Inphonic (INPC) 10-Q/A 2006 Q3 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 September 30, 2006

OR

¨ 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 36,633,309 shares of common stock outstanding as of November 1, 2006.

EXPLANATORY NOTE

We filed our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2006 with the Securities and Exchange Commission (the “SEC”) on November 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 nine months ended September 30, 2006 and related footnote disclosures to correct errors identified during the year-end audit and related to the misapplication of our accounting policies and determination of certain estimates. These adjustments reduced our activations and services revenue $4.5 million and $8.5 million; and equipment revenue $2.6 million and $2.6 million for the three and nine months ended September 30, 2006, respectively; and increased equipment cost of revenue $0.2 million and $0.8 million, sales and marketing expenses by $0.1 million and $0.1 million and general and administrative expenses $3.3 million and $3.3 million for the three and nine months ended September 30, 2006, respectively. In addition our net loss per share increased by $0.30 and $0.42 to ($0.43) and ($0.82) for the three and nine months ended, 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 nine months ended September 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 nine months ended September 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/A

		Page
PART I.—FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets at December 31, 2005 and September 30, 2006	3
	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2005 and September 30, 2006	4
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2006	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and September 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	17
Item 4.	Controls and Procedures	28
PART II.—OTHER INFORMATION
Item 6.	Exhibits	29
SIGNATURES		30

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PART I

ITEM 1. FINANCIAL STATEMENTS

INPHONIC, INC.

Condensed Consolidated Balance Sheets

(in thousands, except per share and share amounts)

	December 31, 2005			September 30, 2006
				(restated) (unaudited)
Assets
Current assets:
Cash and cash equivalents	$	70,783		$	57,537
Accounts receivable, net of allowance for doubtful accounts of $2,042 and $973, respectively		34,606			45,363
Inventory, net		19,680			18,160
Prepaid expenses		2,405			6,650
Deferred costs and other current assets		6,823			2,220
Current assets of discontinued operations		2,430			392
Total current assets		136,727			130,322
Restricted cash and cash equivalents		400			—
Property and equipment, net		12,121			19,439
Goodwill		31,140			36,634
Intangible assets, net		12,651			9,660
Deposits and other assets		3,058			8,721
Total assets	$	196,097		$	204,776
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	31,543		$	58,336
Accrued expenses and other liabilities		31,588			23,388
Current portion of deferred revenue		13,851			10,169
Current liabilities of discontinued operations		3,130			1,178
Current maturities of capital leases		377			350
Total current liabilities		80,489			93,421
Long term debt and capital lease obligations, net of current maturities		15,474			20,258
Deferred revenue, net of current portion		284			553
Total liabilities		96,247			114,232
Stockholders’ equity:
Common stock, $0.01 par value
Authorized 200,000,000 shares at December 31, 2005 and September 30, 2006; issued and outstanding 35,232,869 and 36,564,298 shares at December 31, 2005 and September 30, 2006, respectively		353			366
Additional paid-in capital		264,155			284,244
Accumulated deficit		(164,658	)		(194,066	)
Total stockholders’ equity		99,850			90,544
Total liabilities and stockholders’ equity	$	196,097		$	204,776

See accompanying notes to unaudited condensed consolidated financial statements

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INPHONIC, INC.

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share and share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2006			2005			2006
				(restated)						(restated)
Revenue:
Activations and services	$	65,405		$	80,704		$	170,608		$	221,662
Equipment		26,555			14,399			64,729			52,547
Total revenue		91,960			95,103			235,337			274,209
Cost of revenue, exclusive of depreciation and amortization:
Activations and services		(564	)		551			895			1,876
Equipment		54,317			52,970			134,985			151,401
Total cost of revenue		53,753			53,521			135,880			153,277
Operating expenses:
Sales and marketing, exclusive of depreciation and amortization		24,274			29,605			61,599			83,735
General and administrative, exclusive of depreciation and amortization		15,750			22,982			44,326			53,121
Depreciation and amortization		2,460			4,543			6,379			11,986
Restructuring costs		453			209			848			2,115
Investment write-off		—			—			228			—
Total operating expenses		42,937			57,339			113,380			150,957
Operating loss		(4,730	)		(15,757	)		(13,923	)		(30,025	)
Other income (expense):
Interest income		549			442			1,576			1,616
Interest expense		(185	)		(276	)		(599	)		(900	)
Total other income		364			166			977			716
Loss from continuing operations		(4,366	)		(15,591	)		(12,946	)		(29,309	)
Discontinued operations:
Income (loss) from discontinued operations		(587	)		72			(653	)		(99	)
Net loss	$	(4,953	)	$	(15,519	)	$	(13,599	)	$	(29,408	)
Basic and diluted net loss per share:
Net loss from continuing operations	$	(0.12	)	$	(0.43	)	$	(0.38	)	$	(0.82	)
Net income (loss) from discontinued operations		(0.02	)		0.00			(0.02	)		(0.00	)
Basic and diluted net loss per share	$	(0.14	)	$	(0.43	)	$	(0.40	)	$	(0.82	)
Basic and diluted weighted average shares outstanding		35,515,210			36,304,160			34,099,325			35,836,331

See accompanying notes to unaudited condensed consolidated financial statements

4

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
									(restated)
Balance, December 31, 2005	35,232,869		$	353		$	264,155		$	(164,658	)	$	99,850
Stock-based compensation expense	—			—			10,944			—			10,944
Issuance of common stock in connection with the acquisition earnouts of:
A1 Wireless, Inc.	15,408			—			235			—			235
VMC Satellite, Inc.	697,045			7			4,939			—			4,946
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	681,737			7			1,245			—			1,252
Net loss	—			—			—			(29,408	)		(29,408	)
Balance, September 30, 2006 (restated)	36,564,298		$	366		$	284,244		$	(194,066	)	$	90,544

See accompanying notes to unaudited condensed consolidated financial statements

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INPHONIC, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

	Nine Months Ended September 30,
	2005			2006
				(restated)
Cash flows from operating activities:
Net loss	$	(13,599	)	$	(29,408	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		6,379			11,986
Non-cash sales and marketing expense related to common stock warrant		—			296
Non-cash interest expense, net		486			—
Stock-based compensation		13,721			10,088
Non-cash write-off of investment		228			—
Changes in operating assets and liabilities, net of assets and liabilities received from business acquisitions:
Accounts receivable		(23,621	)		(10,412	)
Inventory		(23,201	)		3,843
Prepaid expenses		(1,267	)		(5,723	)
Deferred costs and other assets		(1,060	)		4,607
Deposits and other assets		(1,357	)		(2,153	)
Accounts payable		17,144			25,598
Accrued expenses and other liabilities		5,538			(5,641	)
Deferred revenue		5,028			(3,413	)
Net cash used in operating activities		(15,581	)		(332	)
Cash flows from investing activities:
Capitalized expenditures, including internal capitalized labor		(8,745	)		(15,525	)
Cash paid for acquisitions		(8,670	)		(3,989	)
Cash paid for intangible assets		(2,532	)		(193	)
Purchase of short-term investments		(5,005	)		(5,000	)
Proceeds from the maturity of short-term investments		—			5,000
Proceeds from the sale of assets of discontinued operations		—			1,111
Reduction in restricted cash and cash equivalents		—			400
Net cash used in investing activities		(24,952	)		(18,196	)
Cash flows from financing activities:
Principal repayments on debt		(215	)		(1,751	)
Borrowings on line of credit		15,000			—
Trade borrowings on line of credit		—			6,355
Cash paid for repurchase of common stock		(3,090	)		(503	)
Proceeds from exercise of warrants and options		9,669			1,181
Net costs of initial public offering		(291	)		—
Net cash provided by financing activities		21,073			5,282
Net decrease in cash and cash equivalents		(19,460	)		(13,246	)
Cash and cash equivalents, beginning of the period		100,986			70,783
Cash and cash equivalents, end of the period	$	81,526		$	57,537
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest	$	107		$	774
Supplemental disclosure of non-cash activities:
Release of funds in escrow related to acquisitions		10,700			—
Issuance of common stock in business acquisitions		8,209			5,181
Issuance of warrant to purchase common stock to vendor		—			3,228
Purchase consideration in accrued liabilities		3,000			224
Inventory issued for advertising credits		—			2,323
Issuance of common stock in intangible asset purchase		1,549			—
Stock-based compensation capitalized as internal labor		—			443
Equipment purchased on capital lease		366			152

See accompanying notes to unaudited condensed consolidated financial statements

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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.

The accompanying financial statements for the three month period ended September 30, 2005 include adjustments to reduce depreciation and amortization expense by $733. These adjustments to depreciation were made to correct a computational error in the fixed asset subledger that caused depreciation expense to be overstated in each prior period between fiscal years 2001 and 2004 and for the six months ended June 30, 2005. We do not believe the impact of the adjustments to be material to the three month or nine month periods ended September 30, 2005 or any other prior period.

(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.

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

(c) Restatement

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 pursuant to SAB 104. As a result we reduced our revenue and accounts receivable $393 for this matter.

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 matter.

In addition during the three months ended June 30, 2006, we identified errors that occurred in the determination of cost of revenue and accounts receivable in the amount of $627 that have been corrected in the accompanying financial statements.

During the three months ended September 30, 2006, we identified errors in accounting for our activations and services revenue, equipment revenue and rebates and amounts paid to consumers as “goodwill” prior to our settlement with the Attorney General of the District of Columbia.

Activations and services revenue - We had recorded revenue for certain types of residual and churn bonuses due from wireless carriers for activations which occurred during the quarter. Upon further evaluation, we subsequently determined revenue recognition was in error as collectibility of such amounts was not reasonably assured pursuant to SAB 104 based on the nature of the amounts due and our collection experience of similar items. Accordingly, we reduced revenue and accounts receivable by $2,917 and will not record revenue on such items in the future until collections are received.

In addition, upon further evaluation of carrier commission receivable balances, we identified several receivable balances that the respective carriers were disputing. Based on correspondence and other information received from the carrier during the three months ended September 30, 2006, although we may continue our collection pursuits, we now believe that based on the nature of the response we should have written off these balances during our third quarter. Accordingly we have reduced activation and services revenue and accounts receivable by $1,551 and will not record revenue on such items in the future until collections are received.

Equipment revenue - We identified a deficiency in our process for recording certain fees due from consumers when they cancel their wireless service contract within specified time periods or the wireless device is not returned to us as is required under the contract with the customer. As a result of this deficiency we reduced equipment revenue and accounts receivable $1,961 during the quarter.

Consumer product rebates and rebates paid to consumers as “goodwill” - We identified an error in accounting for accrued expenses and reserves for consumer product rebates (“accrued consumer liabilities”) totaling $3,950 for the quarter. Of this amount, we determined that our reserve for such liabilities was understated $3,297 from payments made to consumers during the three month period which were outside our customary rebate validation process (“goodwill payments”) which erroneously reduced accrued consumer liabilities when paid rather than expensing such amounts. Accordingly, we increased general and administrative expenses and accrued consumer liabilities for $3,297 during the three months ended September 30, 2006. In addition, we identified that we under-estimated our accrued consumer liability reserve requirements $653 as a result of misestimating the number of periods that continued to be subject to consumer rebate eligibility. Accordingly, we decreased equipment revenue and increased our reserve for accrued consumer liabilities for this amount.

Other- We identified errors that occurred in the recordation of selling and marketing and general and administrative expenses cost of revenue and accounts receivable in the amount of $325 that also have been corrected in the accompanying financial statements.

The impact on our financial statements for these items for the three and nine months ended September 30, 2006 is shown in the table below:

	September 30, 2006 (reported)			September 30, 2006 (adjustments)			September 30, 2006 (restated)
Accounts receivable	$	56,545		$	(11,182	)	$	45,363
Total current assets		141,504			(11,182	)		130,322
Total assets		215,958			(11,182	)		204,776
Accounts payable		58,071			265			58,336
Accrued expenses and other current liabilities		19,438			3,950			23,388
Total current liabilities		89,206			4,215			93,421
Total liabilities		110,017			4,215			114,232
Accumulated deficit		(178,669	)		(15,397	)		(194,066	)
Total stockholders’ equity		105,941			(15,397	)		90,544
Total liabilities and stockholders’ equity		215,958			(11,182	)		204,776

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	For the three months ended									For the nine months ended
	30-Sep (reported)			30-Sep (adjustments)			30-Sep (restated)			30-Sep (reported)			30-Sep (adjustments)			30-Sep (restated)
Revenue:
Activations and services	$	85,171		$	(4,467	)	$	80,704		$	230,196		$	(8,534	)	$	221,662
Equipment		17,013			(2,614	)		14,399			55,161			(2,614	)		52,547
Total revenue		102,184			(7,081	)		95,103			285,357			(11,148	)		274,209
Cost of revenue, exclusive of depreciation and amortization
Equipment		52,770			200			52,970			150,574			827			151,401
Total cost of revenue		53,321			200			53,521			152,450			827			153,277
Sales and marketing, exclusive of depreciation and amortization		29,480			125			29,605			83,610			125			83,735
General and administrative, exclusive of depreciation and amortization		19,685			3,297			22,982			49,824			3,297			53,121
Total operating expenses		53,917			3,422			57,339			147,535			3,422			150,957
Operating loss		(5,054	)		(10,703	)		(15,757	)		(14,628	)		(15,397	)		(30,025	)
Loss from continuing operations		(4,888	)		(10,703	)		(15,591	)		(13,912	)		(15,397	)		(29,309	)
Net loss		(4,816	)		(10,703	)		(15,519	)		(14,011	)		(15,397	)		(29,408	)
Net loss per share:
Net loss from continuing operations		(0.13	)		(0.30	)		(0.43	)		(0.39	)		(0.43	)		(0.82	)
Basic and diluted net loss per share		(0.13	)		(0.30	)		(0.43	)		(0.39	)		(0.43	)		(0.82	)

	For the nine months ended
	30-Sep (reported)			30-Sep (adjustments)			30-Sep (restated)
Cash flows from operating activities:
Net loss	$	(14,011	)	$	(15,397	)	$	(29,408	)
Accounts receivable		(21,594	)		11,182			(10,412	)
Accounts payable		25,333			265			25,598
Accrued expenses and other liabilities		(9,856	)		4,215			(5,641	)

(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 $194,066. To date, management has relied on debt and equity financings to fund our operating deficit. While we currently have $57,537 of cash and cash equivalents on hand as of September 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”); VMC Satellite, Inc. (“VMC”); and FONcentral.com, Inc. (“FC”). 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, their respective acquisition dates.

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 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, 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

8

transaction. Our wireless revenue is reduced for estimated deactivations of customers prior to the expiration of a time period that ranges 90 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 September 30, 2006 was $1,852 and $1,590, 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, 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.

During the three and nine months ended September 30, 2006, we incurred and paid $3,297 to consumers outside our customary rebate redemption process to parties that we believed generally had not satisfied all the terms and conditions of the respective rebate redemption program. Such amounts were paid to satisfy customer complaints and are viewed by us as “goodwill payments” and reflected in general and administrative expenses.

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, pursuant to SAB 104 revenue recognition of such fee was deferred 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 a revenue with an appropriate assurance of collectibility pursuant to SAB 104.

(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 69% of accounts receivable, net of the deactivation reserve, as of December 31, 2005 and September 30, 2006, respectively.

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For the three and nine months ended September 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 September 30,				Nine Months Ended September 30,
	2005		2006		2005		2006
Carrier A	32	%	37	%	29	%	35	%
Carrier B	13	%	19	%	16	%	17	%
Carrier C	17	%	15	%	21	%	16	%
Total	62	%	71	%	66	%	68	%

(c) Accrued Expenses and Other Liabilities

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

	As of
	December 31, 2005		September 30, 2006
Accrued consumer liabilities	$	18,289	$	14,103
Accrued payroll and related expenses		1,452		1,479
Accrued acquisition costs and severance costs		5,063		591
Accrued taxes payable		593		386
Other		6,191		6,829
	$	31,588	$	23,388

(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 September 30, 2005, we recognized $453 in restructuring costs, all of which related to workforce reduction. During the nine months ended September 30, 2005, we recognized $848 in restructuring costs, of which $812 related to workforce reduction and the remaining $36 to excess facilities. All costs related to this plan were paid out in 2005.

During 2006, we implemented a restructuring plan related to changes in our management and operational structure. For the nine months ended September 30, 2006, we recognized $2,115 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 semi-monthly basis over the terms of their respective severance agreements, $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, and $209 related to other costs primarily due to relocation expenses for certain key employees. At September 30, 2006, we had an accrued liability recorded of $367 of which approximately $222 will be paid out in cash by December 31, 2006.

(e) Loss on investment

During the nine months ended September 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 period.

(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

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requisite service period (usually the vesting period). In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to the interaction of the adoption of SFAS No. 123(R) and the SEC rules and regulations. We have applied the provisions of SAB 107 in our adoption of SFAS 123(R).

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 nine months ended September 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 $1,394 and $4,770, of which $24 and $260, respectively, was capitalized in accordance with our compensation policies and SFAS No. 123(R).

In addition on March 22 and June 13, 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 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, and June 13, 2006 grants, respectively. Stock-based compensation expense for these grants for the three and nine months ended September 30, 2006 was $101 and $227 respectively.

The impact of adopting SFAS No. 123(R) increased stock-based compensation expense included in our operating expenses and increased net loss from continuing operations by approximately $718 and $1,715 for the three and nine months ended September 30, 2006 respectively or $0.02 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.

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

	Number of options		Weighted average exercise price		Weighted average contractual term (years)	Aggregate intrinsic value
Balance January 1, 2006	5,115,969		$	9.47
Granted	886,900			6.47
Exercised	(257,599	)		4.95
Forfeited	(813,324	)		11.88
Balance September 30, 2006	4,931,946		$	8.77	7.66	$	7,230
Ending vested & expected to vest	4,681,171		$	8.74	7.60	$	6,924
Exercisable at September 30, 2006	2,849,165		$	8.40	6.97	$	4,428

The weighted-average grant date fair value of options granted during the nine months ended September 30, 2006 was $4.29. The total intrinsic value of options exercised during the nine months ended September 30, 2006 was $663.

Restricted Common Stock—During the nine months ended September 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 nine months ended September 30, 2006.

	Number of Restricted Stock Awards		Weighted-average grant date fair value
Non-vested at January 1, 2006	1,137,878		$	15.58
Granted	1,205,127			6.61
Vested	(443,432	)		14.65
Surrendered for taxes	(37,768	)		15.83
Forfeited	(170,979	)		15.10
Non-vested at September 30, 2006	1,690,826		$	9.47

As of September 30, 2006, there was approximately $12,566 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 1.54 years. The total fair value of shares vested during the nine months ended September 30, 2006 was approximately $6,495.

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 nine months ended September 30, 2006:

	Number of warrants		Weighted average exercise price		Range of exercise
Balance January 1, 2006	787,863		$	8.44	$	0.03 - 24.00
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
Forfeited	(3,334	)		24.00		24.00
Balance at September 30, 2006	1,332,956		$	8.04	$	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.

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Warrants outstanding at September 30, 2006 were exercisable for 1,332,956 shares of our common stock, excluding this contingent warrant.

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

	Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net loss as reported	$	(4,953	)	$	(13,599	)
Add: Stock-based employee compensation expense included in net loss as reported, net of related tax effects		3,874			13,046
Less: Total stock-based employee compensation determined under fair value based methods for all stock award, net of related tax effects		(4,615	)		(9,786	)
Pro forma net loss	$	(5,694	)	$	(10,339	)
Net loss per common share, basic and diluted, as reported	$	(0.14	)	$	(0.40	)
Net loss per common share, basic and diluted, pro forma	$	(0.16	)	$	(0.30	)
Basic and diluted weighted average common shares outstanding		35,515,210			34,099,325

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
Balance Sheet:	December 31, 2005		September 30, 2006
Property and equipment, net	$	—	$	404
	Three Months Ended September 30,				Nine Months Ended September 30,
Statement of operations:	2005		2006		2005		2006
Sales and marketing	$	709	$	674	$	1,761	$	2,212
General and administrative		3,148		2,304		11,703		6,564
Restructuring costs		—		—		—		1,312
Net income (loss) from discontinued operations		69		—		258		—
	$	3,926	$	2,978	$	13,722	$	10,088

During the nine months ended September 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 are 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 nine months ended September 30, 2005 and 2006.

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	Three Months Ended September 30,						Nine Months Ended September 30,
				(restated)						(restated)
	2005			2006			2005			2006
Net loss from continuing operations	$	(4,366	)	$	(15,591	)	$	(12,946	)	$	(29,309	)
Net income (loss) from discontinued operations		(587	)		72			(653	)		(99	)
Net loss	$	(4,953	)	$	(15,519	)	$	(13,599	)	$	(29,408	)
Weighted average shares outstanding
Basic and diluted earnings per share:		35,515,210			36,304,160			34,099,325			35,836,331
Net loss from continuing operations	$	(0.12	)	$	(0.43	)	$	(0.38	)	$	(0.82	)
Net income (loss) from discontinued operations		(0.02	)		0.00			(0.02	)		(0.00	)
Basic and diluted earnings per share	$	(0.14	)	$	(0.43	)	$	(0.40	)	$	(0.82	)

During the three and nine months ended September 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 equivalents as of the end of each period:

	September 30,
	2005	2006
Options to purchase common stock	5,502,930	4,931,946
Restricted stock awards	1,021,266	1,690,826
Warrants to purchase common stock	897,647	1,521,731
Shares awarded in connection with the VMC acquisition	210,379	—
Total common stock equivalents convertible into common stock	7,632,222	8,144,503

(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 nine months ended September 30, 2006 we collected $1,111 of notes receivable recorded at December 31, 2005 related to the divestiture. Summary operating results for discontinued operations was as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2006		2005			2006
Revenue	$	4,777		$	—	$	19,625		$	—
Costs and expenses		(5,364	)		72		(20,278	)		(99	)
Income (loss) from discontinued operations	$	(587	)	$	72	$	(653	)	$	(99	)

Balance sheet data included:

	As of
	December 31, 2005		September 30, 2006
Accounts and notes receivable, net	$	1,848	$	392
Other current assets		582		—
Assets of discontinued operations	$	2,430	$	392
Accounts payable	$	931	$	—
Other accrued expenses		2,199		1,178
Liabilities of discontinued operations	$	3,130	$	1,178

(4) Goodwill

The following table reflects the changes to goodwill for the nine months ended September 30, 2006:

Balance as of December 31, 2005	$	31,140
Goodwill arising from VMC Satellite, Inc. earn-outs (1)		5,494
Balance as of September 30, 2006	$	36,634

(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 paid in April 2006. An additional $2,510 of goodwill was earned in connection with achieved earn-out performance targets on August 24, 2006 and consisted of $1,186 of cash, of which $224 was still payable as of September 30, 2006, and 214,899 shares of our common stock with a fair value of $1,324. We may also be obligated to pay shareholders of VMC an additional $1,568 in cash based on future performance targets.

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(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. On September 28, 2006, we entered into a Seventh Amendment (the “Amendment”) to Third Amended and Restated loan and Security Agreement (the “Agreement”) with Comerica Bank (the “Bank”). The Amendment amended the maturity date from January 1, 2007 to July 1, 2007, reduced the applicable interest to the Bank’s LIBOR plus a margin of 1.75% from the Bank’s LIBOR plus a margin of 2.00%, and modified the terms of the limits on our aggregate borrowing base. At September 30, 2006 and December 31, 2005, there were $19,924 and $15,000 outstanding under this line of credit, respectively. As of September 30, 2006, we had no additional borrowing availability under the facility based on the limits described above. The line of credit expires effective July 1, 2007 and accordingly the outstanding balance has been classified as a current liability as of September 30, 2006. We terminated our line of credit on November 7, 2006.

On November 7, 2006, we executed a $100 million aggregate principal amount senior secured term loan bearing a fixed rate of interest of nine percent per annum and secured by substantially all our assets. The term loan matures in November 2011. Beginning in November 2009, we have the ability to repay principal on the loan without penalty and conversely, the lenders have the right to call the remaining outstanding principal of the debt without penalty. As additional consideration, we also granted the lenders warrants to purchase 1,250,000 shares of our common stock at an exercise price of $0.01 per share. We received $75.0 million of the term loan proceeds on November 7, 2006, and have the option to withdraw the remaining amount at a later date. Proceeds from the term loan will be used to repay all indebtedness under the existing credit facility, fund share repurchases of our common stock, and for general corporate and working capital needs. In conjunction with the loan transaction above, we terminated our credit facility with Comerica Bank and used proceeds from the term loan to repay the outstanding principal obligation of $19,924 plus accrued interest.

(6) Repurchase of Common Stock

On August 17, 2005, our Board of Directors authorized the repurchase of up to $30,000 of our common. We funded our share repurchases with cash on hand and cash generated from operations. During the nine months ended September 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 September 30, 2006. For the duration of the program, we repurchased 1,144,248 shares for an aggregate consideration of $13,591. The program ended August 17, 2006.

(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

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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.

Thirteen related putative federal court class actions, have been filed against us arising out of InPhonic-sponsored rebate offers for online purchases of wireless telephones. Eight of these lawsuits also name a third-party rebate processor as a defendant. This rebate processor began to process claims for InPhonic-sponsored rebate offers in or about July 2005, and InPhonic’s agreement with the rebate processor expired in or about July 2006. One of these lawsuits also names our current third-party rebate processor as a defendant.

Of the thirteen federal court actions, five are pending in the District of Columbia, another five are pending in the District of Arizona, and one each is pending in the federal courts Newark, New Jersey, Chicago, and Los Angeles.

On October 25, 2006 we received a decision by the Judicial Panel on Multidistrict Litigation (“JPML”) granting our motion to consolidate the federal court actions in the United States District Court for the District of Columbia before the Honorable Ellen Segal Huvelle.

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 intend to vigorously defend these actions but cannot predict their outcome.

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 sought injunctive relief, restitution for consumers, statutory penalties, and attorneys’ fees. We reached settlement in principle with the Attorney General of the District of Columbia on November 3, 2006 and are currently negotiating the terms of a definitive agreement.

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.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 November 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 and features 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 September 30, 2006 were $95.1 million and $15.6 million, respectively, compared to total revenue and net loss from continuing operations of $92.0 million and $4.4 million, respectively, for the three months ended September 30, 2005. Revenue from our top three

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wireless carriers represented 71% and 62% of our total consolidated revenue for the three months ended September 30, 2006 and 2005, respectively. For the nine months ended September 30, 2006 total revenue and net loss from continuing operations were $274.2 million and $29.3 million, respectively, compared to total revenue and net loss from continuing operations of $235.3 million and $12.9 million, respectively, for the same period of 2005. Revenue from our top three wireless carriers represented 68% and 66% of our total consolidated revenue for the nine months ended September 30, 2006 and 2005, respectively.

Since we began operations in 1999, we have incurred significant losses and have had negative cash flow from operations. For the nine months ended September 30, 2006, $0.3 million of cash was used in operations. As of September 30, 2006, our accumulated deficit was $194.1 million and our total stockholders’ equity was $90.5 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.

In 2005, we acquired certain assets and assumed certain liabilities of A1 Wireless USA, Inc. (“A1 Wireless”); VMC Satellite, Inc. (“VMC”); and FONcentral.com, Inc. (“FC”). 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, their respective acquisition dates.

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

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

	Three Months Ended September 30,
	2005					2006				Change Between 2005 and 2006
	Amount			% of Revenue		Amount		% of Revenue		Amount			%
	(amounts in thousands)
	(restated)
Revenue:
Activation and services	$	65,405		71	%	$	80,704	85	%	$	15,299		23	%
Equipment		26,555		29	%		14,399	15	%		(12,156	)	-46	%
Total revenue	$	91,960		100	%	$	95,103	100	%	$	3,143		3	%
Cost of revenue
Activation and services	$	(564	)	-1	%	$	551	1	%	$	1,115		-198	%
Equipment		54,317		59	%		52,970	56	%		(1,347	)	-2	%
Total cost of revenue	$	53,753		58	%	$	53,521	57	%	$	(232	)	0	%
Selected operating expenses:
Sales and marketing	$	24,274		26	%	$	29,605	30	%	$	5,331		22	%
General and administrative		15,750		17	%		22,982	24	%		7,232		46	%
Depreciation and amortization		2,460		3	%		4,543	5	%		2,083		85	%
Restructuring		453		0	%		209	0	%		(244	)	-54	%

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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 September 30,
	2005				2006				Change Between 2005 and 2006
	Amount		% of Revenue		Amount		% of Revenue		Amount			%
	(amounts in thousands)
	(restated)
Activations and services:
Wireless activation	$	63,799	69	%	$	77,659	82	%	$	13,860		22	%
MVNE and data services		1,606	2	%		3,045	3	%		1,439		90	%
	$	65,405	71	%	$	80,704	85	%	$	15,299		23	%
Equipment:
Wireless activation	$	26,555	29	%	$	14,399	15	%	$	(12,156	)	-46	%
Total Revenue:
Wireless activation	$	90,354	98	%	$	92,058	97	%	$	1,704		2	%
MVNE and data services		1,606	2	%		3,045	3	%		1,439		90	%
	$	91,960	100	%	$	95,103	100	%	$	3,143		3	%

Activations and Services

Activations and services revenue increased 23% to $80.7 million for the three months ended September 30, 2006 from $65.4 million for the three months ended September 30, 2005. The increase in activations and services revenue of $15.3 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 15% to $86.3 million for the three months ended September 30, 2006 from $75.2 million for the three months ended September 30, 2005. Activations and services revenue of MVNE and data services increased $1.4 million to $3.0 million for the three months ended September 30, 2006, primarily as a result of increased MVNE revenue resulting from additional recurring revenue transactions for back-office support. Recurring revenue transactions increased due to a strategic business partnership beginning in April 2006.

Equipment

Revenue from sales of equipment for the three months ended September 30, 2006 decreased 46% to $14.4 million from $26.6 million for the three months ended September 30, 2005. The decrease in equipment revenue of $12.2 million was attributable to lower average sales prices due to an increase in point-of-sale discounts and other incentives provided to customers as compared to the three months ended September 30, 2005.

Total revenue

Total revenue increased 3% to $95.1 million for the three months ended September 30, 2006 from $92.0 million for the three months ended September 30, 2005. Revenue generated from the sale and activation of wireless devices and services accounted for approximately 97% of consolidated revenue for the three months ended September 30, 2006 compared to 98% for the three months ended September 30, 2005. Revenue from our top three wireless carriers represented 71% of consolidated revenue for the three months ended September 30, 2006 compared to 62% for the comparable period of 2005.

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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 $53.0 million for the three months ended September 30, 2006 as a result of a higher volume of devices sold during the period at a lower average cost compared to sales of such devices in the three months ended September 30, 2005. Total cost of revenue decreased to $53.5 million for the three months ended September 30, 2006 compared to $53.8 million for the three months ended September 30, 2005. Cost of revenue from the sale of wireless devices accounted for approximately 99% of consolidated cost of revenue for the three months ended September 30, 2006 and 100% for the three months ended September 30, 2005. As a percentage of total revenue, cost of equipment revenue decreased to 56% of total revenue for the three months ended September 30, 2006 compared to 59% for the three months ended September 30, 2005.

OPERATING EXPENSES

Sales and Marketing

Sales and marketing expenses increased 22% to $29.6 million for the three months ended September 30, 2006 from $24.3 million for the corresponding period of 2005. The increase of $5.3 million mainly comprised a $5.1 million increase from the growth of existing marketing relationships and the addition of new marketing partner relationships since the three months ended September 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 $25.9 million of third-party marketing expenses in the three months ended September 30, 2006. Such expenses were higher in the three months ended September 30, 2006 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 46% to $23.0 million for the three months ended September 30, 2006 from $15.8 million for the corresponding period of 2005. General and administrative expenses increased $7.2 million for the three months ended September 30, 2006 mainly as a result of costs incurred to evaluate, research and settle rebate matters associated with the District of Columbia attorney general’s action payments made to past customers as “goodwill” for a product rebate that was paid outside our customary validation process and would not have otherwise been paid to the recipient, and increases in costs incurred for other professional services partially offset by decreases in bank related processing fees and severance expenses.

Depreciation and Amortization

Depreciation and amortization expenses, which are amortized over periods ranging from 18 months to 7 years, increased 85% to $4.5 million for the three months ended September 30, 2006 from $2.5 million for the three months ended September 30, 2005. The increase was primarily due to the costs associated with developing new functionality related to our websites, product offerings, and normal fixed asset depreciation on an increased amount of capital expenditures as compared to the corresponding period of 2005. In addition, 2005 expenses were reduced by a $0.7 million adjustment to correct a computational error in the fixed asset subledger that caused depreciation expense to be overstated.

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 September 30, 2005, we recognized $0.5 million in restructuring costs which related to workforce reduction and excess facilities. All costs related to this plan were paid out in 2005. For the three months ended September 30, 2006, we incurred $0.2 million of restructuring costs primarily due to additional severance costs and relocation expenses for certain employees related to a plan which commenced in July 2006.

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Loss from continuing operations

Loss from continuing operations increased to $15.6 million for the three months ended September 30, 2006 from $4.4 million for the three months ended September 30, 2005 as a result of increased costs for the rebate settlement and related expenses offset by decreasing cost of revenue as a percentage of revenue.

Net Loss

Net loss decreased to $15.5 million for the three months ended September 30, 2006 from $5.0 million for the three months ended September 30, 2005.

Comparison of the Results of Operations for the Nine Months Ended September 30, 2006 and 2005

	Nine Months Ended September 30,
	2005				2006				Change Between 2005 and 2006
	Amount		% of Revenue		Restated Amount		% of Revenue		Amount			%
	(amounts in thousands)
Revenue:
Activation and services	$	170,608	72	%	$	221,662	81	%	$	51,054		30	%
Equipment		64,729	28	%		52,547	19	%		(12,182	)	-19	%
Total revenue	$	235,337	100	%	$	274,209	100	%	$	38,872		17	%
Cost of revenue:
Activation and services	$	895	1	%	$	1,876	1	%	$	981		110	%
Equipment		134,895	57	%		151,401	54	%		16,506		12	%
Total cost of revenue	$	135,790	58	%	$	153,277	55	%	$	17,487		13	%
Selected operating expenses:
Sales and marketing	$	61,599	26	%	$	83,735	31	%	$	22,136		36	%
General and administrative		44,327	19	%		53,121	19	%		8,794		20	%
Depreciation and amortization		6,379	3	%		11,986	4	%		5,607		88	%
Restructuring		848	0	%		2,115	1	%		1,267		149	%

REVENUE

	Nine Months Ended September 30,
	2005				2006				Change Between 2005 and 2006
	Amount		% of Revenue		Restated Amount		% of Revenue		Amount			%
	(amounts in thousands)
Activations and services:
Wireless activation	$	164,552	70	%	$	211,039	77	%	$	46,487		28	%
MVNE and data services		6,056	3	%		10,623	4	%		4,567		75	%
		170,608	73	%		221,662	81	%		51,054		30	%
Equipment:
Wireless activation	$	64,729	28	%	$	52,547	19	%	$	(12,182	)	-19	%
Total Revenue:
Wireless activation	$	229,281	97	%	$	263,586	96	%	$	34,305		15	%
MVNE and data services		6,056	3	%		10,623	4	%		4,567		75	%
	$	235,337	100	%	$	274,209	100	%	$	38,872		17	%

Activations and Services

Activations and services revenue increased 30% to $221.7 million for the nine months ended September 30, 2006 from $170.6 million for the nine months ended September 30, 2005. The increase in activations and services revenue of $51.1 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 22% to $238.1 million for the nine months ended September 30, 2006 from $195.3 million for the nine months ended

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September 30, 2005. Activations and services revenue of MVNE and data services increased $4.6 million to $10.6 million for the nine months ended September 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 nine months ended September 30, 2006 was $52.5 million compared to $64.7 million for the nine months ended September 30, 2005. The decrease in equipment revenue of $12.2 million was attributable to lower average sales prices due to an increase in point-of-sale discounts and other incentives provided to customers as compared to the nine months ended September 30, 2005.

Total revenue

Total revenue increased 17% to $274.2 million for the nine months ended September 30, 2006 from $235.3 million for the nine months ended September 30, 2005. Revenue generated from the sale and activation of wireless devices and services accounted for approximately 96% of consolidated revenue for the nine months ended September 30, 2006 compared to 97% for the nine months ended September 30, 2005. Revenue from our top three wireless carriers represented 68% of consolidated revenue for the nine months ended September 30, 2006 compared to 66% for the comparable period of 2005.

COST OF REVENUE

Our cost of revenue related to wireless equipment sales increased to $151.4 million for the nine months ended September 30, 2006 as a result of a higher volume of devices sold during the period compared to sales of such devices for the nine months ended September 30, 2005. Total cost of revenue increased 13% to $153.3 million for the nine months ended September 30, 2006 as compared to $135.8 million for the nine months ended September 30, 2005. Cost of revenue from the sale of wireless devices accounted for approximately 99% of consolidated cost of revenue for the nine months ended September 30, 2006 and for the nine months ended September 2005. As a percentage of total revenue, cost of equipment revenue decreased to 55% of revenue for the nine months ended September 30, 2006 compared to 57% for the nine months ended September 30, 2005.

OPERATING EXPENSES

Sales and Marketing

Sales and marketing expenses increased 36% to $83.7 million for the nine months ended September 30, 2006 from $61.6 million for the corresponding periods of 2005. The increase mainly comprised a $22.0 million increase from the growth of existing marketing relationships and adding new marketing partner relationships since the nine months ended September 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 $73.7 million of third-party marketing expenses in the nine months ended September 30, 2006. Such expenses were higher than the corresponding period 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 20% to $53.1 million for the nine months ended September 30, 2006 from $44.3 million for the corresponding period of 2005. The expense increase of $8.8 million was mainly composed of the following: $3.5 million related to increased payroll expenses from a larger workforce; $6.6 million related to legal, consulting, rebate processing and other expenses including but not limited to costs incurred related to the District of Columbia attorney general’s action and increased temporary help; $3.3 million of payments made to past customers as “goodwill” for a product rebate that was paid outside our customary validation process and would not have otherwise been paid to the recipient; $0.7 million due to a settlement with A1 Wireless; and $0.3 million related to increased facilities costs and telecommunication related expenses. Offsetting these increases were decreases in stock-based compensation and severance expenses of $5.6 million for the period. For the nine months ended September 30, 2005, stock-based compensation included $6.7 million related to the modification of option grant and awards of two employees that were terminated. Absent this, stock-based compensation expense would have increased approximately $1.1 million as a result of compensation expense from options and stock awards granted after the third quarter of 2005 and the impact of the adoption of SFAS No. 123(R).

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General and administrative expenses for the nine months ended September 30, 2006 included $3.8 million related to expenses from evaluating and researching rebate matters associated with the District of Columbia attorney general’s action. Such costs were comprised of rebate processing and exit costs and fees of $1.9 million; legal expenses of $1.3 million and full-time and temporary labor staffing costs of $0.6 million.

Depreciation and Amortization

Depreciation and amortization expenses increased 88% to $12.0 million for the nine months ended September 30, 2006 from $6.4 million for the nine months ended September 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. In addition, 2005 expenses were reduced by a $0.7 million adjustment to correct a computational error in the fixed asset subledger that caused depreciation expense to be overstated.

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 nine months ended September 30, 2005, we recognized $0.8 million in restructuring costs which related to workforce reduction excess facilities. All costs related to this plan were paid out in 2005.

During 2006, we implemented a restructuring plan related to changes in our management and operational structure. For the nine months ended September 30, 2006, we recognized $2.1 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. An additional $0.2 million was incurred for the relocation of certain employees.

Loss from continuing operations

Loss from continuing operations increased to $29.3 million for the nine months ended September 30, 2006 from $12.9 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 along with increases in costs for the rebate settlement and related expenses.

Net Loss

Net loss increased to $29.4 million for the nine months ended September 30, 2006 from $13.6 million 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 $35 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 borrowings drawn on our new term loan 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.

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As of September 30, 2006, we had cash and cash equivalents of $57.5 million and debt and capital lease obligations of $20.6 million. As of December 31, 2005, we had cash and cash equivalents of $70.8 million, and debt and capital lease obligations of $15.8 million.

Consolidated Cash Flows

	Nine Months Ended September 30,
	2005			2006
				restated
	(amounts in thousands)
Net cash used in operating activities	$	(15,581	)	$	(332	)
Net cash used in investing activities		(24,952	)		(18,196	)
Net cash provided by financing activities		21,073			5,282
Change in cash and cash equivalents	$	(19,460	)	$	(13,246	)

Net cash used in operating activities was $0.3 million for the nine months ended September 30, 2006 compared to net cash used in operating activities of $15.6 million for the nine months ended September 30, 2005. For the nine months ended September 30, 2006, net loss after adjustments for items to reconcile net loss to net cash provided by operating activities was approximately $7.0 million. Such items include depreciation and amortization, non-cash interest expense and stock-based compensation.

Changes in operating assets and liabilities from December 31, 2005 increased net cash used in operating activities by approximately $6.7 million. Changes in working capital balances included a decrease of current assets of approximately $7.7 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 balances from December 31, 2005. The accounts receivable increase at September 30, 2006 was primarily 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 September.

Current liabilities, excluding debt and capital lease balances and acquisition earn-out obligations accrued during the period increased $16.5 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 and line of credit balances at September 30, 2006 was the result of the timing of cash collections at the end of the month of September, as explained above, which slowed our payments to certain of our vendors; and higher inventory levels for which payment was not yet due and borrowings undertaken in the period specifically used to paydown accounts payable balances. 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. 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.

In addition to the net cash provided by operating activities, we had trade borrowings of $6.4 million under our line of credit to improve payment terms on inventory purchases. These borrowings are shown as net cash provided by financing activities in the Statement of Cash Flows. When considering these trade borrowings with our cash provided by operating activities, total cash provided by our operations would have been $6.0 million.

Net cash used in investing activities for the nine months ended September 30, 2006 and 2005 was $18.2 million and $25.0 million, respectively. The $6.8 million decrease in net cash used in investing activities was due to a decrease of $4.7 million of cash paid for acquisitions, and a decrease of $2.3 million in cash paid for intangible assets, a decrease of $5.0 million used in the cash used for the purchase of short-term investments, and an increase of $1.1 million in proceeds from the sale of assets of discontinued operations. These increases were partially offset by an increase of $6.8 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 nine months ended September 30, 2006 comprised $13.2 million of software and web site development and $3.0 million of other property and equipment.

Net cash provided by financing activities was $5.3 million for the nine months ended September 30, 2006 compared to net cash provided by financing activities of $21.1 million for the nine months ended September 30, 2005. Financing activities consisted of borrowings on our line of credit of $6.4 million and proceeds from the exercise of options of $1.2 million, partially offset by cash used to repurchase common stock of $0.5 million and principal payments on our line or credit and capital leases of $1.8 million.

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Borrowings Under Line of Credit and Vendor Trade Credit.Through November 7, 2006, we maintained a revolving operating line of credit with Comerica Bank which allowed for aggregate borrowing of up to $25.0 million subject to certain limits based on accounts receivable and inventory levels. As of September 30, 2006, we had an aggregate principal amount of $19.9 million outstanding under the facility, however no further borrowing capacity under the facility was available as of September 30, 2006 based on the limits described above.

On November 7, 2006, we executed a $100 million aggregate amount senior secured term loan bearing a fixed rate of interest of nine percent per annum and secured by substantially all our assets. The term loan matures in November 2011. Beginning in November 2009, we have the ability to repay principal on the loan without penalty and conversely, the lenders have the right to call the remaining outstanding principal of the debt without penalty. As additional consideration, we also granted the lenders warrants to purchase 1,250,000 shares of our common stock at an exercise price of $0.01 per share. We received $75.0 million of the term loan proceeds on November 7, 2006, and have the option to withdraw the remaining amount at a later date. Proceeds from the term loan will be used to repay all indebtedness under the existing credit facility, fund share repurchases of our common stock, and for general corporate and working capital needs. In conjunction with the loan transaction above, we terminated our credit facility with Comerica Bank and used proceeds from the term loan to repay the outstanding principal obligation of $19.9 million plus accrued interest.

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 $35.0 million of credit available to us for the purchase of wireless devices as of October 31, 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 nine months ended September 30, 2006 we repurchased an aggregate of 62,761 shares of our common stock for approximately $0.5 million. The program ended August 17, 2006.

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 September 30, 2006.

	Total		Less than 1 year		1 - 3 years		4 - 5 years		Over 5 years
	(amounts in thousands)
Line of credit (a)	$	19,924	$	19,924	$	—	$	—	$	—
Capital leases		788		384		404		—		—
Operating leases		4,460		1,805		2,655		—		—
Obligation to purchase certain advertising (b)		4,544		4,544		—		—		—
Obligations under VMC APA (c)		—		—		—		—		—
	$	29,716	$	26,657	$	3,059	$	—	$	—

(a) On November 7, 2006, we entered into a new term loan and repaid all amounts outstanding under the line of credit with Comerica Bank. Our borrowings of $75.0 million under the new term loan mature in November 2011.

(b) We have a 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.

(c) Under the VMC Asset Purchase Agreement, we may be obligated to pay shareholders of VMC an additional $1.8 million in cash upon achieving certain future monthly operating targets. This potential obligation has not been included in the table above.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157,Fair Value Measurements (“SFAS No. 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. SFAS 157 will become effective for our fiscal year beginning January 1, 2008. We do not believe the adoption of this pronouncement will have any material effects on our consolidated financial position, results of operations, or cash flows.

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In September 2006, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements(“SAB 108”). SAB 108 provides guidance on how the effects of the carryover or reversal of prior year financial statement misstatements should be considered in quantifying a current year misstatement. Prior practice allowed the evaluation of materiality on the basis of (1) the error quantified as the amount by which the current year income statement was misstated (rollover method) or (2) the cumulative error quantified as the cumulative amount by which the current year balance sheet was misstated (iron curtain method). Reliance on either method in prior years could have resulted in misstatement of the financial statements. The guidance provided in SAB 108 requires both methods to be used in evaluating materiality. Immaterial prior year errors may be corrected with the first filing of prior year financial statements after adoption. The cumulative effect of the correction would be reflected in the opening balance sheet with appropriate disclosure of the nature and amount of each individual error corrected in the cumulative adjustment, as well as a disclosure of the cause of the error and that the error had been deemed to be immaterial in the past. We do not believe the adoption of this pronouncement will have any material effects on our consolidated financial position, results of operations, or cash flows.

In June, 2006, the 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 evaluating the impact of the adoption of this pronouncement, if any, on our consolidated financial position, results of operations, or cash flows.

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 results 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

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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 90 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 September 30, 2006 would have an increase or decrease in revenue and the corresponding reserve of $0.9 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 as 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, pursuant to SAB 104 revenue recognition of such fee was deferred until such fee was collected from the customer. 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 provide the basis on which to accrue a receivable with a degree of certainly pursuant to SAB 104.

As of the most recent quarter ended September 30, 2006, our handset return rate was 10.5% 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 September 30, 2006 would have resulted in an increase or decrease in revenue of approximately $0.1 million with a corresponding increase or decrease in our cost of revenue.

Cost of Revenue

Under certain conditions, consumers’ purchasing wireless devices from us may be eligible for a product rebate depending on the wireless device purchased, service contract activated and the consumer maintaining their service with the wireless carrier for a period of up to six months. We estimate and record an accrued consumer liability and cost of revenue for such rebate at the time of sale based on the terms of the rebate and our rebate redemption experience over the most recent 18 months following the lapse of the contractual rebate redemption period. Our rebate redemptions are generally processed by a third party vendor that validates the consumer’s rebate redemption materials to ensure that the redemption request satisfies all terms and conditions of the rebate program to be eligible for payment. Only consumers that satisfy the redemption requirements of the rebate program receive the rebate amount.

During the three and nine months ended September 30, 2006, we incurred and paid $3.3 million to consumers outside our customary rebate redemption process to parties that we believed generally had not satisfied all the terms and conditions of the respective rebate redemption program. Such amounts were paid to satisfy customer complaints and are viewed by us as “goodwill payments” and reflected in general and administrative expenses.

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

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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 September 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 September 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 September 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 an appropriate level of 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, proper accrual of rebates and other liabilities and adjustments to properly account for certain amounts due from our vendors 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 amounts due to marketing partners, accounts receivable allowances and reserves for deactivations.

• 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 recorded additional allowances for doubtful accounts receivable during our restatement process. The proper accounting for the allowance for doubtful accounts requires that estimates must be made on the future collectibility of receivables. Specifically after analysis we concluded that reserves were required for doubtful collections on disputed accounts receivable, an additional reserve was necessary to provide for disputed accounts receivable arising from the most recent month of carrier commissions arising from December 2006 activations. In addition, our estimation process failed to take into account all information from ongoing collection processes in order to properly state our reserves. An addition to our reserves at was necessary as a result of this material weakness.

• 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 or 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.

• We did not maintain effective controls over the accuracy and completeness of consumer product rebate liabilities. Specifically we did not utilize an appropriate methodology during the year in recording rebates payable to eligible consumers. We understated the consumer product rebate liability by not considering the appropriate amount of open periods eligible for rebates and the backlog of possible eligible rebates that had been delivered to outsourced payment service providers. As a result of this material weakness, an adjustment was necessary to properly record product rebate expenses and related payables.

• We did not maintain effective controls over the accuracy and completeness of costs of goods sold and amounts due from vendors. Specifically, we did not maintain adequate documentation to support the proper accounting for inventory movements related to support phone shipments for refitting and refurbishment. We overstated inventory or receivables in-kind by not maintaining adequate documentation of these phones provided to outside services providers. As a result of this material weakness, an adjustment was necessary to properly record costs of goods sold and amounts due from vendors.

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 nine-month period ended September 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.

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PART II

ITEM 6. EXHIBITS

Exhibit No.	Description
10.1(1)	Cingular Wireless Non-Exclusive Dealer Agreement and Cingular Wireless Internet Dealer and master Dealer Addendum (the “Agreements”) with Cingular Wireless II, LLC (“Cingular”), effective October 1, 2006
10.2(2)	Seventh Amendment to Third Amended and Restated Loan and Security Agreement entered into as of September 28, 2006 by and between Comerica Bank, InPhonic, Inc., SimIpc Acquisition Corp., Star Number, Inc., Mobile Technology Services, LLC and CAIS Acquisition II, LLC.
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.

(1) Confidential treatment requested as to certain portions of this Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended, which portions are omitted and filed separately with the Securities and Exchange Commission. Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 9, 2006.

(2) Previously filed as an Exhibit to our Current Report on Form 8-K filed on October 4, 2006.

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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

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