2005. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. In the opinion of management, these unaudited statements include all the adjustments and accruals necessary for a fair presentation of the results of the periods presented herein. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2005. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for a full year. Certain prior year amounts have been reclassified to conform to the current period presentation.

(b)

Business

We are a leading online seller of wireless services and devices based on the number of activations of wireless services sold online in the United States. We sell wireless service plans and devices, including satellite television services through our own branded websites; including Wirefly.com, A1 Wireless.com, and VMCsatellite.com and through websites that we create and manage for third parties. We offer marketers the ability to sell wireless voice and data services and devices under mobile virtual network enabler (“MVNE”) agreements. This service utilizes the same e-commerce platform, operational infrastructure and marketing relationships that we use in our operations. We provide customers the ability to organize personal communication by providing real time wireless access to e-mail, voicemail, faxes, contacts, scheduling, calendar and conference calling functionality through a website or telephone.

(c)

Restatement

We have restated our consolidated financial statements as of and for the three and six month periods ended June 30, 2006 to reflect the correction of the following errors related to the application of our revenue recognition and cost of revenue accounting policies which had been identified in the audit of our financial statements for the year ended December 31, 2006:

During the three months ended March 31, 2006, we had recorded revenue for certain of our features activations and services commissions in which it was subsequently determined that collectibility was not reasonably assured. As a result we reduced our revenue and accounts receivable by approximately $393 for this adjustment.

During the three months ended June 30, 2006, we had recorded activations and services revenue net of related reserves as a change in estimate of certain carrier commissions in dispute which we had previously deemed as collectible. Upon further evaluation, we believe that it was inappropriate to have recorded revenue associated with this matter until such commissions are collected from the carrier. In addition, we identified other errors related to the recording of activations and services revenue of approximately $923 as it was subsequently determined that collectibility of these amounts was not reasonably assured based on our collection experience. Accordingly, we reduced our revenue and accounts receivable by approximately $3,674 for this adjustment.

In addition during the three months ended June 30, 2006, we identified errors that occurred in the recordation of cost of revenue and accounts receivable in the amount of $627 that have been corrected in the accompanying financial statements. The impact on our financial statements for these items for the three and six months ended June 30, 2006 is shown in the table below:


	June 30, 2006 (reported)			June 30, 2006 (adjustments)			June 30, 2006 (restated)
Accounts receivable	$	61,366		$	(4,694	)	$	56,672
Total current assets		142,794			(4,694	)		138,100
Total assets		210,361			(4,694	)		205,667

Accumulated deficit		(173,853	)		(4,694	)		(178,547	)
Total stockholders' equity		105,500			(4,694	)		100,806
Total liabilities and stockholders' equity		210,361			(4,694	)		205,667


	Three Months Ended June 30, 2006									For the six months ended
	30-Jun (reported)			30-Jun (adjustments)			30-Jun (restated)			30-Jun (reported)			30-Jun (adjustments)			30-Jun (restated)
Revenue:
Activations and services	$	77,890		$	(3,674	)	$	74,216		$	145,025		$	(4,067	)	$	140,958

Total revenue		95,802			(3,674	)		92,128			183,173			(4,067	)		179,106

Cost of revenue, exclusive of depreciation and amortization Equipment	$	49,883		$	627		$	50,510		$	97,804		$	627		$	98,431

Total cost of revenue		50,948			627			51,575			99,129			627			99,756

Operating loss		(5,328	)		(4,301	)		(9,629	)		(9,574	)		(4,694	)		(14,268	)

Loss from continuing operations		(5,069	)		(4,301	)		(9,370	)		(9,024	)		(4,694	)		(13,718	)
Net loss		(5,275	)		(4,301	)		(9,576	)		(9,195	)		(4,694	)		(13,889	)

Net loss per share:
Net loss from continuing operations		(0.14	)		(0.12	)		(0.26	)		(0.25	)		(0.13	)		(0.38	)
Basic and diluted net loss per share		(0.15	)		(0.12	)		(0.27	)		(0.26	)		(0.13	)		(0.39	)


	For the six months ended
	30-Jun (reported)			30-Jun (adjustments)			30-Jun (restated)
Cash flows from operating activities:
Net loss	$	(9,195	)	$	(4,694	)	$	(13,889	)
Accounts receivable		(26,619	)		4,694		$	(21,925	)

(d)

Risks and Uncertainties

Our operations are subject to certain risks and uncertainties including, among others, actual and potential competition by entities with greater financial resources, rapid technological changes, the need to retain key personnel and protect intellectual property and the availability of additional capital financing on terms acceptable to us.

Since inception we have incurred net losses attributable to common stockholders of approximately $178,547. To date, management has relied on debt and equity financings to fund our operating deficit. While we currently have $52,411 of cash and cash equivalents and short-term investments on hand as of June 30, 2006, we may require additional financing to fund future operations.

(e)

Acquisitions and Discontinued Operations

We acquired certain assets and assumed certain liabilities of A1 Wireless USA, Inc. (“A1 Wireless”) on January 4, 2005; VMC Satellite, Inc. (“VMC”) on April 26, 2005; and FONcentral.com, Inc. (“FC”) on May 26, 2005. We accounted for these transactions using the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,Business Combinations. Accordingly our results of operations include the operating results of A1 Wireless effective January 1, 2005, VMC as of April 26, 2005 and FC as of May 26, 2005.

On December 31, 2005, we completed the sale of substantially all of the operating assets of our mobile virtual network operator (“MVNO”) Liberty Wireless (“Liberty”) to Teleplus Wireless Corp, a subsidiary of Teleplus Enterprises, Inc. The sale of Liberty has enabled us to streamline and focus our resources on our other operations including the growth of our MVNE business. The sale of Liberty was recorded as a discontinued operation in the financial statements pursuant to SFAS No. 144,Accounting for Impairment or Disposal of Long Lived Assets.Cash flows pertaining to discontinued operations are not disclosed separately in the Unaudited Condensed Consolidated Statements of Cash Flows.

(2)

Summary of Significant Accounting Policies

(a)

Revenue Recognition

Activations and Services Revenue

We recognize revenue from the sale of wireless services and the provisioning of MVNE and data services.

Wireless Services:We generate revenue from wireless carriers, including a satellite television carrier, who pay commissions and volume and performance-based bonuses, for activating wireless subscribers. We recognize commissions from wireless carriers upon shipment of activated devices to the customer. In addition to activation

commissions certain carriers pay us a monthly residual fee either for as long as a customer who we activate for that carrier continues to be its subscriber, or for a fixed period of time depending on the carrier. We purchase satellite activation certificates evidencing activation rights in advance of their resale to customers. Revenue from satellite television customers includes sales of these satellite activation certificates, net of the certificate cost, as we are acting as an agent in the transaction. Our wireless revenue is reduced for estimated deactivations of customers prior to the expiration of a time period that ranges 120 to 180 days from the date of activation, depending on the wireless carrier. We estimate deactivations based on historical experience, which we developed based on our experience with carriers, customer behavior and sources of customers, among other factors, allowing us to accrue estimates with what we believe is a high degree of certainty. If we determine that we cannot accurately predict future deactivation experience, we may be required to defer 100% of our carrier commissions revenue until the expiration of the appropriate chargeback period. Our reserves for deactivations are included in accounts receivable and deferred revenue on the accompanying balance sheets.

In addition to receiving commissions for each wireless subscriber activated, we earn performance bonuses from the wireless carriers based on negotiated performance targets. The most significant bonus we earn is the quarterly volume bonus, which we bill wireless carriers for on a monthly basis, based on current month activations. We record these bonuses as deferred revenue at the time of billing until we achieve the quarterly targets. We also earn other quarterly bonuses from certain carriers for maintaining low customer churn and signing up customers for certain additional monthly “features” such as text messaging or data service. Wireless carriers also periodically offer bonuses for achieving monthly volume and other performance targets. We recognize these monthly bonuses as earned in accordance with the provisions of Staff Accounting Bulletin (“SAB”) No. 104,Revenue Recognition in Financial Statements. Revenue is recognized only when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller’s price to the buyer is fixed or determinable, and (4) collectibility is reasonably assured. Amounts collected in cash prior to meeting the above criteria are recorded as deferred revenue. Through 2005, commission revenue earned from the activation of carrier features had been deferred until the contractual chargeback period had lapsed. Beginning in 2006, we began to estimate commission revenue earned from feature activations based on historical experience which we have developed based on our experience with carriers and customer behavior over a period of time in excess of 24 months.

MVNE Services:We offer marketers the ability to sell wireless services to their customers under their own brands using our e-commerce platform and operational infrastructure through MVNE contracts. We receive fees for the development of the network platform, for custom functional enhancements to the network platform, and for operational support services. We defer the fees attributable to the production of the network platform and recognize these fees and costs over the expected life of the agreement (typically 12 to 48 months). Fees received for custom functional enhancements to the network platform and for operational services are deferred until all revenue criteria have been satisfied. Deferred revenue from MVNE contracts as of December 31, 2005 and June 30, 2006 was $1,852 and $1,776, respectively.

Data Services:We sell data services, including a service that allows customers to access email, voicemail, facsimiles, contacts and personal calendar information through a website or a telephone; wireless email; and mobile marketing services. We bill customers and recognize revenue monthly, as the services are performed.

Equipment Revenue

Revenue from the sale of wireless devices and accessories in a multiple-element arrangement with services are recognized at the time of sale in accordance withEmerging Issues Task ForceEITF No. 00-21,Revenue Arrangements with Multiple Deliverables, when fair value of the services element exists. Customers have the right to return devices within a specific period of time or usage, whichever occurs first. We provide an allowance for estimated returns of devices based on historical experience. In accordance with the provisions of SAB No. 104, we determined we have sufficient operating history to estimate equipment returns. In connection with wireless activations, we sell customers wireless devices at a significant discount (equipment discount provision or “EDP”), which is generally in the form of a rebate. Rebates are recorded as a reduction of revenue. We recognize equipment revenue, less a reserve for customer rebates (accrued consumer liabilities), which is based on historical experience of rebates claimed. Future experience could vary based upon rates of consumers redeeming rebates.

In the event a customer terminates their wireless service with the carrier within six months of activation and opts not to return the wireless device to us within the time frames permitted within our return policy, in many instances our sales contracts with the customer permit us to charge the customer an EDP termination fee for each unreturned device. Prior to the three months ended June 30, 2006, revenue recognition of such fee was deferred until such fee was collected from the customer pursuant to SAB 104 as we did not have adequate historical collection data to reasonably estimate the ultimate collectibility of the receivable. Beginning April 1, 2006, we began to estimate EDP termination fee revenue based on historical experience of customer collection behavior which we have developed over a time period of 24 months which provides the basis on which to accrue revenue with an appropriate assurance of collectibility pursuant to SAB 104. As of March 31, 2006, $293 of such revenue was deferred, which would have been accrued for in the event that we had adequate customer collection history, less an estimated reserve for uncollectible amounts. As of June 30, 2006, we had accrued as accounts receivable approximately $786 in such EDP fees.

(b)

Concentrations of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist principally of accounts receivable. We extend credit to wireless network carriers (“carriers”) on an unsecured basis in the normal course of business. Three carriers accounted for 67% and 76% of accounts receivable, net of the deactivation reserve, as of December 31, 2005 and June 30, 2006, respectively.

For the three and six months ended June 30, 2005 and 2006, revenue from three carriers exceeded 10% of our total revenue. Revenue as a percentage of total revenue for these carriers was as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2006		2005		2006
Customer A	27	%	35	%	25	%	35	%
Customer B	13	%	16	%	16	%	15	%
Customer C	14	%	16	%	13	%	16	%

Total	54	%	67	%	54	%	66	%

(c)

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities at December 31, 2005 and June 30, 2006 consisted of:


	As of
	December 31, 2005		June 30, 2006
Accrued consumer liabilities	$	18,289	$	14,377
Commitment to provide inventory to vendor		—		4,000
Accrued payroll and related expenses		1,452		1,301
Accrued acquisition costs and severance costs		5,063		896
Accrued taxes payable		593		321
Other		6,191		4,594

	$	31,588	$	25,489

(d)

Restructuring Costs

We implemented a restructuring plan following the acquisition of A1 Wireless, to take advantage of synergies gained through the acquisition and to restructure our operations for efficiency purposes. For the three months ended June 30, 2005, we recognized $245 in restructuring costs, $219 of which related to workforce

reduction and the remaining $26 to excess facilities. During the six months ended June 30, 2005, we recognized $394 in restructuring costs, of which $358 related to workforce reduction and the remaining $36 to excess facilities. All costs related to this plan were paid out in 2005.

During the three months ended June 30, 2006, we implemented a restructuring plan related to changes in our management and operational structure. For the three and six months ended June 30, 2006, we recognized $1,906 related to the termination of our former president and chief operating officer and thirteen other senior executives and employees. Of this amount, $594 related to severance benefits that will be paid out in cash to the recipients on a monthly or bi-monthly basis over the terms of their respective severance agreements and $1,312 related to severance expenses incurred as a result of the modification of stock-based compensation awards under which vesting of 50% of unvested restricted share and option awards was accelerated for three of the former employees.

At June 30, 2006, we had an accrued liability recorded of $553 of which approximately $473 will be paid out in cash by December 31, 2006. In addition, accrued liabilities included $368 related to the acceleration of the stock-based compensation awards described above under which the underlying shares of common stock were not distributed to two of the recipients by June 30, 2006. We expect to distribute these shares in the third quarter of 2006.

(e)

Loss on investment

During the six months ended June 30, 2005, we sold all data service software acquired from Avesair Inc. in May 2003, to a third party vendor and wrote off related capitalized labor, intangible assets, goodwill and other costs related to this asset. As a result of this transaction, we recognized a loss of $228 during the three months ended June 30, 2005.

(f)

Stock-Based Compensation

We adopted Statement of Financial Accounting Standards “SFAS” No. 123 (revised 2004),Share Based Payment (SFAS No. 123(R)) on January 1, 2006 using the modified prospective application method (“MPA”). SFAS No. 123(R) established standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123(R) requires us to measure the cost of employee services received in exchange for an award of equity instruments (usually stock options or unvested (restricted) stock awards) based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award – the requisite service period (usually the vesting period).

Prior to our adoption of SFAS No. 123(R), we applied the intrinsic value method of accounting for employee stock-based compensation as prescribed by Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation (“FIN”) No. 44,Accounting for Certain Transactions involving Stock Compensation an Interpretation of APB Opinion No. 25, to account for our stock option grants to employees. Under this method, compensation expense was recorded on the date of the grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123,Accounting for Stock-Based Compensation(“SFAS No. 123”), established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As permitted by SFAS No. 123, we had elected to continue to apply the intrinsic value-based method of accounting described above, and had adopted the disclosure requirements of SFAS No. 123. All shares of restricted stock awarded to employees were accounted for at fair value in accordance with SFAS No. 123.

Under the MPA method, compensation cost for all share-based payments granted prior to, but not vested as of December 31, 2005, is based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123, and compensation cost for all share based payments granted subsequent to December 31, 2005, will be based on the grant date fair value estimated in accordance with the provisions of SFAS No.123(R). Results for prior periods have not been restated. We use the ratable method of attributing the value of stock-based compensation to expense. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In our pro forma information required under SFAS No. 123 for the periods prior to January 1, 2006, we accounted for forfeitures as they occurred. The fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model which takes into account as of the grant date the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the option.

Stock Options – We have two stock plans under which we have issued or may issue options to purchase shares of our common stock. The 1999 Stock Incentive Plan (the “1999 Plan”), provided for grants of stock-based awards from time to time to employees, officers, directors and consultants of the Company at exercise prices determined by the board of directors. Options granted under the 1999 Plan generally vest over a four-year period and expire ten years from the grant date. As of November 19, 2004, no additional options were available for grant under the 1999 Plan due to the adoption of the 2004 Equity Incentive Plan (the “2004 Plan”).

The 2004 Plan allows for grants of stock-based awards from time to time to employees, officers, directors and consultants at exercise prices determined by the board of directors. For incentive stock options, the exercise price must be at least equal to fair market value at the date of grant. For nonqualified stock options, the option may be granted with an exercise price less than fair market value. Options granted under the 2004 Plan vest over a period to be determined by the administrator, generally four years, and expire ten years from the grant date.

For the three and six months ended June 30, 2006 as a result of our adoption of SFAS No. 123 (R), we recognized stock-based compensation expense related to employee options granted prior to January 1, 2006 of $2,299 and $3,858, of which $88 and $235, respectively, was capitalized in accordance with our compensation policies and SFAS No. 123(R).

In addition on March 22 and June 13 of 2006, we granted options to certain of our employees to purchase 679,900 and 207,000 shares of our common stock, respectively. The options granted on March 22, 2006 and June 13, 2006 were granted at an exercise price of $6.46 and $6.51 per share, respectively. The grant date fair value of employee share options was estimated using the Black Scholes option-pricing model with the following assumptions: an expected life averaging 5.77 years; an average volatility of 72%; no dividend yield; and a risk-free interest rate averaging 4.75%. The weighted average fair value per share of options granted was $4.29. Compensation cost of the grant was reduced by an estimated forfeiture amount based on an annual experience rate of 9.93%. As of the date of grants, total compensation cost related to the grants including estimated forfeitures was approximately $2,324 and $715 for the March 22, 2006 and June 13, 2006 grants, respectively. Stock-based compensation expense for these grants for the three and six months ended June 30, 2006 was $97 and $126 respectively.

The impact of adopting SFAS No. 123(R) increased stock-based compensation expense included in our operating expenses and reduced net income from continuing operations by approximately $1,244 and $1,748 for the three and six months ended June 30, 2006 respectively or $0.03 and $0.05 per basic and diluted share. There was no impact from the adoption on cash flow from operations or cash flows from financing activities.

The following table summarizes the activity for stock options granted to employees and non-employees for the six months ended June 30, 2006.


	Number of options		Weighted average exercise price		Weighted average contractual term	Aggregate intrinsic value
Balance January 1, 2006	5,115,969		$	9.47
Granted	886,900			6.35
Exercised	(152,847	)		4.93
Forfeited	(550,717	)		11.37

Balance June 30, 2006	5,299,305		$	8.89	7.96	$	2,537,656

Ending vested & expected to vest	4,962,939		$	8.85	7.88	$	2,465,793

Exercisable at June 30, 2006	2,754,733		$	8.29	7.18	$	1,743,915

The weighted-average grant date fair value of options granted during the six months ended June 30, 2006 was $4.29. The total intrinsic value of options exercised during the six months ended June 30, 2006 was $324.

Restricted Common Stock – During the six months ended June 30, 2006, we granted 1,205,127 shares of restricted common stock to certain of our key employees. The restrictions on this common stock lapse and the stock vests over periods ranging up to four years from the grant date. The following table summarizes the activity for restricted stock for the six months ended June 30, 2006.


	Number of Restricted Stock Awards		Weighted-average grant date fair value
Nonvested at January 1, 2006	1,137,878		$	16.48
Granted	1,205,127			6.21
Vested	(304,938	)		16.06
Surrendered for taxes	(31,921	)		15.72
Forfeited	(112,230	)		17.52

Nonvested at June 30, 2006	1,893,916		$	10.00

As of June 30, 2006, there was approximately $14,014 of total unrecognized compensation cost related to restricted share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 1.71 years. The total fair value of shares vested during the six months ended June 30, 2006 was approximately $4,899.

Stock Purchase Warrants– In April 2006, we issued a warrant to purchase 566,324 shares of our common stock at an exercise price of $7.35 per share. The estimated fair value of the warrant granted was determined using the Black Scholes Model. The weighted average grant date fair value per share of this warrant was $5.70. The following table summarizes warrant activity for the six months ended June 30, 2006:


	Number of warrants		Weighted average exercise price		Range of exercise
Balance January 1, 2006	787,863		$	8.44	$	0.03 -15.60
Granted	566,324			7.35		7.35
Exercised	(17,270	)		0.28		0.03 - 14.04
Surrendered for cashless exercise	(627	)		2.25		0.03 - 2.49

Balance June 30, 2006	1,336,290		$	8.08	$	0.03 -15.60

In April 2006, we issued an additional warrant to purchase 188,775 shares of our common stock to a vendor that is exercisable upon certain performance conditions. The exercise price of the warrant will be based on the trading price of our common stock at the time the performance conditions are met by the vendor. Once it is probable that the vendor will achieve the performance conditions set forth under the terms of the warrant, the fair value of the warrant will be amortized to sales and marketing expense over the remaining contractual term of the vendor commitment.

Warrants outstanding at June 30, 2006 were exercisable for 1,336,290 shares of our common stock, excluding this contingent warrant.

Our pro forma net loss per common share, basic and diluted, for the three and six months ended June 30, 2005 was as follows:


	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net loss as reported	$	(1,652	)	$	(8,646	)
Add: Stock-based employee compensation expense included in net loss as reported, net of related tax effects		2,529			9,172
Less: Total stock-based employee compensation determined under fair value based methods for all stock award, net of related tax effects		(2,653	)		(5,171	)

Pro forma net loss	$	(1,776	)	$	(4,645	)

Net loss per common share, basic and diluted, as reported	$	(0.05	)	$	(0.26	)
Net loss per common share, basic and diluted, pro forma	$	(0.05	)	$	(0.14	)
Basic and diluted weighted average common shares outstanding		33,847,007			33,380,156

Stock-based compensation which includes compensation recognized on stock option grants and restricted stock awards has been included in the following line items in the accompanying condensed consolidated financial statements. There was no tax benefit recognized in the statements of operations for stock-based awards in either period:


	As of
	December 31, 2005		June 30, 2006
Balance Sheet:
Property and equipment, net	$	—	$	286

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2006		2005		2006
Statement of operations:
Sales and marketing	$	456	$	819	$	1,052	$	1,538
General and administrative		2,210		2,097		8,555		4,260
Restructuring		—		1,312		—		1,312
Income from discontinued operations		126		—		189		—

	$	2,792	$	4,228	$	9,796	$	7,110

During the three and six months ended June 30, 2006, we modified the stock-based awards of 5 employees which accelerated the vesting of 81,035 shares of restricted stock and options underlying 122,258 shares of our common stock. As a result of the expedited vesting, we accelerated expense recognition of the compensation cost associated with the newly vested shares. Accordingly, stock-based compensation expense includes $1,312 from these actions. Incremental compensation cost arising from the modifications to the vesting terms of the awards was not significant.

(g)

Net Loss per Share

We calculate net loss per share in accordance with SFAS No. 128,Earnings Per Share. Basic net loss per common share excludes any dilutive effects of options, warrants, restricted stock and convertible securities and is calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares issuable and outstanding for the period. Diluted net loss per common share equals basic net loss per common share, as the effects of options, warrants, restricted stock and convertible securities will be anti-dilutive.

The following table reconciles net loss and basic and diluted weighted average common shares outstanding to the historical or pro forma net loss and the pro forma basic and diluted weighted average common shares outstanding for the three and six months ended June 30, 2005 and 2006.


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2006			2005			2006
				(restated)						(restated)
Net loss from continuing operations	$	(1,162	)	$	(9,370	)	$	(8,580	)	$	(13,718	)
Net loss from discontinued operations		(490	)		(206	)		(66	)		(171	)

Net loss	$	(1,652	)	$	(9,576	)	$	(8,646	)	$	(13,889	)

Weighted average shares outstanding
Basic and diluted earnings per share:		33,847,007			35,856,253			33,380,156			35,529,454
Net loss from continuing operations	$	(0.04	)	$	(0.26	)	$	(0.26	)	$	(0.38	)
Net loss from discontinued operations		(0.01	)		(0.01	)		(0.00	)		(0.01	)

Basic and diluted earnings per share	$	(0.05	)	$	(0.27	)	$	(0.26	)	$	(0.39	)

During the three and six months ended June 30, 2006 and 2005, we incurred a net loss. If our outstanding common stock equivalents were exercised or converted into common stock, the result would have been anti-dilutive and, accordingly, basic and diluted net loss attributable to common stockholders per share are identical for all periods presented in the accompanying condensed consolidated statements of operations. The following summarizes our potential outstanding common stock as of the end of each period:


	June 30,
	2005	2006
Options to purchase common stock	5,881,423	5,299,305
Restricted stock awards	269,266	1,893,916
Warrants to purchase common stock	942,380	1,525,065
Options awarded in connection with the VMC acquisition	210,379	—

Total options, warrants and restricted stock awards convertible into common stock	7,303,448	8,718,286

(3)

Discontinued Operations

On December 31, 2005, we completed the sale of substantially all of the operating assets of our Liberty Wireless business. During the six months ended June 30, 2006 we collected $1,110 of notes receivable recorded at December 31, 2005 related to the divestiture.

Summary of operating results for the discontinued operations is as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
		2005			2006			2005			2006
Revenue	$	6,392		$	—		$	14,848		$	—
Costs and expenses		(6,882	)		(206	)		(14,914	)		(171	)

Loss from discontinued operations	$	(490	)	$	(206	)	$	(66	)	$	(171	)

Balance sheet data included:


	As of
	December 31, 2005		June 30, 2006
Accounts and notes receivable, net	$	1,848	$	597
Other current assets		582		—

Assets of discontinued operations	$	2,430	$	597

Accounts payable	$	931	$	—
Other accrued expenses		2,199		1,601

Liabilities of discontinued operations	$	3,130	$	1,601

(4)

Goodwill

The following table reflects the changes to goodwill for the six months ended June 30, 2006:



Balance as of December 31, 2005	$	31,140
Goodwill arising from VMC Satellite, Inc. earn-out⁽¹⁾		2,984

Balance as of June 30, 2006	$	34,124

(1)

We achieved the earn-out performance target stipulated in the VMC Asset Purchase Agreement on February 28, 2006 and accordingly recorded additional goodwill of $2,984. The earn-out consideration consisted of amounts that were paid in cash of $2,362 and 119,389 shares of our common stock with a fair value of $622. Such consideration was in April 2006.

(5)

Debt

We maintain a revolving operating line of credit which allows for aggregate borrowings of up to $25,000 subject to certain limits based on accounts receivable and inventory levels. At June 30, 2006 and December 31, 2005, there was $15,000 outstanding under this line of credit. As of June 30, 2006, we had no additional borrowing availability under the facility based on the limits described above. The line of credit expires effective January 1, 2007 and accordingly the outstanding balance has been classified as a current liability as of June 30, 2006. Borrowings outstanding under the line of credit are secured by substantially all of our assets. Under the terms of the facility, we are required to maintain a current ratio, as defined, of no less than 1.1 to 1. We are also required to maintain an unrestricted cash balance of no less than $10,000 held at the bank and to meet certain minimum levels of EBITDA, as defined. As of June 30, 2006, we were in compliance with the financial covenants under the credit facility.

(6)

Repurchase of Common Stock

On August 17, 2005, our Board of Directors authorized the repurchase of up to $30,000 of our common stock through August 17, 2006. The shares may be repurchased by us from time to time at prevailing market prices. The timing and amount of any shares repurchased are based on market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan, which permits shares to be repurchased when we might otherwise be precluded from doing so by laws prohibiting insider trading or by self imposed trading black out periods. There is no guarantee as to the exact number of shares that will be repurchased under the stock repurchase program, and we may discontinue purchases at any time. We intend to fund our share repurchases with cash on hand and cash generated from future operations. During the six months ended June 30, 2006, we repurchased 62,761 shares of our common stock at an average price of $8.01 per share for approximately $503. All shares repurchased were returned to the status of authorized but unissued shares of common stock as of June 30, 2006. Since the inception of this program, we have repurchased 1,144,248 shares for an aggregate consideration of $13,591.

(7)

Commitments and Contingencies

Legal Matters

On August 5, 2004, Avesair, Inc., one of the companies the assets of which we acquired, filed suit against us demanding, among other matters, that we issue to Avesair shares of our common stock valued at approximately $4,000 as of June 30, 2004. The stock demanded by Avesair represents the maximum value of

shares that they could have earned for achieving certain performance-based targets under the asset purchase agreement. We believe the performance-based targets were not achieved and intend to vigorously contest this matter. However, any adverse resolution of this matter could have a material adverse impact on our financial results if we are required to issue additional shares and would result in dilution to our stockholders.

On July 25, 2005, the Federal Communications Commission (FCC) issued a Notice of Apparent Liability, asserting that we registered with the FCC and reported and contributed to the Universal Service Fund (USF) and the Telecommunications Relay Service Fund later than required by FCC rules. The FCC has preliminarily proposed to fine us approximately $820 for late payment of such fees. In a letter dated August 24, 2005 we responded to the FCC’s preliminary finding and asserted that no fine is appropriate under the circumstances. However, any adverse resolution of this matter could have a material adverse impact on our financial results.

Eight related putative nationwide class actions have been filed against us arising out of InPhonic-sponsored rebate offers for online purchases of wireless telephones. Five of the eight putative class actions also name a third-party rebate processor as a defendant. The rebate processor began to process claims for InPhonic-sponsored rebate offers in or about July 2005, and our agreement with this rebate processor expired in or about July 2006.

We have filed a motion with the Judicial Panel on Multidistrict Litigation (“JPML”) to consolidate the eight actions in the United States District Court for the District of Columbia. The rebate processor and a majority of the putative class representative plaintiffs have joined our request for consolidation of these cases in the District of Columbia. Other plaintiffs seek consolidation of these cases in the District of Arizona. Our JPML motion is fully briefed and likely to be heard by the JPML in the latter part of September 2006. We expect a decision from the JPML by the fourth quarter of 2006.

Three of the actions were originally filed in the United States District Court for the District of Columbia. Three actions were originally filed in the United States District Court for the District of Arizona. One action was originally filed in New Jersey state court, but was subsequently removed to, and remains pending in, the United States District Court for the District of New Jersey. The remaining action was originally filed in the United States District Court for the Northern District of Illinois.

The putative class action complaints allege, among other things, violations of the consumer protection laws of various states and (in certain lawsuits) the federal RICO (anti-racketeering) statute in connection with our disclosure and implementation of the terms and conditions of rebate offers. The class action plaintiffs seek statutory penalties, treble damages, attorneys’ fees, and punitive damages under the consumer protection statutes, and treble damages and attorneys’ fees under the RICO statute, as well as injunctions concerning the content of our websites.

The federal lawsuits are in an early stage. We have made motions in each of the courts where these cases are pending to defer pre-trial deadlines until the JPML makes its decision on transfer and consolidation. To date, the federal court in the District of Columbia has stayed all proceedings in two of the lawsuits pending the JPML’s ruling, and the federal court in the Northern District of Illinois has entered a substantially similar order. Similar motions remain pending in the New Jersey action and in one of the Arizona actions. We intend to vigorously defend these actions but cannot predict their outcomes.

On June 8, 2006, the Attorney General of the District of Columbia brought a lawsuit in the Superior Court of the District of Columbia (the “DCAG Action”), alleging violations of the D.C. consumer protection statute based on factual allegations that are substantively the same as those in the private putative nationwide class actions. The DCAG Action seeks injunctive relief, restitution for consumers, statutory penalties, and attorneys’ fees. The DCAG Action cannot be removed to federal court or consolidated with the eight federal putative class actions. However, we have asked the JPML to transfer the private actions to the federal court in the District of Columbia so that they can be informally coordinated with the DCAG Action. We answered the complaint on July 28, 2006. We intend to vigorously defend this action, but cannot predict its outcome.

From time to time we are party to other disputes or legal proceedings. We do not believe that any of the pending proceedings are likely to have a material adverse effect on our business.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, as amended, contains statements that are forward-looking within the meaning of the Securities Act of 1933, and the Securities Exchange Act of 1934 that involve risks and uncertainties. In some cases, forward-looking statements are identified by words such as “believe”, “anticipate”, “expect”, “intend”, “plan”, “will”, “may” and similar expressions. All of these forward-looking statements are based on information available to us at this time and we assume no obligation to update any of these statements. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict, including, among other things: our limited operating history; the ability to maintain strong relationships with wireless carriers; ongoing consolidation among wireless carriers; a decrease in the new subscriber growth rate; increased competition with additional retail and on-line distributors of wireless services and devices; increase in the rate of deactivations of active accounts; ability to attract new customers; ability to successfully integrate acquisitions; ability to accurately estimate reserve for future deactivations; interruptions or delays in service from third parties; our ability to effectively manage business growth; ability to attract and retain key personnel; and government regulation.

Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, due to the risks listed below and other risks described under Item 1A, “Risk Factors” of our Form 10-Q filed on August 9, 2006.

Overview

We are a leading online seller of wireless services and devices based on the number of activations of wireless services sold online in the United States. We sell wireless service plans and devices, including satellite television services through our own branded websites; including Wirefly.com, A1 Wireless.com, and VMCsatellite.com and through websites that we create and manage for third parties. We offer marketers the ability to sell wireless voice and data services and devices, under mobile virtual network enabler (“MVNE”) agreements. This service utilizes the same e-commerce platform, operational infrastructure and marketing relationships that we use in our operations. We provide customers the ability to organize personal communications by providing real time wireless access to e-mail, voicemail, faxes, contacts, scheduling, calendar and conference calling functionality through a website or telephone.

We measure our performance based on our financial results and various non-financial measures. Key financial factors that we focus on in evaluating our performance include revenue growth within a period, contribution margin (defined as revenue less cost of revenue and marketing expenses), and operating income (defined as contribution margin less other operating expenses including sales, general and administrative and depreciation and amortization expenses). Our financial results can, and do, vary significantly from quarter-to-quarter as a result of a number of factors which include economic conditions specific to online commerce and wireless communications industries, the timing of introduction of popular devices by mobile phone manufacturer, our ability to attract visitors to our websites, changes in wireless carrier commission and bonus structures, the timing of recognition of bonuses paid to us by wireless carriers and our competitors’ pricing and marketing strategies.

Key non-financial measures of our success are customer feedback and customer satisfaction ratings compiled by third parties. We believe that maintaining high overall customer satisfaction is critical to our ongoing efforts to promote the use of the private-labeled websites that we create and manage for our marketers, as well as our own branded websites, and to improve our operating results. We actively solicit customer feedback on our website functionality as well as the entire purchase experience. To maintain a high level of performance by our customer service representatives, we also undertake an ongoing customer feedback process. If we are unable to meet customer expectations with respect to price or do not successfully expand our product lines or otherwise fail to maintain high overall customer satisfaction, our business and results of operations would be harmed.

Revenues include commissions, bonuses and other payments we receive from wireless carriers, including a satellite television provider, in connection with the activation of customers on their networks, as well as payments from customers for wireless services and devices. Our revenue continues to increase as a result of internal growth and acquisitions. As further described below, total revenue and net loss from continuing operations for the three months ended June 30, 2006 were $92.1 million and $9.4 million, respectively, compared to total revenue and net loss from continuing operations of $75.2 million and $1.2 million, respectively, for the three months ended June 30, 2005. Revenue from our top three wireless carriers

represented 67% and 54% of our total consolidated revenue for the three months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 total revenue and net loss from continuing operations were $179.1 million and $13.7 million, respectively, compared to total revenue and net loss from continuing operations of $143.4 million and $8.6 million, respectively, for the same period of 2005. Revenue from our top three wireless carriers represented 66% and 54% of our total consolidated revenue for the six months ended June 30, 2006 and 2005, respectively.

As a key extension of our current services, on March 14, 2006 we launched Wirefly.biz, a new business unit dedicated to the unique needs of small business customers. With this launch we extended the Wirefly brand to the small business market place to assist small customers with an array of services, discounts and customer support typically afforded only to larger enterprise companies. On April 4, 2006 we launched a new Motorola-branded online store-in-store. Motorola will make its popular portfolio of mobile handsets, accessories and in-home products available across thousands of our shopping websites, including the popular Wirefly.com. On April 6, 2006 we signed an agreement with a strategic business partner to host the data service platform for the upcoming launch of its family-oriented wireless service.

Since we began operations in 1999, we have incurred significant losses and have had negative cash flow from operations. For the six months ended June 30, 2006, we used $7.8 million of cash in operations. As of June 30, 2006, accumulated deficit was $178.5 million and our total stockholders’ equity was $100.8 million. In order to achieve profitability in the future, we are depending upon our ability to produce revenue at levels that exceed the costs of that revenue plus operating expenses.

In 2006, we have continued to concentrate our resources on the growth of our wireless activations and the MVNE services we provide. Three of our key goals include (i) improving the customer experience platform that we utilize for order processing, customer service and rebate handling to automate additional processes and make more efficient use of our system and internal work force and the outsourced call center resources; (ii) further balancing spending on marketing initiatives with customer activation and revenue generation characteristics; and (iii) reducing certain general and administrative operating expenses as a percentage of revenue.

As a result of the sale of our MVNO operations on December 31, 2005, we no longer believe that segment information, in accordance with SFAS No. 131,Disclosures About Segments of an Enterprise and Related Information, is applicable as our Wireless Activation and Services segment (“WAS”) represents greater than 95% of our total revenue and cost of revenue. Accordingly we will no longer report segment data separately in the notes to our financial statements. Our Management’s Discussion and Analysis of Results of Operations will continue to provide a comparison of our revenue and cost of revenue of our wireless activation and services and other components of revenue and cost of revenue to the extent MVNE and data services fluctuations appear significant in explaining and describing such results of operations.

Restatement

As described in the Quarterly Report on Forms 10-Q/A for the first quarter ended March 31, 2006 and in this Quarterly Report on Form 10-Q/A we restated our financial statements for each of the quarters ended March 31, and June 30, 2006. (See Note 1(c) to the Condensed Consolidated Financial Statements.)

Comparison of the Results of Operations for the Three Months Ended June 30, 2006 and 2005


	Three Months Ended June 30,								Change Between 2005 and 2006
	2005				2006				Change Between 2005 and 2006
(amounts in thousands)	Amount		% of Revenue		Amount		% of Revenue		Amount			%
	(restated)
Revenue:
Activation and services	$	55,452	74	%	$	74,216	81	%	$	18,764		34	%
Equipment		19,774	26	%		17,912	19	%		(1,862	)	-9	%

Total revenue	$	75,226	100	%	$	91,228	100	%	$	16,902		22	%

Cost of revenue
Activation and services	$	286	0	%	$	1,065	1	%	$	779		272	%
Equipment		41,718	55	%		50,510	55	%		8,792		21	%

Total cost of revenue	$	42,004	56	%	$	51,575	56	%	$	9,571		23	%

Selected operating expenses:
Sales and marketing	$	19,827	26	%	$	27,408	30	%	$	7,581		38	%
General and administrative		12,299	16	%		16,908	18	%		4,609		37	%
Depreciation and amortization		2,142	3	%		3,960	4	%		1,818		85	%
Restructuring		245	0	%		1,906	2	%		1,661		678	%

REVENUE

Revenue

Revenue consists of activations and services revenue, and equipment revenue. Activations and services revenue consists of (i) revenue from commissions, bonuses and other payments for the activation of services of wireless carriers and a satellite television carrier through private-labeled websites that we create and manage for marketers as well as through our own branded websites; (ii) revenue from the provisioning of MVNE Services which provide marketers the ability to sell MVNO services to their customers under their own brands using our e-commerce platform and operational infrastructure; and, (iii) revenue from data services under which we provide subscribers with real-time wireless access to work and personal information, including email, calendar, corporate directories, personal contacts and documents in addition to wireless entertainment and content. Activations and services revenue also includes amounts due from carriers resulting from ongoing disputes relating to commissions revenue. Such disputes arise in the normal course of reconciliation with carrier commission reports and we continue to update and improve our processes and procedures surrounding the collection of such disputed items. Equipment revenue consists mainly of revenue from the sale of wireless devices to our customers that subscribe to wireless services through our private-labeled websites or those websites that we manage for other marketers. The following further details the components of our revenue and a comparative discussion of performance:


	Three Months Ended June 30,								Change Between 2005 and 2006
	2005				2006				Change Between 2005 and 2006
(amounts in thousands)	Amount		% of Revenue		Amount		% of Revenue		Amount			%
	(restated)
Activations and services:
Wireless activation	$	53,622	71	%	$	69,226	76	%	$	15,604		29	%
MVNE and data services		1,830	3	%		4,990	5	%		3,160		173	%

	$	55,452	74	%	$	74,216	81	%	$	18,764		34	%

Equipment:
Wireless activation	$	19,774	26	%	$	17,912	19	%	$	(1,862	)	-9	%

Total Revenue:
Wireless activation	$	73,396	98	%	$	87,138	95	%	$	13,742		19	%
MVNE and data services		1,830	3	%		4,990	5	%		3,160		173	%

	$	75,226	100	%	$	92,128	100	%	$	16,902		22	%

Activations and Services

Activations and services revenue increased 34% to $74.2 million for the three months ended June 30, 2006 from $55.5 million for the three months ended June 30, 2005. The increase in activations and services revenue of $18.8 million was attributable to an increase in the number of wireless activations that we generated through marketing partners and increased advertising efforts compared to the prior period. Gross carrier commissions for activations subject to chargeback increased 27% to $80.4 million for the three months ended June 30, 2006 from $63.4 million for the three months ended June 30, 2005. Activations and services revenue of MVNE and data services increased $3.2 million to $5.0 million for the three months ended June 30, 2006. The increase in revenue was primarily the result of project development work completed and accepted by a customer in early June 2006.

Equipment

Revenue from sales of equipment for the three months ended June 30, 2006 decreased 9% to $17.9 million from $19.8 million for the three months ended June 30, 2005. The decrease in equipment revenue of $1.9 million was attributable to lower average sales prices due to an increase in instant discounts provided to customers as compared to the three months ended June 30, 2005. Equipment revenue for the three months ended June 30, 2006 included $0.8 million of estimated equipment discount provisions (“EDP”) to be collected from customers, who opt not to return their phones after canceling their plans prior to a contractually stated deactivation period.

Total revenue

Total revenue increased 22% to $92.1 million for the three months ended June 30, 2006 respectively from $75.2 million for the three months ended June 30, 2005. Revenue generated from the sale and activation of wireless devices and services accounted for approximately 81% of consolidated revenue for the three months ended June 30, 2006 compared to 74% for the three months ended June 30, 2005. Revenue from our top three wireless carriers represented 67% of consolidated revenue for the three months ended June 30, 2006 compared to 54% for the comparable period of 2005. Wireless activations and services revenue and equipment sales revenue may vary from period to period based on our promotional efforts, which include subsidizing the costs of devices purchased by our customers. We expect that revenue from the sale and activation of wireless devices and services will continue to increase during 2006 compared to 2005 performance.

COST OF REVENUE

Cost of revenue consists mainly of the cost of wireless devices (equipment) sold to our wireless activations and services customers. Our cost of revenue related to wireless equipment sales increased to $50.5 million for the three months ended June 30, 2006 as a result of a higher volume of devices sold during the period compared to sales of such devices in the three months ended June 30, 2005. Total cost of revenue increased 23% to $51.6 million for the three months ended June 30, 2006 compared to $42.0 million for the three months ended June 30, 2005. Cost of revenue from the sale of wireless devices accounted for approximately 98% of consolidated cost of revenue for the three months ended June 30, 2006 and 99% for the three months ended June 30, 2005. As a percentage of wireless total activations revenue, cost of equipment revenue was 55% of revenue for the three months ended June 30, 2006 and 2005.

OPERATING EXPENSES

Sales and Marketing

Sales and marketing expenses increased 38% to $27.4 million for the three months ended June 30, 2006 from $19.8 million for the corresponding period of 2005. The increase of $7.6 million was comprised mainly of a $6.2 million increase from the growth of existing marketing relationships and the addition of new marketing partner relationships since the three months ended June 30, 2005. Our marketing expenses largely comprise payments to on-line advertisers, search engines and third-party marketing partners based on orders or activations. We incurred approximately $24.1 million of third-party marketing expenses in the three months ended June 30, 2006. Such expenses were higher than corresponding periods of 2005 due to increased wireless activation competition, and increased rates and volume of advertising, which caused our customer acquisition costs to increase. In addition, advertising placement and search costs also increased. We expect that marketing expenses will continue to represent a significant percentage of our revenue in future periods.

General and Administrative

General and administrative expenses increased 37% to $16.9 million for the three months ended June 30, 2006 from $12.3 million for the corresponding period of 2005. The expense increase of $4.6 million was mainly composed of the

following: $2.6 million related to increased payroll related expenses from a larger workforce, $0.9 million related to consulting and other expenses; $0.7 million due to a settlement with A1 Wireless and $0.3 million related to increased facilities costs and telecommunication related expenses. Stock-based compensation expense decreased $0.1 million for the period. For the three months ended June 30, 2005 stock-based compensation included $1.1 million related to the modification of option grants and awards of two employees that were terminated during that quarter. Absent this, stock-based compensation expense would have increased approximately $1.0 million as a result of compensation expense from options and stock awards granted after the first quarter of 2005 and the impact of the adoption of SFAS No. 123(R).

Depreciation and Amortization

Depreciation and amortization expenses, which are amortized over periods ranging from 18 months to 7 years, increased 85% to $4.0 million for the three months ended June 30, 2006 from $2.1 million for the three months ended June 30, 2005. The increase was primarily due to the costs associated with developing new functionality related to our websites, product offerings and amortization expense related to VMC and FC acquisitions on April 26, 2005 and May 26, 2005, and normal fixed asset depreciation on an increased amount of capital expenditures as compared to the corresponding period of 2005.

Restructuring

We implemented a restructuring plan following the acquisition of A1 Wireless, to take advantage of synergies gained through the acquisition and to restructure our operations for efficiency purposes. For the three months ended June 30, 2005, we recognized $0.2 million in restructuring costs which related to workforce reduction excess facilities. All costs related to this plan were paid out in 2005.

During the three months ended June 30, 2006, we implemented a restructuring plan related to changes in our management and operational structure. For the three months ended June 30, 2006, we recognized $1.9 million related to the termination of our former president and chief operating officer and thirteen other senior executives and employees. Of this amount, $0.6 million related to severance benefits that will be paid out in cash to the recipients on a monthly or bi-monthly basis over the terms of their respective severance agreements and $1.3 million related to severance expenses incurred as a result of the modification of stock-based compensation awards under which vesting of 50% of unvested restricted share and option awards was accelerated for three of the former employees.

Loss from continuing operations

Loss from continuing operations increased to $9.4 million for the three months ended June 30, 2006 from $1.2 million for the three months ended June 30, 2005 as a result of increasing cost of revenue and general operating expenses as described above in order to support overall revenue growth.

Net Loss

Net loss increased to $9.6 million for the three months ended June 30, 2006 from $1.7 million for the three months ended June 30, 2005.

Comparison of the Results of Operations for the Six Months Ended June 30, 2006 and 2005


	Six Months Ended June 30,								Change Between 2005 and 2006
	2005				2006				Change Between 2005 and 2006
(amounts in thousands)	Amount		% of Revenue		Amount		% of Revenue		Amount			%
	(restated)
Revenue:
Activation and services	$	105,203	73	%	$	140,598	79	%	$	35,755		34	%
Equipment		38,174	27	%		38,148	21	%		(26	)	0	%

Total revenue	$	143,377	100	%	$	179,106	100	%	$	35,729		25	%

Cost of revenue:
Activation and services	$	1,459	1	%	$	1,325	1	%	$	(134	)	(9	)%
Equipment		80,668	56	%		98,431	55	%		17,763		22	%

Total cost of revenue	$	82,127	57	%	$	99,756	56	%	$	17,629		21	%

Selected operating expenses:
Sales and marketing	$	37,325	26	%	$	54,130	30	%	$	16,805		45	%
General and administrative		28,577	20	%		30,139	17	%		1,562		5	%
Depreciation and amortization		3,919	3	%		7,443	4	%		3,524		90	%
Restructuring		394	0	%		1,906	1	%		1,512		384	%

REVENUE


	Six Months Ended June 30,								Change Between 2005 and 2006
	2005				2006				Change Between 2005 and 2006
(amounts in thousands)	Amount		% of Revenue		Amount		% of Revenue		Amount			%
	(restated)
Activations and services:
Wireless activation	$	100,753	70	%	$	133,380	75	%	$	32,627		32	%
MVNE and data services		4,450	3	%		7,578	4	%		3,128		70	%

		105,203	74	%		140,958	79	%		35,755		34	%

Equipment:
Wireless activation	$	38,174	27	%	$	38,148	21	%	$	(26	)	0	%

Total Revenue:
Wireless activation	$	138,927	97	%	$	171,528	96	%	$	32,601		23	%
MVNE and data services		4,450	3	%		7,578	4	%		3,128		70	%

	$	143,377	100	%	$	179,106	100	%	$	35,729		25	%

Activations and Services

Activations and services revenue increased 34% to $141.0 million for the six months ended June 30, 2006 from $105.2 million for the six months ended June 30, 2005. The increase in activations and services revenue of $35.8 million was attributable to an increase in the number of wireless activations that we generated through marketing partners and increased advertising efforts compared to prior year periods. Gross carrier commissions for activations subject to chargeback increased 26% to $151.7 million for the six months ended June 30, 2006 from $120.0 million for the six months ended 2005. Activations and services revenue of MVNE and data services increased $3.1 million to $7.6 million for the six months ended June 30, 2006. The increase in revenue was primarily the result of project development work completed and accepted by a customer in early June 2006.

Equipment

Revenue from sales of equipment for the six months ended June 30, 2006 were $38.1 million compared to $38.2 million for the six months ended June 30, 2005. Although revenue remained flat between the corresponding six month

periods, we experienced a reduction in equipment sales revenue in the six months ended June 30, 2006 as described above, primarily due to a decrease in price per unit as a result of an increase in discounts offered. Equipment revenue for the six months ended June 30, 2006 included $0.3 million of estimated EDP to be collected from customers, who opt not to return their phones after canceling their plans prior to a contractually stated deactivation period.

Total revenue

Total revenue increased 25% to $179.1 million for the six months ended June 30, 2006 respectively from $143.4 million for the six months ended June 30, 2005. Revenue generated from the sale and activation of wireless devices and services accounted for approximately 79% of consolidated revenue for the six months ended June 30, 2005 compared to 73% for the three months ended June 30, 2005. Revenue from our top three wireless carriers represented 66% of consolidated revenue for the six months ended June 30, 2006 compared to 54% for the comparable period of 2005.

COST OF REVENUE

Cost of revenue consists mainly of the cost of wireless devices (equipment) sold to our wireless activations and services customers. Our cost of revenue related to wireless equipment sales increased to $98.4 million for the six months ended June 30, 2006 as a result of a higher volume of devices sold during the period compared to sales of such devices for the six months ended June 30, 2005. Total cost of revenue increased 21% to $99.8 million for the six months ended June 30, 2006 as compared to $82.1 million for the six months ended June 30, 2005. Cost of revenue from the sale of wireless devices accounted for approximately 99% of consolidated cost of revenue for the six months ended June 30, 2006 and 98% for the six months ended June 2005. As a percentage of wireless total activations revenue, cost of equipment revenue decreased to 55% of revenue for the six months ended June 30, 2006 compared to 56% for the six months ended June 30, 2005.

OPERATING EXPENSES

Sales and Marketing

Sales and marketing expenses increased 45% to $54.1 million for the six months ended June 30, 2006 from $37.3 million for the corresponding periods of 2005. The increase was comprised mainly of a $15.3 million increase from the growth of existing marketing relationships and adding new marketing partner relationships since the six months ended June 30, 2005. Our marketing expenses largely comprise payments to on-line advertisers, search engines and third-party marketing partners based on orders or activations. We incurred approximately $47.8 million of third-party marketing expenses in the six months ended June 30, 2006. Such expenses were higher than corresponding periods of 2005 due to increased wireless activation competition, and increased rates and volume of advertising, which caused our customer acquisition costs to increase. In addition, advertising placement and search costs also increased.

General and Administrative

General and administrative expenses increased 5% to $30.1 million for the six months ended June 30, 2006 from $28.6 million for the corresponding period of 2005. The expense increase of $1.6 million was mainly composed of the following: $2.9 million related to increased payroll expenses from a larger workforce; $1.7 million related to consulting and other expenses; $0.7 million due to a settlement with A1 Wireless; and $0.5 million related to increased facilities costs and telecommunication related expenses. Offsetting these increases, stock-based compensation expense decreased $4.3 million for the period. For the six months ended June 30, 2005, stock-based compensation included $2.2 million related to the modification of option grant and awards of two employees that were terminated during that quarter. Absent this, stock-based compensation expense would have decreased approximately $2.1 million as a result of compensation expense from options and stock awards granted after the first quarter of 2005 and the impact of the adoption of SFAS No. 123(R).

Depreciation and Amortization

Depreciation and amortization expenses, which are amortized over periods ranging from 18 months to 7 years, increased 90% to $7.4 million for the six months ended June 30, 2006 from $3.9 million for the six months ended June 30, 2005. The increase was primarily due to the costs associated with developing new functionality related to our websites, product offerings and amortization expense related to VMC and FC acquisitions on April 26, 2005 and May 26, 2005, and normal fixed asset depreciation on an increased amount of capital expenditures as compared to the corresponding period of 2005.

Restructuring

We implemented a restructuring plan following the acquisition of A1 Wireless, to take advantage of synergies gained through the acquisition and to restructure our operations for efficiency purposes. During the six months ended June 30, 2005, we recognized $394 in restructuring costs, of which $3 million related to workforce reduction and the remaining $36 to excess facilities. All costs related to this plan were paid out in 2005.

During the six months ended June 30, 2006, we implemented a restructuring plan related to changes in our management and operational structure. For the three and six months ended June 30, 2006, we recognized $1.9 million related to the termination of our former president and chief operating officer and thirteen other senior executives and employees. Of this amount, $0.6 million related to severance benefits that will be paid out in cash to the recipients on a monthly or bi-monthly basis over the terms of their respective severance agreements and $1.3 million related to severance expenses incurred as a result of the modification of stock-based compensation awards under which vesting of 50% of unvested restricted share and option awards were accelerated for three of the former employees.

Loss from continuing operations

Loss from continuing operations increased to $13.7 million for the six months ended June 30, 2006 from $8.6 million for the corresponding period in 2005. Although we experienced significant revenue growth, cost of revenue and operating expenses both increased as described above in order to support the revenue growth we experienced.

Net Loss

Net loss increased to $13.9 million for the six months ended June 30, 2006 from $8.6 for the same period of 2005.

Liquidity and Capital Resources

Since inception, we have funded our operations principally through the sale of equity securities and to a lesser extent, through subordinated debt, credit facilities, capital leases and lines of credit. In addition, certain of our vendors from whom we purchase handsets and other wireless equipment that we sell to our customers allow us to purchase up to approximately $49.0 million of such equipment on extended payment terms. The significant components of our working capital are inventory and liquid assets such as cash and cash equivalents, short-term investments and trade accounts receivable, reduced by accounts payable, accrued expenses and deferred revenue.

Our future capital and operating requirements will depend on many factors, including the level of our revenues, the expansion of our sales and marketing activities, the cost of our fulfillment operations, potential investments in businesses or technologies and continued market acceptance of our products. Additionally, poor financial results, unanticipated expenses, acquisitions of technologies or business or strategic investments could give rise to additional financing requirements sooner than we expect. In the event that cash on hand and available borrowings are not sufficient to fund working capital requirements that are not satisfied through net cash provided by operating activities or future cash requirements, we could be required, or could elect, to seek additional funding through a public or private equity or debt financing in the future, and this financing may not be available on terms acceptable to us, or at all.

As of June 30, 2006, we had cash and cash equivalents of $47.4 million, short-term investments of $5.0 million and debt and capital lease obligations of $15.8 million. As of December 31, 2005, we had cash and cash equivalents of $70.8 million, and debt and capital lease obligations of $15.9 million.

Consolidated Cash Flows


	Six Months Ended June 30,
	2005			2006
				(restated)
	(amounts in thousands)
Net cash used in operating activities	$	(9,238	)	$	(7,823	)
Net cash used in investing activities		(32,594	)		(15,585	)
Net cash provided by financing activities		6,106			36

Change in cash and cash equivalents		(35,726	)		(23,372	)
Short term investments on June 30, 2005 and 2006		—			5,000

Change in cash and cash equivalents and investments	$	(35,726	)	$	(18,372	)

Net cash used in operating activities was $7.8 million for the six months ended June 30, 2006 compared to net cash used in operating activities of $9.2 million for the six months ended June 30, 2005. For the six months ended June 30, 2006, net income (loss) after adjustments for items to reconcile net income (loss) to net cash provided by operating activities was approximately $0.8 million. Such items included depreciation and amortization, non-cash interest expense and stock-based compensation.

Changes in operating assets and liabilities from December 31, 2005 decreased net cash provided by operating activities of approximately $8.6 million. Changes in working capital balances included an increase of current assets of approximately $23.4 million, excluding cash and cash equivalents, short-term investments and cash collected from notes receivable related to discontinued operations. The increase in these current assets was primarily the result of increased accounts receivable and inventory balances from December 31, 2005. The accounts receivable increase at June 30, 2006 was the result of higher commission balances owed to us by the carriers as a result of increased revenue and the timing of collections at the end of the month of June. Approximately $9.7 million of our June 30, 2006 accounts receivable balance was collected within the first two business days of July. Inventory balances increased as a result of product demand and anticipated business in the third quarter of 2006. We expect inventory balances to decrease during the three months ended September 30, 2006 as we take advantage of our buying leverage.

In addition, at June 30, 2006, we held inventory on our balance sheet committed to a vendor in an exchange for cash of $4.0 million which we had received by June 30, 2006 and 1.5 million of advertising trade credits. The inventory was expected to be delivered to the vendor in July and early August 2006, but we do not expect to recognize any revenue from this transaction and any gain from the exchange will be recognized as a reduction to our marketing expenses as we receive the advertising services from the vendor through the first quarter of 2007. At June 30, 2006, we had an accrued liability recorded on our balance sheet to reflect the cash proceeds received from the vendor.

Current liabilities, excluding debt and capital lease balances and acquisition earn-out obligations accrued during the period increased $14.6 million from December 31, 2005. The increase was mainly the result of an increase in accounts payable offset by decreases in accrued liabilities and deferred revenue. The increase in accounts payable at June 30, 2006 was the result of the timing of cash collections at the end of the month of June, as explained above, which slowed our payments to certain of our vendors; and higher inventory levels for which payment was not yet due. Accrued expenses decreased as a result of reductions in accrued consumer liabilities and cash amounts paid to fund the VMC earnout payment made in May 2006, partially offset by the $4.0 million commitment to provide inventory to a vendor described above. Deferred revenue decreased as a result of MVNE contract deliveries for which we were able to recognize revenue and an improvement in our deactivation rates.

Net cash used in investing activities for the six months ended June 30, 2006 and 2005 was $15.6 million and $32.6 million, respectively. The $17.0 million decrease in net cash used in investing activities was due to decreases from the 2005 period in the purchase of short term investments of approximately $12.9 million and cash paid for acquisitions and intangible assets of $5.5 million and increases of $1.1 million from proceeds received from the sale of discontinued operations and reductions in restricted cash balances in 2006. These amounts were partially offset by an increase of $2.8 million in the purchase of property and equipment and capitalized labor costs, primarily associated with enhancing our operating infrastructure and E-commerce platform to enable expanded and new functionality. Capital expenditures for the six months ended June 30, 2006 comprised $6.9 million of software and web site development and $1.6 million of other property, plant and equipment.Cash from investing activities included short-term investments of $5.0 million for the six months ended June 30, 2006.

Net cash provided by financing activities was $36,000 for the six months ended June 30, 2006 compared to net cash provided by financing activities of $6.1 million for the six months ended June 30, 2005. Financing activities consisted of cash used to repurchase common stock of $0.5 million and principal payments of capital leases of $0.2 million, partially offset by the proceeds received from the exercise of options of approximately $0.8 million.

Borrowings Under Line of Credit and Vendor Trade Credit.We maintain a revolving operating line of credit with Comerica Bank which allows for aggregate borrowing of up to $25.0 million subject to certain limits based on accounts receivable and inventory level. As of June 30, 2006, we had an aggregate principal amount of $15.0 million outstanding under the facility, however no further borrowing capacity under the facility was available as of June 30, 2006 based on the limits described above. Interest on advances under the revolving line of credit is payable monthly at a rate of LIBOR plus 2.0%. Under the terms of our line of credit we are required to maintain a current ratio, as defined of 1.1 to 1. We are also required to maintain an unrestricted cash balance of no less than $10.0 million held at Comerica and to meet certain minimum levels of EBITDA, as defined. As of June 30, 2006, we were in compliance with the EBITDA covenant under the credit facility. Our line of credit matures on January 1, 2007. We expect to refinance the facility or extend its maturity date prior to its maturity.

We have customary trade terms with many of our vendors including the carriers and original equipment manufacturers that provide wireless devices to us for sale to our customers. Based upon our vendor trade credit programs with the providers of our inventory, we had approximately $25.0 million of credit available to us for the purchase of wireless devices as of August 1, 2006.

Common Stock Repurchase Program. Our Board of Directors has authorized us to repurchase shares of our common stock up to an aggregate amount of $30.0 million. During the six months ended we repurchased an aggregate of 62,761 shares of our common stock for approximately $0.6 million. We expect to continue our share purchases through August 2006 at prevailing market rates using existing cash balances and funds generated from operating activities. There can be no assurances that we will repurchase up to the authorized amount over this time period.

Contractual Obligations

The following table summarizes our significant contractual obligations, including interest on capital leases, and the expected effect on liquidity and cash flows as of June 30, 2006.


	Total		Less than 1 year		1 - 3 years		4 - 5 years		Over 5 years
	(amounts in thousands)
Line of credit	$	15,000	$	15,000	$	—	$	—	$	—
Capital leases		917		433		475		9		—
Operating leases		4,225		1,871		2,354		—		—
Obligation to purchase certain advertising (a)		4,550		4,550		—		—		—
Commitment to provide inventory to vendor (b)		4,000		4,000		—		—		—
Obligations under VMC APA (c)		—		—		—		—		—

	$	24,692	$	21,854	$	2,829	$	9	$	—

(a)	We have a minimum purchase commitment to purchase a minimum level of advertising and media services from a vendor by March 31, 2007. Such commitment period may be extended at the option of the vendor.

(b)	We have a commitment to provide a vendor wireless devices and accessories for which we have already received a $4.0 million cash payment as of June 30, 2006. The inventory was shipped to the buyer in the third quarter of 2006.

(c)	Under the VMC Asset Purchase Agreement, we may be obligated to pay shareholders of VMC an additional $2.7 million in cash and 167,144 shares of our common stock upon achieving certain future operating targets. Such potential obligation has not been included in the table above.

Recent Accounting Pronouncements

In June, 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 will apply to fiscal years beginning after December 15, 2006, with earlier adoption permitted. We are currently in process of assessing the impact of the adoption of this statement on our financial results.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs that is an amendment to ARB No. 43, Chapter 4 (“SFAS No. 151”), amends chapter 4 “Inventory Pricing” of ARB No. 43 and paragraph A3 of SFAS No. 144. Previously, ARB 43 did not define the term so abnormal which could lead to unnecessary incomparable financial reporting. SFAS No. 151 clarifies that abnormal costs related to idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as period costs. SFAS No. 151 is effective for fiscal year beginning after June 15, 2005. We adopted the pronouncement effective January 1, 2006. There was no material effect on our financial position, cash flows or result of operations as a result of this adoption.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS No. 154”), a replacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. Previously, voluntary changes in accounting principles were generally required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the statement does not change the transition provisions of any existing accounting pronouncements. We adopted the pronouncement effective January 1, 2006. There was no material effect on our financial position, cash flows or result of operations as a result of this adoption.

Application of Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated condensed financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgments about our revenue, cost of revenue and the carrying values of assets and liabilities that are not readily apparent from other sources. Because this can vary in each situation, actual results may differ from the estimates under different assumptions and conditions.

The following is a summary of the most critical of these estimates. For additional information, see Item 7, Part II, “Management Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information currently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions

Revenue Recognition

Activation and Services – We generate revenue primarily from wireless carriers, as well as a satellite television carrier, who pay commissions and volume and performance-based bonuses, for activating wireless services and features on their networks. We recognize commissions from wireless carriers upon shipment of activated devices to the customer. In addition to activation commissions, under certain conditions, certain carriers pay us a monthly residual fee for as long as a customer we activate for the carrier continues to be its subscriber, or for a fixed period of time depending on the carrier. We purchase satellite activation certificates evidencing activation rights in advance of their resale to customers. Revenue from satellite television customers includes sales of these satellite activation certificates, net of the certificate cost, since we are acting as an agent in the transaction.

Our revenue is reduced for estimated deactivations of the wireless services by customers prior to the expiration of a time period that ranges 120 to 180 days from the date of activation, depending on the wireless carrier. We estimate deactivations based on historical experience, which we have developed based on our experience with carriers, customer behavior and sources of customers, among other factors, allowing us to accrue estimates with what we believe is a high degree of certainty. Any increase or decrease in the deactivation amount will cause a corresponding dollar-for-dollar increase or decrease in revenue. As an example, the impact of a 1% change in the deactivation rate applied to the quarter ended June 30, 2006 would have an increase or decrease in revenue and the corresponding reserve of $0.8 million. Any decrease in revenue resulting from an increase in deactivations would also be offset, in part, by returns of wireless devices. Our reserves for deactivations are included in accounts receivable and deferred revenue on our balance sheet. If we determine that we cannot accurately predict future deactivation experience, we may be required to defer 100% of our carrier commission revenue until the expiration of the appropriate chargeback period. New channels for which we have insufficient historical data to adequately estimate deactivation experience will be deferred through the expiration period for a period of 24 months, until such time that we can accurately estimate the deactivation experience for the new channel.

In addition to receiving commissions for each wireless subscriber activated, we earn performance bonuses from the wireless carriers based on negotiated performance targets. The most significant bonus we earn is the quarterly volume bonus, which we bill wireless carriers for on a monthly basis, based on current month activations. We record these bonuses as deferred revenue at the time of billing until we achieve the quarterly targets. We earn other quarterly bonuses from certain carriers for maintaining low customer churn and signing up customers for certain additional monthly “features” such as data service or text messaging. Wireless carriers also periodically offer bonuses for achieving monthly volume and other performance targets and also formerly provided some bonus compensation under annual volume based plans. We recognize these monthly bonuses as earned in accordance with the provisions of SAB No. 104. Revenue is recognized only when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable, and (4) collectibility is reasonably assured. Amounts collected in cash prior to meeting the above criteria are recorded as deferred revenue. Through 2005, commission revenue earned from the activation of carrier features had been deferred until the contractual chargeback period had lapsed. Beginning in 2006, we began to estimate commission revenue earned from feature activations based on historical experience which we have developed based on our experience with carriers and customer behavior over a period of time in excess of 24-months. This allows us to accrue estimates with what we believe is a high degree of certainty in accordance with SAB 104.

Equipment revenue—Revenue from the sale of devices and accessories in a multiple-element arrangement with services is recognized at the time of sale in accordance with EITF No. 00-21. Customers have the right to return devices within a specific period of time or usage, whichever occurs first. We provide an allowance for estimated returns on devices based on historical experience. In connection with our wireless activations, we sell the customer the wireless device at a significant discount, which may be in the form of a rebate. Rebates are recorded as a reduction of revenue and as a current liability until paid. We recognize rebate amounts based on the historical experience of rebates claimed. Future rebate experience could vary based upon rates of consumers redeeming rebates.

In the event a customer terminates their wireless service with the carrier within six months of activation and opts not to return the wireless device to us within the time frames permitted within our return policy, in many instances our sales contracts with the customer permit us to charge the customer an EDP termination fee for each unreturned device. Prior to the three months ended June 30, 2006, revenue recognition of such fee was deferred until such fee was collected from the customer pursuant to SAB 104 as we did not have adequate historical collection data to reasonably estimate the ultimate collectibility of the receivable. Beginning April 1, 2006, we began to estimate EDP termination fee revenue based on historical experience of customer collection behavior which we have developed over a time period of 24 months which provides the basis on which to accrue revenue with an appropriate assurance of collectibility pursuant to SAB 104. As of March 31, 2006, $0.3 million of such revenue was deferred, which would have been accrued for in the event that we had adequate customer collection history, less an estimated reserve for uncollectible amounts. As of June 30,, 2006, we had accrued as accounts receivable approximately $0.8 million in such EDP fees.

As of the most recent quarter ended June 30, 2006, our handset return rate was 9.5% of handset revenue. We have recorded handset return rates of 10.4% and 11.2% for the years ended December 31, 2005 and 2004, respectively. Any increase or decrease in the actual handset return experience will cause a corresponding dollar-for-dollar decrease or increase in revenue. The impact of a 1% change in the handset returns rate applied to the quarter ended June 30, 2006 would have resulted in an increase or decrease in revenue of approximately $0.2 million.

Inventory Valuation

Our inventory consists of wireless devices and accessories. The carrying value of inventory is stated at the lower of cost or market value. Cost is determined using a method which approximates the first-in-first-out accounting method. We write down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value or replacement cost based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected, additional inventory write-downs may be required. Historically, we have not experienced significant write-offs, with the exception of returned, unmarketable inventory.

Stock-based Compensation

We adopted SFAS No. 123(R) on January 1, 2006 using the modified prospective application (“MPA”) method. SFAS No. 123(R) established standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123(R) requires us to measure the cost of employee services received in exchange for an award of equity instruments (usually stock options or unvested (restricted) stock awards) based on the grant date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award – the requisite service period (usually the vesting period). The amount of compensation expense recognized using the fair value method requires us to exercise judgment and make assumptions relating to the factors that determine the fair value of our stock option grants.

Provision for Income Taxes

We have historically reported net losses and, in accordance with accounting principles generally accepted in the United States, have not recorded any income tax benefits from those losses. Although we intend to utilize net operating loss carryforwards to offset taxable income that may be generated in 2006, we expect alternative minimum tax amounts to be payable primarily due to the net operating loss carryforward limitations associated with the alternative minimum tax calculation. We continue to maintain a valuation allowance against our deferred tax assets, consisting primarily of net operating loss carryforwards, and we may recognize deferred tax assets in future periods when they are estimated to be realizable provided they are not subject to ownership change limitations. To the extent we report taxable income in future periods, we intend to use our net operating loss carryforwards to the extent available to offset taxable income and reduce cash outflows for income taxes. Certain of these net operating losses obtained through our acquisitions are not included in the components of the deferred tax assets, as the use of these losses will be significantly limited under Section 382 of the Internal Revenue Code.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management had previously concluded that our disclosure controls and procedures were effective as of June 30, 2006. However, in connection with the restatement of our March 31, 2006, June 30, 2006 and September 30, 2006 interim financial statements as fully described in Note 1 of this Form 10-Q/A, management determined that the material weaknesses described below existed as of June 30, 2006. Accordingly, our Chief Executive Officer and Chief Accounting Officer have now concluded that disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were not effective as of June 30, 2006 to ensure information required to be disclosed by us in the reports we file or submit under the Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified within the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.

Not withstanding the material weaknesses described below, management believes the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q/A fairly present in all material respects our financial condition, results of operations and cash flows for all periods presented.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood, that a material misstatement of the annual or interim quarterly financial statements will not be prevented or detected. Management identified material weaknesses in our internal controls including the following:

•

We did not maintain sufficient staffing of operational and financial resources.We did not maintain staffing in operational and financial resources sufficient to provide the level of controls and analysis required on a timely basis in light of the increasing complexity and growth of our business. This resulted in certain accounting processes and controls not being performed on a timely basis and the inability to maintain an adequate control environment, resulting in numerous material adjusting entries being made after year end. This material weakness contributed to errors such as those relating to proper revenue recognition and accounts receivable described below.

•

We did not always effectively communicate information to our finance department. Specifically, we failed to maintain effective communication channels to adequately identify and record certain transactions during 2006. The failure to provide this communication contributed to errors relating to accounting and reporting of expenses and liabilities. This material weakness caused or contributed to, adjustments necessary to appropriately record accounts receivable allowances and reserves for deactivations described below.

•

We did not maintain effective controls over the recordation, accuracy and completeness of activations and services revenue and related accounts receivable.

We did not take steps to adequately identify and appropriately record certain commission and bonus revenue received during the year from various wireless carriers in a timely and accurate manner. Recording amounts received from carriers in the appropriate accounts in a timely and accurate manner is an important business process control that is essential to the correct reporting of amounts in the financial statements. This material weakness contributed to errors relating to accounting and reporting for revenue and accounts receivable.

We did not utilize an appropriate methodology during the year in recording receivables from wireless carriers associated with disputed deactivations, churn bonuses and other carrier related fees. We overstated accounts receivable by using a methodology that anticipated future improvements in collections beyond that supported by past experience, and which did not consider certain current factors and other information. As a result of this material weakness, an adjustment was necessary to properly record revenue and related receivables from these fees.

•

We did not maintain effective controls over the determination and accuracy of equipment revenue and related accounts receivable.We did not utilize an appropriate methodology during the year in recording certain fees due from consumers when contracts are cancelled within specified time periods and the wireless device is not returned to us. Specifically, related accounts receivable were overstated to the extent that we used collection percentages which anticipated improvements in excess of past experience. As a result of this material weakness, an adjustment was necessary to properly record revenue and related receivables from these fees.

These material weaknesses resulted in adjustments to our revenue and accounts receivable and certain other financial statement line items as referred to above and resulted in the restatement of previously issued consolidated financial statements for the three and six-month periods ended June 30, 2006.

Changes in Internal Control over Financial Reporting

With the exception of the items described above, there have been no significant changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting for this current period.

PART II

ITEM 6.

EXHIBITS


Exhibit No.		Description
31.1		Rule 13a-14(a) Certification of Principal Executive Officer.

31.2		Rule 13a-14(a) Certification of Principal Financial Officer.

32.1		Section 1350 Certification of Chief Executive Officer.

32.2		Section 1350 Certification of Chief Financial Officer.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


INPHONIC, INC.

By:		/S/ DAVID A. STEINBERG
		David A. Steinberg Chairman of the Board and Chief Executive Officer

By:		/S/ GEORGE Z. MORATIS
		George Z. Moratis Executive Vice President and Chief Accounting Officer

Date: May 31, 2007

Inphonic (INPC) Inactive 10-Q/A2006 Q2 Quarterly report (amended)

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