Inphonic (INPC) 10-Q 2007 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarter ended March 31, 2007

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 36,915,903 shares of common stock outstanding as of May 31, 2007.

INPHONIC, INC.

INDEX

FORM 10-Q

		Page
	PART I. – FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets at December 31, 2006 and March 31, 2007	3
	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and March 31, 2007	4
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2007	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and March 31, 2007	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
	PART II. – OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Submission of Matters to a Vote of Security Holders	49
Item 5.	Other Information	49
Item 6.	Exhibits	49
SIGNATURES		50

2

PART I

ITEM 1. FINANCIAL STATEMENTS

INPHONIC, INC. & SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except per share and share amounts)

	December 31, 2006			March 31, 2007
				(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	89,972		$	53,422
Accounts receivable, net of allowance for doubtful accounts of $9,749 and $10,534, respectively		63,820			55,783
Inventory, net		23,164			29,477
Prepaid expenses		6,507			5,715
Deferred costs and other current assets		3,122			3,618
Current assets of discontinued operations		391			137
Total current assets		186,976			148,152
Restricted cash and cash equivalents		38			38
Property and equipment, net		22,746			25,038
Goodwill		38,223			38,223
Intangible assets, net		8,092			7,178
Deposits and other assets		8,330			10,768
Total assets	$	264,405		$	229,397
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	85,975		$	82,592
Accrued expenses and other liabilities		22,521			19,006
Current portion of deferred revenue		16,604			15,736
Current maturities of capital leases		301			279
Current liabilities of discontinued operations		1,103			1,095
Total current liabilities		126,504			118,708
Long-term debt and capital lease obligations, net of current maturities		63,826			64,584
Deferred revenue, net of current portion		478			402
Total liabilities		190,808			183,694
Commitments and contingencies		—			—
Stockholders’ equity:
Common stock, $0.01 par value
Authorized 200,000,000 shares at December 31, 2006 and March 31, 2007; issued and outstanding 37,138,480 and 37,322,831 shares at December 31, 2006 and March 31, 2007, respectively		371			373
Additional paid-in capital		301,611			301,530
Accumulated deficit		(228,385	)		(256,200	)
Total stockholders’ equity		73,597			45,703
Total liabilities and stockholders’ equity	$	264,405		$	229,397

See accompanying notes to unaudited condensed consolidated financial statements

3

INPHONIC, INC. & SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share and share amounts)

	Three Months Ended March 31,
	2006			2007
Revenue:
Activations and services	$	66,742		$	84,761
Equipment		20,236			16,644
Total revenue		86,978			101,405
Cost of revenue, exclusive of depreciation and amortization:
Activations and services		260			763
Equipment		47,921			65,662
Total cost of revenue		48,181			66,425
Operating expenses:
Sales and marketing, exclusive of depreciation and amortization		26,722			31,445
General and administrative, exclusive of depreciation and amortization		13,231			23,876
Depreciation and amortization		3,483			5,390
Total operating expenses		43,436			60,711
Operating loss		(4,639	)		(25,731	)
Other income (expense):
Interest income		627			677
Interest expense		(336	)		(2,664	)
Total other income (expense)		291			(1,987	)
Loss from continuing operations		(4,348	)		(27,718	)
Discontinued operations:
Income (loss) from discontinued operations		35			(97	)
Net loss	$	(4,313	)	$	(27,815	)
Basic and diluted net loss per share:
Net loss from continuing operations	$	(0.12	)	$	(0.72	)
Net income (loss) from discontinued operations		0.00			(0.00	)
Basic and diluted net loss per share	$	(0.12	)	$	(0.72	)
Basic and diluted weighted average shares outstanding		35,348,335			38,711,483

See accompanying notes to unaudited condensed consolidated financial statements

4

INPHONIC, INC. & SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Total
	Shares		Amount
Balance, December 31, 2006	37,138,480		$	371		$	301,611		$	(228,385	)	$	73,597
Stock-based compensation expense	—			—			3,296			—			3,296
Repurchase and retirement of common stock	(557,074	)		(6	)		(6,319	)		—			(6,325	)
Exercise of common stock options,													—
restricted stock awards and other	741,425			8			2,942			—			2,950
Net loss	—			—			—			(27,815	)		(27,815	)
Balance, March 31, 2007	37,322,831		$	373		$	301,530		$	(256,200	)	$	45,703

See accompanying notes to unaudited condensed consolidated financial statements

5

INPHONIC, INC. & SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

	Three Months Ended March 31,
	2006			2007
Cash flows from operating activities:
Net loss	$	(4,313	)	$	(27,815	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		3,483			5,390
Increase(decrease) in allowance for doubtful accounts		347			785
Non-cash interest expense, sales and marketing expense and other		16			1,108
Stock-based compensation, including related payroll taxes		2,882			3,111
Changes in operating assets and liabilities
Accounts receivable		(1,037	)		7,506
Inventory		(5,386	)		(6,313	)
Prepaid expenses		(1,012	)		792
Deferred costs and other assets		4,006			(496	)
Deposits and other assets		(109	)		(2,676	)
Accounts payable		8,432			(3,383	)
Accrued expenses and other liabilities		(5,878	)		(3,477	)
Deferred revenue		(206	)		(944	)
Net cash provided by (used in) operating activities		1,225			(26,412	)
Cash flows from investing activities:
Capitalized expenditures, including internal capitalized labor		(4,199	)		(6,629	)
Purchase of short-term investments		(5,000	)		—
Proceeds from the sale of assets of discontinued operations		794			—
Reduction in restricted cash and cash equivalents		400			—
Other		—			(50	)
Net cash used in investing activities		(8,005	)		(6,679	)
Cash flows from financing activities:
Principal repayments on capital leases		(81	)		(84	)
Cash paid for repurchase of common stock		(502	)		(6,325	)
Proceeds from exercise of options, warrants and other		434			2,950
Net cash used in financing activities		(149	)		(3,459	)
Net decrease in cash and cash equivalents		(6,929	)		(36,550	)
Cash and cash equivalents, beginning of the period		70,783			89,972
Cash and cash equivalents, end of the period	$	63,854		$	53,422
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest	$	260		$	956
Supplemental disclosure of non-cash activities:
Issuance of common stock in business acquisitions		2,985			—
Stock-based compensation capitalized as internal labor		149			139

See accompanying notes to unaudited condensed consolidated financial statements

6

INPHONIC, INC. & SUBSIDIARIES

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, 2006, has been prepared without audit. The consolidated balance sheet at December 31, 2006 has been derived from, but does not include all the disclosures contained in the audited financial statements for the year ended December 31, 2006. 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, 2006. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for a full year. Certain prior year amounts have been reclassified to conform to the current period presentation.

(b) Business

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

(c) 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 $256,200. To date, management has relied on debt and equity financings to fund our operating deficit. While we had $53,422 of cash and cash equivalents on hand as of March 31, 2007, we may require additional financing to fund future operations.

(d) Discontinued Operations

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 Liberty sale has enabled us to streamline and focus our resources on our other operations including the growth of our MVNE. 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.

7

INPHONIC, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

(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. Within our Satellite Television business unit, we receive satellite activation certificates evidencing activation rights in advance of their resale to customers. Revenue from satellite television customers includes commissions earned at the time of the satellite service activation, net of an estimate for deactivations, as we are acting as an agent in the transaction. Revenue is reduced for estimated deactivations of the carrier’s 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 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 deactable 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. Accounts receivable at December 31, 2006 and March 31, 2007 included the reserve for deactivations of $7,450 and $8,111, respectively. Deferred revenue at December 31, 2006 and March 31, 2007 included the reserve for deactivations of $14,735 and $13,499, respectively.

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 bonuses we earn are the quarterly volume bonuses, which we collect from wireless carriers 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 wireless 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. We recognize these monthly bonuses as earned in accordance with the provisions of the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104,Revenue Recognition in Financial Statements (“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. As of December 31, 2006 and March 31, 2007, our estimated reserve for deactivations of feature activations was $629 and $1,111, respectively.

In the ordinary course of recording and collecting commissions from our wireless carrier partners, we engage in a matching and reconciling process between source information for customer wireless carrier activations generated and maintained in our back-office sales information systems and each carrier’s billing system. Although the substantial majority of our sales information matches to that of the carriers, matching differences do arise. Examples of such differences include (i) instances in which an activation per our records does not correlate to a commission fee payment schedule submitted by the carrier; (ii) commission fee payment collected from the carrier that is different than the expected payment per our sales records; and (iii) a deactivation identified on a carrier statement that does not match the carrier’s original commission fee payment for such activation.

Data files supported by our billing records related to differences are submitted monthly to each carrier for resolution. Resolution of these differences is usually an iterative process and it can take up to 12 months or longer for final resolution of any difference. Information is exchanged between us and the carrier

8

INPHONIC, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

throughout this process. We recognize revenue based on the underlying data maintained in our back-office sales information systems unless the carrier provides us details that supersedes our information. Given the nature of these differences and based on our experience in resolving such items with the carriers, we are also able to determine an appropriate reserve against revenue to reflect the likely success or failure of resolving these differences. In certain instances when a wireless carrier denies a claim we may file in resolving differences of this nature, we will write-off the related accounts receivable while pursuing further collection efforts and will record into income at a future date if collected. To the extent that we collect commission or other fee payments in excess of expectations, we will record revenue in the period of receipt net of estimated chargeback requirements.

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 development of the network platform, as well as 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, 2006 and March 31, 2007 included $1,195 and $728, respectively.

Other Revenue:

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. We bill customers monthly and revenue is recognized monthly, as the services are performed.

Equipment Revenue:

Revenue from the sale of wireless devices and accessories in a multiple-element arrangement with services is recognized at the time of sale in accordance with EITF 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. Return rights of indirect retailers for wireless devices are limited to warranty claims, which are generally covered by the device manufacturers’ original warranties. 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 the wireless device to the customer at a significant discount, which is generally in the form of a rebate (“equipment discount provisions” or “EDP”). Rebates are recorded as a reduction of revenue. We recognize equipment revenue net of rebate costs based on historical experience of rebates claimed. Future experience could vary based upon rates of consumers redeeming rebates.

In the event a customer terminates their wireless service with the carrier within six months of activation or 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. Prior to the three months ended June 30, 2006, revenue recognition of such fee was deferred until such fee was collected from the customer pursuant to SAB 104 as we did not have adequate historical collection data to reasonably estimate the ultimate collectibility of the receivable. Beginning April 1, 2006, we began to estimate EDP termination fee revenue based on historical experience of customer collection behavior which we have developed over a time period of 24 months which provides the basis on which to accrue revenue with an appropriate assurance of collectibility pursuant to SAB 104. As of March 31, 2006, $293 of such revenue was deferred, which would have been accrued for in the event that we had adequate customer collection history, less an estimated reserve for uncollectible amounts. As of December 31, 2006 and March 31, 2007, accounts receivable for such EDP termination fees approximated $1,686 and $1,020, respectively.

(b) Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of customers to pay. The amount of the allowance is based on a combination of factors including the status of collection efforts with the respective wireless carriers on balances in which additional source information or

9

INPHONIC, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

other transaction details continue to be exchanged between us and the carrier. Our allowance for receivables due from carriers is estimated based on previous experience with collection efforts of similar nature. If the financial condition of any of the larger carrier customers we do business with were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

(c) Cost of Revenue

The major components of cost of revenue, exclusive of depreciation and amortization, are:

Activations and services. Cost of activations and services revenue includes costs incurred from providers of telecommunications and data center services.

Equipment. We purchase wireless devices and accessories from wireless carriers, device manufacturers and third-party vendors to sell to customers and indirect retailers in the WAS business unit. We sell these wireless devices and accessories at a price below cost to encourage the sale and use of the services. We do not manufacture any of this equipment. Costs from the sale of wireless devices and accessories sold directly to customers are recognized at the time of sale. From time to time, we receive price protection credits on equipment purchased from certain vendors. We recognize price protection credits received for equipment that has been sold and shipped as a reduction of cost of revenue.

(d) Inventory

Inventory consists primarily of wireless devices. The carrying value of inventory is stated at the lower of its cost or market value. Cost is determined using a consistent method which approximates the first-in-first-out method. We write down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value or replacement cost based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected, additional inventory write-downs may be required.

(e) Long-Lived Assets

Property and Equipment

Property and equipment is recorded at cost or at fair value if it is acquired in a business acquisition. Replacements and improvements that extend the useful life of property and equipment are capitalized. Property and equipment is depreciated over the following useful lives. Leasehold improvements are depreciated over the stated useful life or the contractually stated period of the underlying lease.

	Estimated useful life (in years)
Computer and equipment	3
Software	3
Furniture and fixtures	7
Leasehold improvements	3
Website development	1.5
Internal software development	2

We account for the costs relating to the development of our e-commerce platform for internal use based on AICPA Statement of Position (“SOP”) No. 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and the Emerging Issues Task Force (“EITF”) No. 00-02,Accounting for Web Site Development Costs. Website development costs consist of internal and external costs incurred to purchase and implement the web software and enhancements to the functionality of the web software used in our business.

In accordance with SFAS No. 144, we are required to evaluate the carrying value of long-lived assets and certain intangible assets. SFAS No. 144 first requires an assessment of whether circumstances currently exist which suggest the carrying value of long-lived assets may not be recoverable. At December 31, 2006 and March 31, 2007, we did not believe any such conditions existed. Had these conditions existed, we would have assessed the recoverability of the carrying value of our long-lived assets and amortizable intangible assets based on estimated undiscounted cash flows to be generated from such assets. In assessing

10

INPHONIC, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

the recoverability of these assets, we would have projected estimated cash flows based on various operating assumptions such as average revenue per activation, deactivation rates, and sales and workforce productivity ratios. If the projection of undiscounted cash flows did not exceed the carrying value of the long-lived assets, we would have been required to record an impairment charge to the extent the carrying value exceeded the fair value of such assets.

Goodwill and Intangible Assets

Goodwill and intangible assets with indefinite useful lives are not amortized and are evaluated for impairment at least annually, or when events or circumstances suggest a potential impairment may have occurred. In accordance with SFAS No. 142,Goodwill and Other Intangible Assets (“SFAS No. 142”), we have selected the fourth quarter to perform the annual impairment test. SFAS No. 142 requires us to compare the fair value of the reporting unit to its carrying amount on an annual basis to determine if there is a potential impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value. The fair value for goodwill and other intangible assets not subject to amortization is determined based on discounted cash flows, market multiples or other measures, as appropriate. Based on our assessment for the year ended December 31, 2006, no impairments of goodwill or other intangible assets were noted. There were no other indications of impairment existing at March 31, 2007.

Intangible assets with determinable useful lives, which primarily consist of software and technology, customer contracts, affiliate relationships, a supplier relationship and a non-compete agreement, were recorded at fair value at the date of acquisition and amortized over the following economic lives:

	Estimated economic life (in years)
Software and technology	1.5 to 5
Customer contracts	1.5 to 3
Affiliate relationships	5
Non-compete agreement	2 to 5
Supplier relationship	10
Other	1.5 to 5

Intangible assets not subject to amortization include trade names.

(f) Financial Instruments

Fair Value of Financial Instruments

Our financial instruments, as defined under SFAS No. 107,Disclosures about Fair Value of Financial Instruments, include our cash, accounts receivable, accounts payable and borrowings under our term loan. The fair value of cash, accounts receivable, and accounts payable were equal to their respective carrying values at December 31, 2006 and March 31, 2007. Historically, we have not experienced any losses due to such concentration of credit risk.

As of March 31, 2007, the carrying value of the term loan was $64,373 and the fair value of the debt approximated $75,000. The carrying value of the debt was recorded at a discount primarily as the result of a portion of the proceeds allocated to the fair value of detachable warrants issued with the debt. See Note 5 for further discussion.

Concentration Risk

Financial instruments that potentially subject us to a concentration of credit risk consist principally of accounts receivable and accounts payable. We extend credit to wireless network carriers (“carriers”) on an unsecured basis in the normal course of business. Four carriers accounted for 74% and 83% of accounts receivable, net of the deactivation reserve, as of December 31, 2006 and March 31, 2007, respectively.

For the three months ended March 31, 2006 revenue from three carriers exceeded 10% of our total revenue. For the three months ended March 31, 2007, revenue from four carriers exceeded 10% of our total revenue. Revenue as a percentage of total revenue for these carriers was as follows:

11

INPHONIC, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

	Three Months Ended March 31,
	2006		2007
Carrier A	34	%	35	%
Carrier B	15	%	20	%
Carrier C	16	%	14	%
Carrier D	9	%	11	%
Total	74	%	80	%

We are extended credit from wireless carriers at up to 60 days in the normal course of business to purchase certain handset equipment. Three of the carriers described above accounted for approximately 46% of accounts payable as of December 31, 2006 and March 31, 2007.

We depend primarily on our carriers to supply cellular phones and accessories in a timely manner in adequate quantities and consistent quality. If we are unable to obtain handset equipment in adequate quantities, we may incur delays in shipment or be unable to meet demand for our products. For the three months ending March 31, 2006 and 2007, one carrier accounted for approximately 35% and 27% of our total purchases of handset equipment.

(g) Accounts payable

Accounts payable at December 31, 2006 and March 31, 2007 consisted of:

	As of
	December 31, 2006		March 31, 2007
Trade payables for inventory	$	50,989	$	47,373
Other accounts payable		34,986		35,219
	$	85,975	$	82,592

(h) Accrued Consumer Liabilities

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.

(i) Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities at December 31, 2006 and March 31, 2007 consisted of:

12

	As of
	December 31, 2006		March 31, 2007
Accrued consumer liabilities, including accrued rebates	$	8,203	$	2,798
Accrued payroll and related expenses		1,685		1,369
Accrued acquisition costs and severance costs		1,674		1,392
Accrued sales taxes payable		443		492
Accrued interest		995		1,745
Accrued product costs		2,245		2,251
Other		7,276		8,959
	$	22,521	$	19,006

(j) 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”). On the date of our adoption of SFAS No. 123(R), we had options outstanding under our 1999 Stock Incentive Plan (the “1999 Plan”) and our 2004 Equity Incentive Plan (the “2004 Plan”). All option grants subsequent to the date of our adoption have been granted under our 2004 Plan. Additionally, we grant shares of restricted common stock to certain of our employees and members of our board of directors. In accordance with SFAS No. 123(R), we measure the cost of the employee services received in exchange for the award of equity instruments based on the grant-date fair value of the award. The grant date fair value 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 compensation cost recognized for both our stock options and restricted stock is reduced by an estimated forfeiture amount based on our historical annual experience of 9.93%.

From time to time, we issue stock options to non-employees in connection with certain consulting services. We account for these grants in accordance with EITF 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, (“EITF 96-18”). As such, and in accordance with the provisions of the stock option grants, we measure the cost of the non-employee services based on the initial grant date fair value and recognize expense over the vesting period. We use the vesting date as the measurement date in accordance with EITF 96-18 based on the terms of the stock option grant. On the vesting date, the change in fair value from the fair value on the grant date is recorded to general and administrative expense. All unvested non-employee options are recorded at the fair value as of the balance sheet date with any changes from the previous balance sheet date recorded to general and administrative expense.

Stock Options—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 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.

The following table summarizes the activity for stock options held by employees and non-employees for the three months ended March 31, 2007.

13

INPHONIC, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

	Number of options		Weighted average exercise price		Weighted average contractual term (years)	Aggregate intrinsic value
Balance January 1, 2007	4,043,103		$	9.01
Granted	—			—
Exercised	(466,528	)		6.52
Forfeited	(108,042	)		12.47
Balance March 31, 2007	3,468,533		$	9.23	7.53	$	11,879
Ending vested & expected to vest	3,303,109		$	9.21	7.48	$	11,408
Exercisable at March 31, 2007	1,965,973		$	8.90	6.95	$	7,244

The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was $2,483 and $139, respectively.

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. We granted 679,900 options to employees for the three months ended March 31, 2006. There were no stock options granted to employees during the three months ended March 31, 2007. The weighted average grant date fair value for the options granted during the three months ended March 31, 2006 was $4.28, based on the following assumptions used in the Black-Scholes option pricing model:

	For the Three Months Ended March 31, 2006
Expected volatility	72.00	%
Risk free interest rate	4.69	%
Expected dividend rate	0.00	%
Expected life (in years)	5.8

Restricted Common Stock—The restrictions on the common stock granted to certain of our employees and members of our board of directors 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 three months ended March 31, 2007.

14

INPHONIC, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

	Number of Restricted Stock Awards		Weighted-average grant date fair value
Non-vested at January 1, 2007	2,964,649		$	10.20
Granted	—			—
Released	(113,661	)		11.23
Surrendered for taxes	(7,019	)		16.32
Forfeited	(6,084	)		9.47
Non-vested at March 31, 2007	2,837,885		$	10.14

The fair value of each share of restricted stock granted is estimated on the grant date using the closing market price of our stock on the grant date. We granted 462,709 of restricted stock for the three months ended March 31, 2006 with a weighted average grant date fair value of $6.46. No restricted shares were granted during the three months ended March 31, 2007. The total grant date fair value of shares vested during the three months ended March 31, 2007 and 2006 was approximately $1,277 and $1,600, respectively.

Stock Purchase Warrants—The following table summarizes warrant activity for the three months ended March 31, 2007:

	Number of warrants		Weighted average exercise price		Range of exercise
Balance January 1, 2007	2,565,965		$	4.59	$	0.03 -24.00
Granted	—			—		—
Exercised	(150,735	)		9.85		2.49 - 11.16
Surrendered for cashless exercise	(476,655	)		11.05		2.49 - 11.16
Forfeited	(3,334	)		0.03		0.03
Balance at March 31, 2007	1,935,241		$	2.59	$	0.03 -24.00

In April 2006, we issued an additional warrant to purchase 188,775 shares of our common stock to a vendor that is exercisable upon certain performance conditions. The exercise price of the warrant will be based on the trading price of our common stock at the time the performance conditions are met by the vendor. Once it is probable that the vendor will achieve the performance conditions set forth under the terms of the warrant, the fair value of the warrant will be amortized to sales and marketing expense over the remaining contractual term of the vendor commitment. Warrants outstanding at March 31, 2007 were exercisable for 1,935,241 shares of our common stock, excluding this contingent warrant.

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. Share-based compensation capitalized as part of our internally developed software was $139 and $149 for the three months ended March 31, 2007 and 2006, respectively. There was no tax benefit recognized in the statements of operations for stock-based awards in either period.

15

INPHONIC, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

Statement of operations:
	Three Months Ended March 31,
	2006		2007
Sales and marketing	$	719	$	673
General and administrative		2,163		2,559
	$	2,882	$	3,232

As of March 31, 2007, there was approximately $32,927 of total unrecognized compensation cost related to our stock option and restricted share-based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 1.44 years. Included in the table above is compensation cost for stock options issued to non-employees of $14 and a reduction of expense of $7 for the three months ended March 31, 2007 and 2006, respectively.

(j) Advertising Costs

We expense advertising and other marketing costs as incurred and principally include amounts paid to marketing partners based on the delivery of customers to our websites for wireless activation and services.

In January 2007, we launched our services on a partnered website. In connection with the launch of these services and the related agreement, we have paid $3,500 of cash and will pay an additional $8,500 of cash in quarterly installments over a 3 year period for the purchase of certain advertising services, including banner ads and other similar advertising. We have accounted for these cash payments as direct response advertising in accordance with the AICPA Statement of Position 93-7,Reporting on Advertising Costs, (“SOP 93-7”). We expect to amortize the deferred costs ratably based on the revenue and cost of revenue expected to be generated over the 5 year contractual life. As of March 31, 2007, we have included $3,477 in other long-term assets, the recoverability of which is dependent upon our realizing sufficient revenues from this program.

(k) Net Loss per Share

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

The following table reconciles net loss and basic and diluted weighted average common shares outstanding to the historical or pro forma net loss and the pro forma basic and diluted weighted average common shares outstanding for the three months ended March 31, 2006 and 2007. Weighted average shares presented for the three months ended March 31, 2007 includes the effect of 1,250,000 shares representing detachable warrants issued with the term loan on November 6, 2006, as described in Note 5. These warrants are exercisable at $0.01 per share.

	Three Months Ended March 31,
	2006			2007
Net loss from continuing operations	$	(4,348	)	$	(27,718	)
Net income(loss) from discontinued operations		35			(97	)
Net loss	$	(4,313	)	$	(27,815	)
Weighted average shares outstanding		35,348,335			38,711,483
Basic and diluted earnings per share:
Net loss from continuing operations	$	(0.12	)	$	(0.72	)
Net income(loss) from discontinued operations		0.00			(0.00	)
Basic and diluted earnings per share	$	(0.12	)	$	(0.72	)

16

INPHONIC, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

During the three months ended March 31, 2007 and 2006, 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:

	March 31,
	2006	2007
Options to purchase common stock	5,550,531	3,468,533
Restricted stock awards	1,440,001	2,837,885
Warrants to purchase common stock	787,863	2,124,016
Total common stock equivalents convertible into common stock	7,778,395	8,430,434

(l) Income Taxes

In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109 (“FIN 48”). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, we adopted the provisions of FIN 48 and there was no material effect on the financial statements. As a result, there was no cumulative effect related to adopting FIN 48.

Our policy is that we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of our adoption of FIN 48, we did not have any accrued interest or penalties associated with the possibility of incurring these previously recognized tax benefits. There was no income tax expense recognized for these charges during the three months ended March 31, 2007.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are not currently subject to any U.S federal or state income tax examinations. However, income tax returns for tax years 2003 to 2006 remain open for examination. We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

We are currently analyzing whether transactions involving our capital stock over the last several years may have caused a change in control as defined by the Internal Revenue Code which, in turn, may impact the amount of net operating loss carryforwards available for our use in the future to offset taxable income. In as much as our tax benefits associated with such carryforwards are fully reserved for via a valuation allowance, any adjustment to the amount of such carryforwards is not expected to impact our financial statements but could impact cash flows to the extent we generate taxable income in the future.

(m) Recent Accounting Pronouncements

In June 2006, the FASB ratified the EITF Issue No. 06-3,How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITF 06-3”). EITF No. 06-3 requires an entity to disclose transactional tax amounts assessed by government authorities that are considered significant. EITF No. 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. We have adopted this pronouncement effective January 1, 2007. EITF 06-3 did not impact the method for recording and reporting these sales taxes in our consolidated financial position, results of operations or cash flows and will have no impact in future periods. We exclude such taxes from our revenue and include any such cash to be collected from our customers or remitted to governmental authorities as of the most recent period then ended within our accounts receivable or accrued expenses and other current liabilities, respectively, in our consolidated financial position.

In September 2006, the 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.

17

INPHONIC, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

In February 2007, the Financial Accounting Standards Board issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115( “SFAS No. 159”),which allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item will be reported in current earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes the company elects for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted. 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.

(3) Discontinued Operations

On December 31, 2005, we completed the sale of substantially all of the operating assets of our Liberty Wireless business.

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

	Three Months Ended March 31,
	2006		2007
Revenue	$	—	$	—
Costs and expenses		35		(97	)
Income(loss) from discontinued operations	$	35	$	(97	)
Balance sheet data included:
	As of
	December 31, 2006		March 31, 2007
Accounts and notes receivable, net	$	391	$	137
Assets of discontinued operations	$	391	$	137
Other accrued expenses	$	1,103	$	1,095
Liabilities of discontinued operations	$	1,103	$	1,095

(4) Long-Lived Assets

Property and Equipment

Property and equipment, stated net of accumulated depreciation and amortization, consisted of the following as of December 31, 2006 and March 31, 2007:

18

INPHONIC, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

	December 31, 2006			March 31, 2007
Computer and equipment	$	10,187		$	11,337
Software		6,367			7,227
Furniture and fixtures		785			821
Leasehold improvements		2,039			2,080
Other equipment		554			573
Capitalized leases		1,397			1,397
Less: Accumulated depreciation and amortization		(13,101	)		(14,257	)
		8,228			9,178
Website and internal software development costs		31,169			35,808
Less: Accumulated depreciation and amortization		(16,651	)		(19,948	)
Website and internal software development costs, net		14,518			15,860
Total property and equipment, net	$	22,746		$	25,038

Depreciation expense for the three months ended March 31, 2006 and 2007 was $2,437 and $4,476, respectively.

Website and internal software development costs

We capitalized a total of approximately $128 and $331 during the three months 2006 and 2007, respectively, relating to the development of the e-commerce platform. In addition, we capitalized costs incurred to develop certain internal use software of approximately $2,814 and $4,308 during the three months ended March 31, 2006 and 2007, respectively. We amortize the web development costs over a period of 18 months and internal use software costs over a period of 24 months. These costs are included in depreciation and amortization in the accompanying consolidated statements of operations. Amortization expense on the e-commerce platform and other internal use software development costs was approximately $1,510 and $3,298 for the three months ended March 31, 2006 and 2007, respectively.

Acquired Intangible Assets

We amortize intangible assets on a straight-line basis over periods ranging from one to ten years. Intangible assets for our acquired trade name have indefinite lives. During the three months ended March 31, 2007, we had no additions to our intangible assets. Amortization expense for the three months ended March 31, 2006 and 2007 was $1,045 and $914, respectively.

During the three months ended March 31, 2007 we had no additions to our goodwill. Goodwill as of December 31, 2006 and March 31, 2007 was $38,223.

19

INPHONIC, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

(5) Debt

Debt consisted of the following:

	December 31, 2006			March 31, 2007
Borrowings under term loan	$	75,000		$	75,000
Capital leases		574			490
		75,574			75,490
Less discount from warrant issuance		(11,447	)		(10,627	)
Less current maturities		(301	)		(279	)
Long-term debt	$	63,826		$	64,584

$100 million term loan

On November 7, 2006, we executed a $100,000 aggregate principal amount senior secured term loan with Goldman Sachs Credit Partners, L.P., Citicorp North America, Inc. and AP InPhonic Holdings Inc. bearing a fixed rate of interest of nine percent per annum and secured by substantially all our assets. As of November 7, 2006, the Goldman Sachs Group, Inc., an affiliate of Goldman Sachs Credit Partners, L.P., beneficially-owned approximately 15.5% of our common stock. This 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 proceeds of $75,000 aggregate principal amount of the term loan proceeds on November 7, 2006, and are required to draw down the remaining amount by July 31, 2007. Proceeds from the term loan were 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. For the three months ended March 31, 2007, we accrued $1,744 of interest on the term loan, which was included as accrued expenses and other current liabilities on the accompanying balance sheet at March 31, 2007. Accrued interest as of December 31, 2006 was $994.

Under the terms of the term loan, we are required to maintain certain minimum levels of EBITDA on a quarterly basis beginning December 31, 2006, maintain a minimum $25,000 cash balance at a certain financial institution beginning July 31, 2007, maintain a maximum level of capitalized expenditures and maintain certain other financial and non-financial covenants, including our delivery of our audited financial statements with the opinion of our independent registered public accounting firm within 90 days of our year-end in accordance with the financial statement delivery requirements under the term loan agreement. On May 1, 2007, we amended the term loan agreement to extend the required draw date for an additional $25,000 of borrowings and the date by which we must maintain a minimum $25,000 cash balance at a certain financial institution chosen by our lenders, to July 31, 2007. We are required to maintain a $25,000 balance in this cash collateral account during the remaining term of the loan until we maintain an EBITDA to indebtedness ratio of less than 1.0:1.0. Additionally, we received an extension of time to satisfy the delivery requirements of our first quarter 2007 financial statements and related certificates under the term loan agreement to June 19, 2007, respectively. We were in compliance with the covenants under the term loan agreement, as amended.

(6) Repurchase of Common Stock

In November 2006, our Board of Directors authorized the repurchase of up to $30,000 of our common stock through August 2007. The shares may be repurchased by us from time to time at prevailing market prices. The timing and amount of any shares repurchased are based on market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan, which permits shares to be repurchased when we might otherwise be precluded from doing so by laws prohibiting insider trading or by self imposed trading black out periods. There is no guarantee as to the exact number of shares that will be repurchased under the stock repurchase program, and we may discontinue purchases at any time. We intend to fund our share repurchases with cash on hand and cash generated from future operations. During the three months ended March 31, 2007, we repurchased 557,074 shares of our common stock at an average price of $11.35 per share for approximately $6,325. All shares repurchased were retired as of March 31, 2007. Since the inception of this program, we have repurchased 844,574 shares for an aggregate consideration of $9,561.

20

INPHONIC, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

(7) Commitments and Contingencies

Legal Matters

On May 7 and 18, 2007, two putative federal securities law class actions were filed in the United States District Court for the District of Columbia on behalf of persons who purchased our common stock between August 2, 2006, and May 3, 2007. These substantially similar lawsuits assert claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, against us, our chief executive officer and our chief financial officer. These claims are related to our April 3, 2007, and May 4, 2007 announcements concerning our restatement of certain previously issued financial statements. Potential plaintiffs have until July 6, 2007, to move the court for appointment as lead plaintiff. We have not yet responded to the complaints. We believe that the allegations contained within these class action lawsuits are without merit and intend to vigorously defend the litigation. However, any adverse resolution on this matter could have a material adverse impact on our financial results.

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 $4.0 million 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 and if we are required to issue additional shares would result in dilution to our stockholders.

On May 3, 2007, the Federal Communications Commission (FCC) issued an Order of Forfeiture and Further Notice of Apparent Liability in which it imposed a forfeiture of $820 against us for being late in complying with certain regulatory obligations that arose in 2004 and 2005 from a business that we sold in December 2005. Those obligations included: registering with the FCC, filing certain reports, and paying certain Universal Service Fund fees. The FCC’s order also proposed imposing an additional fine of $100 for not having maintained in 2006 and 2007 a license necessary to conduct the business that was discontinued by us in 2005. As we did not operate the business in 2006 and 2007 we have requested that the proposed fine be dismissed. With regard to the forfeiture itself, we have appealed the decision to the FCC and are awaiting a ruling. This forfeiture issue was initially raised by the FCC in July 2005. We advised the FCC then, and believe now, that no fine is appropriate under the circumstances.

Fifteen related putative federal court class actions have been filed against us arising out of InPhonic-sponsored rebate offers for online purchases of wireless telephones. Several of these lawsuits also name either our current or former third-party rebate processor as a defendant. 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 consolidated amended class action complaint, alleges, among other things, that we and our current or former third-party rebate processor (depending on the particular claim) violated the consumer protection laws of all 50 states, various D.C. state laws and 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 compensatory damages and/or restitution, statutory penalties and treble damages under D.C. consumer protection laws and RICO, attorneys’ fees and punitive damages, as well as injunctions concerning the content of our websites. The federal lawsuit is in an early stage. We intend to vigorously defend that action but cannot predict its outcome.

On or about March 21, 2007, a complaint was filed in New York state court, asserting a claim relating to InPhonic-sponsored rebate offers under the New York Deceptive Trade Practices Act on behalf of a proposed class of New York consumers. We have filed a motion to dismiss the action, or alternatively to stay the action, under New York law because the plaintiff’s claim and the proposed class are already part of the complaint in the case in D.C. federal court. The company is awaiting a ruling on its motion to dismiss or to stay. The lawsuit is in an early stage. We intend to vigorously defend that action but cannot predict its outcome.

On April 27, 2007, we and the Federal Trade Commission (FTC) announced that we had entered into a consent agreement with the FTC in which InPhonic agreed to clearly and prominently disclose certain information regarding its rebate offers, such as when consumers can expect to receive their rebates, any time period that consumers must wait before submitting a rebate request, and certain information that would disqualify a consumer from receiving a rebate. We also agreed to provide rebates within time frames and under terms and conditions reasonably specified by us in our communications with our customers. We also

21

INPHONIC, INC. & SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share and share amounts)

agreed to provide rebates to certain customers who had previously been denied them. The FTC approved the final consent arrangements on June 8, 2007. We have accrued an estimate of our liability associated with this consent arrangement in the accompanying financial statements.

On February 15, 2007, we reached a final settlement with the District of Columbia Attorney General’s Office concerning our use of mail-in rebates. We have accrued for the settlement and estimated costs of compliance in the accompanying financial statements at March 31, 2007.

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.

22

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, 2006.

Forward-Looking Statements

This Quarterly Report on Form 10-Q 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 in this filing; under Item 1A, “Risk Factors.”

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.

Our revenue includes, commissions, bonuses and other payments we receive from wireless carriers, including a satellite television provider, in connection with the activation of customers on their networks, as well as payments from customers for wireless services and devices. As further described below, total revenue and net loss from continuing operations for the three months ended March 31, 2007 were $101.4 million and $27.7 million, respectively compared to total revenue and loss from continuing operations of $87.0 million and $4.3 million, respectively for the three months ended March 31, 2006. Revenue from our top four wireless carriers represented 80% and 74% of our total consolidated revenue for the three months ended March 31, 2007 and 2006, respectively.

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Future revenue and cash collections may be affected by our ability to successfully resolve differences with wireless carriers between our sales information and subscriber activation data and similar information maintained in the respective carriers’ systems which they use to determine our commission and other amounts due us. Although in most instances our records match, differences do exist which may create delays in our collection of any additional amounts owed to us. Although we believe we have adequate reserves in place for such differences and potential collection shortfalls based on our collection experience, as our business volume increases and commission and feature plans become more numerous or complex with each carrier, our automated systems may not be updated as quickly as required or our workforce trained as promptly as needed to investigate such differences. In the event that we are slow to research such amounts, our cash collections may be affected. In the last half of 2006, we experienced an increase in such differences requiring specific research and an increased reserve of accounts receivable which caused our net loss to increase.

A major determinant of our revenue is the extent and success of our marketing efforts and expenditures. Our marketing efforts are conducted mainly through Internet search engines which display links to our websites based on search results and through third-party, incentive-based online marketing initiatives, including the use of websites that we create and manage under our marketers’ brands. We also use online advertising, search engines and third-party marketing partners based on orders and activations including Google, Yahoo, MSN and AOL. We incurred total advertising and other marketing costs of approximately $27.3 million and $23.7 million in the three months ended March 31, 2007 and 2006, respectively, and $104.8 million and $80.3 million in fiscal years 2006 and 2005, respectively. Online marketing initiatives are an important aspect of our business strategy because the underlying promotions attract consumers to our websites or our partners’ websites. We expect to reduce or streamline our marketing spending over the remainder of 2007 focusing our efforts on search and third-party marketing partner programs as opposed to branding through banner and block advertisement of web properties.

The nature of our sales promotions and extent of our marketing initiatives also have a correlation to the quality of customer we attract or activation we place with the carrier. For instance, subsidizing the equipment sale that may lead to higher deactivation experience than activations we provision through our own websites or more traditional marketing partners.

Since we began operations in 1999, we have incurred significant losses and have had negative cash flow from operations. For fiscal years 2006 and 2005, our loss from continuing operations was $63.5 million and $37.8 million, respectively. In the three months ended March 31, 2007, our loss from continuing operations was $27.7 million and net cash used in operating activities was $26.4 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 necessary to operate our business. There can be no assurance that we will achieve profitability in the future.

Over the remainder of 2007, we expect to concentrate resources on several key goals which include: (i) increased efforts to improve collections with the wireless carriers to generate cash; (ii) reduce operating and employee expense as well as capitalized expenditures in the near-term to improve cash flow; (iii) to continue to improve the customer experience platform that we utilize for order processing, customer service and rebate handling to refine existing automation and increase efficiency and effectiveness of our back-office systems, internal workforce and outsourced call center; (iv) to further balance spending on marketing initiatives with customer activation and revenue generation characteristics; and (v) to utilize our existing customer database, website traffic and online marketing capabilities to sell new products and services.

In June 2007, we took several actions to reduce our costs of operations. We reduced our employee headcount by approximately 8% and cancelled certain information and technology projects and other capital expenditures and certain sales and marketing initiatives. We will continue to review our operations throughout the 2007 fiscal year to determine if additional operating costs can be reduced or avoided and other efficiencies identified. Such reductions taken to date are expected to generate approximately $2.0 million of monthly cash savings beginning in June 2007.

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Comparison of the Results of Operations for the Three Months Ended March 31, 2007 and 2006

	Three Months Ended March 31,								Change Between
	2006				2007				2006 and 2007
(amounts in thousands)	Amount		% of Revenue		Amount		% of Revenue		Amount			%
Revenue:
Activation and services	$	66,742	77	%	$	84,761	84	%	$	18,019		27	%
Equipment		20,236	23	%		16,644	16	%		(3,592	)	-18	%
Total revenue	$	86,978	100	%	$	101,405	100	%	$	14,427		17	%
Cost of revenue
Activation and services	$	260	0	%	$	763	1	%	$	503		193	%
Equipment		47,921	55	%		65,662	65	%		17,741		37	%
Total cost of revenue	$	48,181	55	%	$	66,425	66	%	$	18,244		38	%
Selected expenses:
Sales and marketing	$	26,722	31	%	$	31,445	31	%	$	4,723		18	%
General and administrative		13,231	15	%		23,876	24	%		10,645		80	%
Depreciation and amortization		3,483	4	%		5,390	5	%		1,907		55	%
Interest expense		336	0	%		2,664	3	%		2,328		693	%

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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 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. 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 provides a comparative discussion of performance:

	Three Months Ended March 31,								Change Between 2006 and 2007
(amounts in thousands)	2006				2007
	Amount		% of Revenue		Amount		% of Revenue		Amount			%
Activations and services:
Wireless activation	$	64,154	74	%	$	81,775	81	%	$	17,621		27	%
MVNE and data services		2,588	3	%		2,986	3	%		398		15	%
	$	66,742	77	%	$	84,761	84	%	$	18,019		27	%
Equipment:
Wireless activation	$	20,236	23	%	$	16,644	16	%	$	(3,592	)	-18	%
Total Revenue:
Wireless activation	$	84,390	97	%	$	98,419	97	%	$	14,029		17	%
MVNE and data services		2,588	3	%		2,986	3	%		398		15	%
	$	86,978	100	%	$	101,405	100	%	$	14,427		17	%

Activations and Services

Our activations and services revenue increased $18.0 million, or 27%, to $84.7 million for the first quarter of 2007 from $66.7 million for the same period of 2006. This increase in activations and services revenue was primarily attributable to a $14.2 million increase related to the number of wireless activations for the three months ended March 31, 2007 that we generated through marketing partners and increased advertising efforts and increases in other revenues including the revenue of our satellite activation business unit, our MVNE business unit, and residual based revenue. These increases were partially offset by higher estimated deactivations resulting from increased volume and increases in deactivation experience. Gross carrier commissions for current period activations subject to chargeback increased 19.9% to $85.5 million for the three months ended March 31, 2007 from $71.3 million for the same period of 2006.

Equipment

Our revenue from sales of equipment decreased 18% to $16.6 million for the first quarter of 2007 from $20.2 million for the same period of 2006. The decrease in equipment revenue of $3.6 million was primarily attributable to lower average sales prices per unit due to an increase in point-of-sale discounts and other incentives provided to customers as compared to the three months ended March 31, 2006 offset in part by a higher volume of sales.

Total revenue

Total revenue increased 17% to $101.4 million for the first quarter of 2007 from $87.0 million for the first quarter of 2006. Revenue generated from the sale and activation of wireless devices and services accounted for approximately 97% of consolidated revenue for the three months ended March 31, 2006 and 2007, respectively. Revenue from our top four wireless carriers represented 74% and 80% of consolidated revenue for the three months ended March 31, 2006 and 2007, respectively. 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. Although we expect revenue from the sale and activation of wireless devices will continue to increase during 2007 compared to 2006 performance, to the extent we reduce planned incentives or such offerings are below 2006 levels, future revenues may be affected.

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COST OF REVENUE

Cost of revenue consists mainly of the cost of wireless devices sold to our wireless activations and services customers. Our cost of revenue related to wireless equipment sales increased to $65.7 million for the first quarter of 2007 as a result of a higher volume of devices sold during the period at a higher unit cost compared to sales of such devices in the first quarter of 2006. The higher unit cost is primarily due to consumers’ increasing demand and purchase higher cost phones including multiple features. The increase in equipment costs per unit also contributed to the increases in cost of equipment as a percentage of activations and services revenue and as a percentage of total revenue in the three months ended March 31, 2007. As a percentage of wireless total activations revenue, cost of equipment revenue increased to 67% of revenue for the three months ended March 31, 2007 compared to 56% for the three months ended March 31, 2006. Total cost of revenue increased 38% to $66.4 million for the first quarter of 2007 from $48.2 million for the first quarter of 2006. Cost of revenue from the sale of wireless devices accounted for approximately 99% of consolidated cost of revenue for the three months ended March 31, 2006 and 2007.

EXPENSES

Sales and Marketing

Our sales and marketing expenses increased 18% to $31.4 million for the first quarter of 2007 from $26.7 million for the first quarter of 2006. The increase was mainly comprised of a $3.6 million from the growth of existing marketing relationships and adding new marketing partner relationships since the first quarter of 2006. 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 $27.3 million of third-party marketing expenses in the first quarter of 2007. Such expenses were higher than the first quarter of 2006 due to increased wireless activation competition, and increased advertising and search volume, which caused our customer acquisition costs to increase. As a percentage of revenue, sales and marketing costs approximated 31% for the first quarters ended March 31, 2007 and 2006, respectively. We expect that marketing expenses will continue to represent a significant percentage of our revenue in future periods.

General and Administrative

Our general and administrative expenses increased 80% to $23.9 million for the first quarter of 2007 from $13.2 million for the first quarter of 2006. The expense increase of $10.7 million was mainly composed of the following: $3.8 million related to additional accounting and legal services primarily due to services rendered related to our 2006 restatement and costs associated with the FTC matter; $1.9 million related to increased payroll related expenses from a larger workforce; $1.2 million of costs incurred to evaluate, research and settle rebate matters that were paid outside of our customary validation process; $1.6 million related to consulting and other services primarily due to information technology and related activity; $0.6 million related telecom and hosting services from increased activity and a larger workforce; $0.4 million related to stock-based compensation expense; and $1.2 million related to other expenses. We expect that our general and administrative expenses related to completing our 2006 restatement will increase in the second quarter of 2007 compared to the first quarter of 2007. Also in June 2007, we took several actions to reduce general and administrative expenses and as a result expect a reduction in recurring general and administrative expenses as a percentage of revenue in future quarters beginning with our third quarter of 2007 compared to our first quarter of 2007.

Depreciation and Amortization

Our depreciation and amortization expenses, which are amortized over periods ranging from 18 months to 7 years, increased 55% to $5.4 million for the first quarter of 2007 from $3.5 million for the first quarter of 2006. The increase was due to the fixed asset additions associated with our development of new functionality related to our websites and product offerings since March 2006.

Interest Expense

Interest expense increased $2.3 million to $2.7 million for the first quarter of 2007 from $0.3 million for the same period of 2006. The increase of $2.3 million is primarily due to increased borrowings and higher interest rates. Borrowings at March 31, 2006 consisted of $15.0 million under our line of credit incurring interest at a variable rate approximating 6.5%. Borrowings at March 31, 2007 consisted of $75.0 million under our term loan bearing a fixed rate of interest of 9.0% per annum. Additionally, we amortized approximately $0.8 million of the discount on our term loan due to the allocation of proceeds to detachable warrants and $0.1 million of deferred financing costs during the three months ended March 31, 2007 which we have included in interest expense in the accompanying results of operations.

Loss from continuing operations

Loss from continuing operations increased to $27.7 million for the first quarter of 2007 from $4.3 million for first quarter of 2006. The increase in net loss from continuing operations was primarily the result of increases in cost of revenue and general and administrative expenses as a percentage of revenue earned in the first quarter of 2007 compared to the first quarter of 2006. We have implemented measures that we expect will reduce general and administrative expenses in future quarters. However, there is no assurance that such expenses will decrease as a percentage of revenue in future periods or that net losses will decrease.

Net Loss

Net loss increased to $27.8 million for the first quarter of 2007 from $4.3 million for first quarter of 2006.

Liquidity and Capital Resources

Since inception, we have funded our operations principally through the sale of equity securities and to a lesser extent, subordinated debt, credit facilities, capital leases and term loans. The significant components of our working capital are inventory and liquid assets such as cash and trade accounts receivable, reduced by accounts payable, accrued expenses and deferred revenue.

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Net cash used in operating activities for the three months ended March 31, 2007 was $26.4 million. For the three month period, we incurred a net loss of $27.8 million and although adjustments to reconcile net loss to net cash used in operating activities, which were primarily non-cash in nature, were approximately $10.4 million, we experienced changes in operating assets and liabilities from December 31, 2006, as explained below, which contributed to an additional use of net cash for operating activities of $9.0 million. Cash balances at March 31, 2007 were approximately $53.4 million, a decrease of $36.4 million from December 31, 2006. We have an additional $25.0 million available under our term loan which may be withdrawn prior to July 31, 2007. We expect that our cash balances will continue to decrease during the three months ended June 30, 2007. We have implemented a program to achieve approximately $2.0 million of monthly cash savings beginning in June 2007. There can be no assurance that we will be able to achieve such cash savings or that expenses that we have not incurred in the past will offset such savings. We are contemplating other operating expense reduction opportunities that may be implemented in the third and fourth quarters of 2007. Since our inception, our operations have used more cash than they have generated. We may require additional cash to operate our business, which may not be available on terms acceptable to us, or at all.

Our future capital and operating requirements will depend on many factors, including the level of our revenue, 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 businesses or strategic investments could give rise to additional financing requirements sooner than we expect. In the event that cash on hand and borrowings on our 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 or a sale of assets. There can be no assurance that we would be able to secure additional funding in the future.

We analyze our working capital requirements very closely as nearly $46.3 million or 83% of our March 31, 2007 accounts receivable was generated from revenue earned from four wireless carriers. Generally, we collect our monthly commissionable and residual revenue from these carriers within 30 to 90 days of the month-end following a subscriber’s activation net of commission chargebacks that occurred during the period. The timing of our collections from the wireless carriers is also influenced by our ability to reconcile our billing records with that of the respective carrier. Our matching and resolution process is largely a manual process and although the substantial majority of our sales information readily matches, some records may require additional research which may delay collection beyond a 30 to 90 day period of time. The timing of collection of our accounts receivable influences the timing of payment to our vendors.

Our major uses of cash consist of payments made for inventory, marketing and payroll expenses and capital expenditures. Costs incurred for marketing and advertising is generally paid on the date the advertising occurs or shortly thereafter. We have payment terms with most other vendors we deal with that generally extend up to 45 to 60 days from service provisioning. Payroll expenses are generally funded semi-monthly. As of March 31, 2007, we owed the three wireless carriers referred to above approximately $38.1 million for wireless devices and accessories we procured from them or their affiliates during the quarter.

Given the timing and significance of payments for advertising costs to the extent we have difficulties collecting accounts receivable, we may have to defer advertising promotions, inventory purchases or other costs which could impact our ability to generate revenue.

Consolidated Cash Flows

	Three Months Ended March 31,
(amounts in thousands)	2006			2007
Net cash provided by (used in) operating activities	$	1,225		$	(26,412	)
Net cash used in investing activities		(8,005	)		(6,679	)
Net cash used in financing activities		(149	)		(3,459	)
Change in cash and cash equivalents		(6,929	)		(36,550	)
Short term investments on March 31, 2006 and 2007		5,000			—
Change in cash and cash equivalents and investments	$	(1,929	)	$	(36,550	)

Net cash used in operating activities was $26.4 million for the three months ended March 31, 2007 compared to net cash provided by operating activities of $1.2 million for the three months ended March 31, 2006. For the three months ended March 31, 2007, net loss after adjustments for items to reconcile net loss to net cash provided by operating activities was approximately $17.4 million. Such items included depreciation and amortization, change in allowance for doubtful accounts, non-cash interest expense and stock-based compensation.

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Changes in operating assets and liabilities from December 31, 2006 decreased net cash provided by operating activities by approximately $9.0 million. Changes in working capital balances included a decrease of current assets of approximately $1.5 million, excluding cash and cash equivalents. The decrease in these current assets was primarily the result of decreased accounts receivable offset by increases in inventory balances from December 31, 2006. The decrease of accounts receivable was mainly the result of the timing of cash collections. Inventory balances increased during the three months ended March 31, 2007 as a result of an increase in handset device purchases and receipts during the period to take advantage of volume incentives with certain carriers.

Current liabilities, excluding debt and capital lease balances decreased $7.8 million from December 31, 2006. The decrease during the period was mainly the result of a net increase in accounts payable and accrued liabilities and expenses. Accounts payable and accrued liabilities at March 31, 2007 decreased from December 31, 2006 primarily as a result the timing of payments made to equipment and other vendors during the period and reductions in accrued expenses including accrued consumer liabilities.

Net cash used in investing activities for the three months ended March 31, 2007 and 2006 was $6.7 million and $8.0 million, respectively. The decrease in net cash used in investing activities was primarily due to a $5.0 million decrease in the cash used to purchase short-term investments offset by a $3.7 million increase in the use of cash for investing activities for other activities. Other activities included an increase of $2.4 million in the purchase of property and equipment and capitalized labor costs, primarily associated with enhancing our infrastructure; a $0.8 million decrease of proceeds from the sale of Liberty Wireless due to cash receipts occurring in 2006 but for which no corresponding amounts were received in 2007; a decrease of $0.4 million proceeds from the reduction of restricted cash occurring in 2006 but for which there were no corresponding decreases in 2007; and a $0.1 million increase from other activities. Capital expenditures for the three months ended March 31, 2007 comprised $4.4 million of software and web site development and $2.2 million of computer and other equipment. We saw an increase from the prior periods due to increased spending on our e-commerce platform, enhancing functionality and new products such as upgrades and prepaid services.

Net cash used in financing activities was $3.5 million for the three months ended March 31, 2007 compared to net cash provided by financing activities of $0.1 million for the three months ended March 31, 2006. Financing activities consisted of cash used to repurchase common stock of $6.3 million and principal payments of capital leases of $0.1 million, partially offset by the proceeds received from the exercise of stock options of $2.9 million.

Borrowings Under our Term Loan.As of March 31, 2007, we maintained a term loan with Goldman Sachs Credit Partners L.P., Citicorp North America, Inc. and AP InPhonic Holdings, LLC which allowed for aggregate borrowing of up to $100.0 million. During 2006, we borrowed an aggregate principal amount of $75.0 million under the agreement. As of March 31, 2007, we have the ability to borrow an additional $25.0 million. This facility is secured by a first priority lien on substantially all of our assets. Interest on borrowings under the term loan is payable quarterly at a fixed rate of 9.0%. Interest expense during the three months ended March 31, 2007 also included $0.8 million of amortization of the discount on the term loan resulting from the allocation of a portion of the $75.0 million proceeds to detachable warrants.

Under the provisions of the term loan and the executed amendments, we are required to maintain certain minimum levels of EBITDA on a quarterly basis. By July 31, 2007, we are required to draw the remaining $25.0 million of funds and deposit them at an institution designated by the lenders. A minimum of $25.0 million in cash must remain in this cash collateral account during the remaining term of the loan until we maintain an EBITDA to indebtedness ratio of less than 1.0:1.0. We also received an extension of the financial statement delivery requirements for the three months ended March 31, 2007 financials to June 19, 2007.

Common Stock Repurchase Program. During the three months ended March 31, 2007, we repurchased 557,074 shares of our common stock for approximately $6.3 million. As of March 31, 2007, we were authorized by our Board of Directors to repurchase up to an additional $20.4 million of our common stock through November 3, 2007. Subsequent to March 31, 2007 and through May 31, 2007, we repurchased an additional 464,000 shares of our common stock for approximately $4.4 million. There can be no assurances that we will repurchase up to the full amount that we have been authorized by our Board of Directors over the remaining time period.

Contractual Obligations

The following table summarizes our contractual obligations, including interest on capital leases, and the expected effect on liquidity and cash flows as of March 31, 2007.

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(amounts in thousands)	Total		Less than 1 year		1 -3 years		4 - 5 years		Over 5 years
Term loan (a)	$	94,557	$	8,588	$	85,969	$	—	$	—
Capital leases		577		307		270		—		—
Operating leases		5,110		2,469		2,641		—		—
Obligation to purchase certain advertising (b)		4,506		4,506		—		—		—
Obligations under VMC APA (c)		1,300		1,300
Fixed future cash commitments for online advertising (d)		8,500		2,950		5,550		—		—
	$	114,550	$	20,120	$	94,430	$	—	$	—

(a) Under the term loan agreement, we may repay or the lender may require the repayment of the debt on the third anniversary of the agreement. For the purposes of this presentation, we have included the contractual obligation due on the third anniversary. If not prepaid, the debt matures in November 2011. The term loan incurs interest at 9.00% per annum.

(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, as amended, we have agreed to pay shareholders of VMC an additional $1.3 million in cash to settle any remaining contingent consideration. Of the $1.3 million, $0.2 million represents legal fees incurred during the settlement.

(d) Under an agreement with a vendor, we will pay $8.5 million of cash in quarterly installments for the purchase of certain advertising services, including banner ads and other similar advertising.

Recent Accounting Pronouncements

In June 2006, the FASB ratified the EITF Issue No. 06-3,How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITF 06-3”). EITF No. 06-3 requires an entity to disclose transactional tax amounts assessed by government authorities that are considered significant. EITF No. 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. We have adopted this pronouncement effective January 1, 2007. EITF 06-3 did not impact the method for recording and reporting these sales taxes in our consolidated financial position, results of operations or cash flows and will have no impact in future periods. We exclude such taxes from our revenue and include any such cash to be collected from our customers or remitted to governmental authorities as of the most recent period then ended within our accounts receivable or accrued expenses and other current liabilities, respectively, in our consolidated financial position.

In September 2006, the 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.

In February 2007, the Financial Accounting Standards Board issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115( “SFAS No. 159”),which allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item will be reported in current earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes the company elects for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted. 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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Application of Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues 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 revenues, cost of revenues 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 these critical estimates.

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. Revenue from satellite television customers includes commissions earned at the time of the satellite service activation, net of an estimate for deactivations, as 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. Our estimated deactivation rates for the three months ended March 31, 2007 and 2006 were 24.3% and 18.7% of gross carrier commission revenue for the respective periods. 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 three months ended March 31, 2007 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 reserve for deactivations is reflected as a component of 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 deactable carrier commission revenue until the expiration of the appropriate chargeback period. New channels for which we have insufficient historical data to adequately estimate deactivation experience will be deferred through the expiration period for a period of 24 months, until such time that we can accurately estimate the deactivation experience for the new channel.

In addition to receiving commissions for each wireless subscriber activated, we earn performance bonuses from the wireless carriers based on negotiated performance targets. The most significant bonuses we earn are the quarterly volume bonus, which we collect from our wireless carriers 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 wireless 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 Recognition in Financial Statements (“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. As of March 31, 2007, our estimated reserve for deactivations of feature activations was $1.1 million.

In the ordinary course of recording and collecting commissions from our wireless carrier partners, we engage in an active matching and reconciling process between source information for customer wireless carrier activations generated and maintained in our back-office sales information systems and each carrier’s billing system. Although the substantial majority of our sales information matches to that of the carriers, matching differences do arise. Examples of such differences include (i) instances in which an activation per our records does not correlate to a commission fee payment schedule submitted by the carrier; (ii) commission fee payment collected from the carrier that is different than the expected payment per our sales records; and (iii) a deactivation identified on a carrier statement that does not match the carrier’s original commission fee payment for such activation.

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Data files supported by our billing records related to differences are submitted monthly to each carrier for resolution. Resolution of these differences is usually an iterative process and it can take up to 12 months or longer for final resolution of any difference. Information is exchanged between us and the carrier throughout this process. We recognize revenue based on the underlying data maintained in our back-office sales information systems unless the carrier provides us details that supersede our information. Given the nature of these differences and based on our experience in resolving such items with the carriers, we are also able to determine an appropriate reserve against revenue to reflect the likely success or failure of resolving these differences. In certain instances when a wireless carrier denies a claim we may file in resolving differences of this nature, we will write-off the related accounts receivable while pursuing further collection efforts and will record into income at a future date if collected. To the extent that we collect commission or other fee payments in excess of what we have recorded, we will record revenue in the period of receipt net of estimated chargeback requirements.

Equipment revenue—Revenue from the sale of wireless devices and accessories in a multiple-element arrangement with services is recognized at the time of sale in accordance with EITF 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. Return rights of indirect retailers for wireless devices are limited to warranty claims, which are generally covered by the device manufacturers’ original warranties. 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 the wireless device to the customer at a significant discount (“equipment discount provisions” or “EDP”).

In the event a customer terminates their wireless service with the carrier within six months of activation or 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. During 2004 and 2005 and prior to the three months ended June 30, 2006, revenue recognition of such fee was deferred until such fee was collected from the customer pursuant to SAB 104 as we did not have adequate historical collection data to reasonably estimate the ultimate collectibility of the receivable. Beginning April 1, 2006, we began to estimate EDP termination fee revenue based on historical experience of customer collection behavior which we have developed over a time period of 24 months which provides the basis on which to accrue revenue with an appropriate assurance of collectibility pursuant to SAB 104. As of March 31, 2006, $0.3 million of such revenue was deferred, which would have been accrued for in the event that we had adequate customer collection history, less an estimated reserve for uncollectible amounts. As of March 31, 2007, we had accrued as accounts receivable approximately $1.0 million in such EDP termination fees.

During the most recent quarter ended March 31, 2007, our handset return rate was 15.5% of handset revenue. 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 March 31, 2007 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.

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 for which the contractual rebate redemption period has lapsed. Our rebate redemptions are 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 earn the rebate amount under our normal terms and conditions.

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MVNE Services Revenue-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 development of the network platform, as well as 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.

Other Revenue—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. We bill customers monthly and revenue is recognized monthly, as the services are performed.

Cost of Revenue

The major components of cost of revenue, exclusive of depreciation and amortization, are:

Cost of Activations and Services Revenue—Cost of activations and services revenue includes costs incurred from providers of telecommunications and data center services.

Cost of Equipment Revenue—We purchase wireless devices and accessories from wireless carriers, device manufacturers and third-party vendors to sell to customers and indirect retailers in the WAS business unit. We sell these wireless devices and accessories at a price below cost to encourage the sale and use of the services. We do not manufacture any of this equipment. Costs from the sale of wireless devices and accessories sold directly to customers are recognized at the time of sale. From time to time, we receive price protection credits on equipment purchased from certain vendors. We recognize price protection credits received for equipment that has been sold and shipped as a reduction of cost of revenue.

Inventory Valuation

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

Stock-based Compensation

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

Goodwill and Intangible Assets

Goodwill and other intangible assets with indefinite useful lives are not amortized and are evaluated for impairment at least annually, or when events or circumstances suggest a potential impairment may have occurred. In accordance with SFAS No. 142,Goodwill and Other Intangible Assets (“SFAS No. 142”), we have selected the fourth quarter to perform the annual impairment test. SFAS No. 142 requires us to compare the fair value of the reporting unit to its carrying amount on an annual basis to determine if there is a potential impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value. The fair value for goodwill and other intangible assets not subject to amortization is determined based on discounted cash flows, market multiples or other measures, as appropriate.

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Advertising Costs

We expense advertising and other marketing costs as incurred and principally include amounts paid to marketing partners based on the delivery of customers to our websites for wireless activation and services.

In January 2007, we launched our services on a partnered website. In connection with the launch of these services and the related agreement, we have paid $3.5 million of cash and will pay and additional $8.5 million of cash in quarterly installments over a 3 year period for the purchase of certain advertising services, including banner ads and other similar advertising. We have accounted for these cash payments as direct response advertising in accordance with the AICPA Statement of Position 93-7,Reporting on Advertising Costs, (“SOP 93-7”). We expect to amortize the deferred costs ratably based on the revenue and cost of revenue expected to be generated over the 5 year contractual life. As of March 31, 2007, we have included $3.5 million in other long-term assets, the recoverability of which is dependent upon our realizing sufficient revenues from this program.

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 these losses. As of March 31, 2007, we had approximately $273.2 million of net operating loss carryforwards, which may be available to offset any future taxable income, subject to ownership change limitations. Net operating loss carryforwards may be used to offset up to 90% of our alternative minimum taxable income. Alternative minimum taxes are allowed as credit carryovers against regular tax in the future in the event that the regular tax exceeds alternative minimum tax expense. The net operating loss carryforwards will begin to expire in 2019. 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.

We are currently analyzing whether transactions involving our capital stock over the last several years may have caused a change in control as defined by the Internal Revenue Code which, in turn, may impact the amount of net operating loss carryforwards available for our use in the future to offset taxable income. In as much as our tax benefits associated with such carryforwards are fully reserved for via a valuation allowance, any adjustment to the amount of such carryforwards is not expected to impact our financial statements but could impact cash flows to the extent we generate taxable income in the future.

In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109 (FIN 48). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, we adopted the provisions of FIN 48 and there was no material effect on the financial statements. As a result, there was no cumulative effect related to adopting FIN 48.

Our policy is that we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of our adoption of FIN 48, we did not have any accrued interest or penalties associated with the possibility of incurring these previously recognized tax benefits. There was no income tax expense recognized for these charges during the three months ended March 31, 2007.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are not currently subject to any U.S federal or state income tax examinations. However, income tax returns for tax years 2003 to 2006 remain open for examination. We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We currently do not hedge interest rate exposures and have not used derivative financial instruments for speculation or trading purposes. At March 31, 2007, our debt financing consisted primarily of our principal amounts outstanding under our fixed rate term loan. Our borrowings under the term loan are secured by substantially all of our assets.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, including our principal executive and principal financial and accounting officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2007. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in this quarterly report on Form 10-Q has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial and accounting officers, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive and principal financial and accounting officers have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Not withstanding the material weaknesses described below, management believes the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q 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 has instituted controls to remediate the deficiencies deemed to be material weaknesses at December 31, 2006 and will reconsider how each deficiency is characterized in public filings after a sufficient period lapses wherein the control can be tested for operating effectiveness (usually two quarters for quarterly controls). Accordingly, management has determined the following material weaknesses in our internal control over financial reporting continue to exist as of March 31, 2007:

• 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 to provide the level of controls and analysis required on a timely basis in light of the increasing complexity and growth of our business. The failure to provide an adequate level of staffing 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 to the 2006 financial statements 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 consistently provide adequate communication of 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. As a result this material weakness contributed to errors in the 2006 financial statements relating to accounting and reporting for revenue and accounts receivable.

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We did not utilize an appropriate methodology during 2006 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 could not be supported by past experience, failed to include 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 in the course of concluding on our analysis of reserves necessary to allow for doubtful collections on disputed accounts receivable, we concluded that 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 during 2006 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 2006 in recording certain fees due from consumers when contracts are cancelled within specified time periods and the wireless device is not returned to us. Specifically, we overstated related accounts receivable during 2006 by using collection percentages in excess of that which could be supported by 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 2006 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.

Changes in Internal Control Over Financial Reporting

There were changes in our internal control over financial reporting to remediate the 2006 material weaknesses that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

• On May 31, 2007, Lawrence S. Winkler ceased acting as our Chief Financial Officer;

• George Z. Moratis was appointed Executive Vice President and Chief Accounting Officer;

• We have hired several experienced finance employees to support our activations and services revenues and related accounts receivable;

• We have implemented accounting methodology changes at December 31, 2006 in the areas in which the material weaknesses were identified; and

• We have implemented several procedural changes to promote improved communication between operations and finance.

Management expects to continue to undertake changes in its operations and procedures throughout 2007 to remediate the material weaknesses identified above.

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PART II

ITEM 1. LEGAL PROCEEDINGS

Legal Matters

On May 7 and 18, 2007, two putative federal securities law class actions were filed in the United States District Court for the District of Columbia on behalf of persons who purchased our common stock between August 2, 2006, and May 3, 2007. These substantially similar lawsuits assert claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, against us, our chief executive officer and our chief financial officer. These claims are related to our April 3, 2007, and May 4, 2007 announcements concerning our restatement of certain previously issued financial statements. Potential plaintiffs have until July 6, 2007, to move the court for appointment as lead plaintiff. We have not yet responded to the complaints. We believe that the allegations contained within these class action lawsuits are without merit and intend to vigorously defend the litigation. However, any adverse resolution on this matter could have a material adverse impact on our financial results.

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 $4.0 million 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 and if we are required to issue additional shares would result in dilution to our stockholders.

On May 3, 2007, the Federal Communications Commission (FCC) issued an Order of Forfeiture and Further Notice of Apparent Liability in which it imposed a forfeiture of $819,905 against us for being late in complying with certain regulatory obligations that arose in 2004 and 2005 from a business that we sold in December 2005. Those obligations included: registering with the FCC, filing certain reports, and paying certain Universal Service Fund fees. The FCC’s order also proposed imposing an additional fine of $100,000 for not having maintained in 2006 and 2007 a license necessary to conduct the business that was discontinued by us in 2005. As we did not operate the business in 2006 and 2007 we have requested that the proposed fine be dismissed. With regard to the forfeiture itself, we have appealed the decision to the FCC and are awaiting a ruling. This forfeiture issue was initially raised by the FCC in July 2005. We advised the FCC then, and believe now, that no fine is appropriate under the circumstances.

Fifteen related putative federal court class actions have been filed against us arising out of InPhonic-sponsored rebate offers for online purchases of wireless telephones. Several of these lawsuits also name either our current or former third-party rebate processor as a defendant. 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 consolidated amended class action complaint, alleges, among other things, that we and our current or former third-party rebate processor (depending on the particular claim) violated the consumer protection laws of all 50 states, various D.C. state laws and 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 compensatory damages and/or restitution, statutory penalties and treble damages under D.C. consumer protection laws and RICO, attorneys’ fees and punitive damages, as well as injunctions concerning the content of our websites. The federal lawsuit is in an early stage. We intend to vigorously defend that action but cannot predict its outcome.

On or about March 21, 2007, a complaint was filed in New York state court, asserting a claim relating to InPhonic-sponsored rebate offers under the New York Deceptive Trade Practices Act on behalf of a proposed class of New York consumers. We have filed a motion to dismiss the action, or alternatively to stay the action, under New York law because the plaintiff’s claim and the proposed class are already part of the complaint in the case in D.C. federal court. The company is awaiting a ruling on its motion to dismiss or to stay. The lawsuit is in an early stage. We intend to vigorously defend that action but cannot predict its outcome.

On April 27, 2007 we and the Federal Trade Commission (FTC) announced that we had entered into a consent agreement with the FTC in which InPhonic agreed to clearly and prominently disclose certain information regarding its rebate offers, such as when consumers can expect to receive their rebates, any time period that consumers must wait before submitting a rebate request, and certain information that would disqualify a consumer from receiving a rebate. We also agreed to provide rebates within time frames and under terms and conditions reasonably specified by us in our communications with our customers. We also agreed to provide rebates to certain customers who had previously been denied them. The FTC approved the final consent arrangements on June 8, 2007.

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On February 15, 2007, we reached a final settlement with the District of Columbia Attorney General’s Office concerning our use of mail-in rebates.

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

ITEM 1A. RISK FACTORS

There are a number of important factors that could cause our actual results to differ materially from those that are indicated by forward-looking statements. These factors include, without limitation, those listed below and elsewhere in this Quarterly Report on Form 10-Q.

Risks Related to Our Business

We have historically incurred significant losses and may not be profitable in the future.

We have experienced significant net losses each year since our inception in 1999. For the three months ended March 31, 2007 we had net losses of $27.8 million. As of March 31, 2007, we had an accumulated deficit of $256.2 million. We may continue to incur net losses, and we cannot assure you that we will be profitable in future periods. We may not be able to adequately control costs and expenses or achieve or maintain adequate operating margins. Our financial results may also be impacted by stock-based compensation charges and possible limitations on the amount of net operating loss carryforwards that we can utilize annually in the future to offset any taxable income. Our ability to achieve and sustain profitability will depend on our ability to generate and sustain substantially higher revenue while maintaining reasonable cost and expense levels. If we fail to generate sufficient revenue or achieve profitability, we will continue to incur significant losses. We may then be forced to reduce operating expenses by taking actions not contemplated in our business plan, such as discontinuing sales of certain of our wireless services and devices, curtailing our marketing efforts or reducing the size of our workforce.

Many of our expenses, such as compensation for employees and lease payments for facilities and equipment, are relatively fixed. We base these expense levels, in part, on our expectations of future revenue. A softening in demand for our product and service offerings, whether caused by changes in consumer spending, consumer preferences, weakness in the U.S. or global economies or other factors, may result in decreased revenue, significant changes in our operating results from period to period and may cause our net losses to increase.

We expect our financial results to fluctuate, which may lead to volatility in our stock price.

Our revenue and operating results may vary significantly from period to period due to a number of factors, including:

• the timing of introduction of popular devices by mobile phone manufacturers and our ability to accurately forecast and procure an adequate supply of such devices;

• timing of bonuses paid to us by wireless carriers;

• collectibility of our accounts receivable;

• seasonal fluctuations in both Internet usage and purchases of wireless services and devices;

• our ability to attract visitors to our websites and our ability to convert those visitors into customers;

• economic conditions specific to online commerce and the wireless communications industry;

• our ability to retain existing customers;

• delays in market acceptance or adoption by consumers of our services, including our MVNE services;

• delays in our development and offering of new wireless services and devices;

• changes in our use of sales and distribution channels;

• our ability to obtain wireless devices at competitive prices;

• our ability to manage our activation, delivery and procurement operations and their related costs;

• the amount of our marketing and other advertising costs;

• our or our competitors’ pricing and marketing strategies;

• our competitors’ introduction of new or enhanced products and services;

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• the extent to which overall Internet use is affected by spyware, viruses, and “phishing,” spoofing and other spam emails directed at Internet users, viruses and “denial of service” attacks directed at Internet companies and service providers, and other events; and

• the amount and timing of operating costs relating to expansion of our operations.

If we are unable to maintain strong relationships with wireless carriers, our business would be adversely affected.

We depend upon a small number of wireless carriers for a substantial portion of our revenue and the loss of any one of these relationships could cause our revenue to decline substantially. In addition, the increasing consolidation in the wireless industry, as evidenced by Cingular’s acquisition of AT&T Wireless and Sprint’s merger with Nextel, has caused the number of wireless carriers to decline and could result in further revenue and pricing pressure. For the three months ended March 31, 2007 revenue from Cingular, T-Mobile, Sprint Nextel and Verizon Wireless each represented greater than 10% of our total revenue and an aggregate of 80%, and for fiscal year 2006, revenue from Cingular, T-Mobile and Sprint Nextel each represented greater than 10% of our total revenue and an aggregate of 74%. Our wireless carriers could terminate their agreements with us without penalty and with little notice. Our agreements with these carriers are non-exclusive, and they have entered into similar agreements with our competitors, which may be on more favorable terms. Our revenue may decline if:

• one or more of the wireless carriers terminates its agreement with us or we are unable to negotiate extensions of these agreements on acceptable terms; or

• there is a downturn in the business of any of these wireless carriers; or

• there is continued significant consolidation in the wireless services industry.

In addition, if the wireless carriers were to discontinue allowing us to sell and activate wireless service plans on their networks and instead were to provide these activation services exclusively themselves, this would have a significant adverse effect on our revenue.

At March 31, 2007 and December 31, 2006, the four wireless carriers accounted for approximately 83% and 74% of our total accounts receivable, net of deactivation reserves. If we are unable to collect amounts due from these and the other wireless carriers, our business could be adversely affected. Collection of our accounts receivable is critical as such cash is a key source of our liquidity.

The restatements of our consolidated financial statements may subject us to actions or additional litigation which could have an adverse effect on our business, results of operations, financial condition and liquidity.

We have recently restated our unaudited financial statements for the quarterly periods ended March 31, 2006, June 30, 2006 and September 30, 2006 each as filed on Form 10-Q as well as the unaudited financial results for the quarter and year-ended December 31, 2006 included in our earnings release issued on February 22, 2007. Putative class actions have been filed with respect to these matters. These or other actions could result in our having to pay fines or other penalties or damages and could have an adverse effect on our business, results of operations, financial condition and liquidity. The restatements may also result in negative publicity and we may lose or fail to attract and retain key customers, employees and management personnel as a result of these matters.

Certain consequences of our late filing of our Quarterly Report on Form 10-Q for the fiscal quarter-ended March 31, 2007 under the federal securities laws may adversely affect our financial condition and results of operations, including our ability to raise capital.

Our failure to file timely our Quarterly Report on Form 10-Q for the fiscal quarter-ended March 31, 2007 may adversely affect our ability to access the capital markets. We are ineligible to use a “short-form” registration that allows us to incorporate by reference future reports on Form 10-K, Form 10-Q and other SEC reports into our registration statements, or shelf registration until we have filed all of our periodic reports in a timely manner for a period of twelve months. As a result, any attempt to access the capital markets could be more expensive or be subject to delays compared to if we were able to use a short-from registration.

Because of the delayed filing of our periodic reports, we face delisting from NASDAQ which would adversely affect the trading price of our common stock.

As a result of the restatement and the delayed filing of our periodic reports with the SEC, on May 14, 2007, we received a NASDAQ staff determination letter indicating that we had failed to comply with the filing requirement for continued listing set forth in NASDAQ Marketplace Rule 4310(c)(14) due to our failure to timely file our Form 10-Q for the period ended March 31, 2007, and that our securities are, therefore, subject to delisting from the NASDAQ Global Market. We previously received and announced a NASDAQ staff determination letter with respect to our failure to

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timely file our Form 10-K for the fiscal year ended December 31, 2006. We requested and subsequently attended a hearing before the NASDAQ Listing Qualifications Panel on May 24, 2007 to appeal both staff determinations and presented a plan to cure both filing deficiencies and regain compliance. We filed our Annual Report on Form 10-K on June 1, 2007 and are filing this Quarterly Report on Form 10-Q, both as part of our plan to regain compliance. Both NASDAQ delisting actions have been automatically stayed pending the NASDAQ Panel’s decision, and our common stock will continue to be listed on the NASDAQ Global Market until the Panel issues its decision and during any extension that is allowed by the Panel.

If the NASDAQ Panel does not grant our request for an extension and continued listing, the extension is not for the duration we requested, or we are unable to fulfill the plan to regain compliance or otherwise meet or maintain compliance with all of the NASDAQ listing requirements, our securities will be delisted from the NASDAQ Global Market. If we are delisted, we may apply for listing on another exchange, however, there is no assurance that we will meet the requirements for initial listing or maintain compliance with the continued listing requirements of such an exchange. Delisting from the NASDAQ Global Market would adversely affect the trading price of our common stock, significantly limit the liquidity of our common stock and impair our ability to raise additional funds.

Our internal control and procedures for financial reporting may not ensure that our public filings include timely and reliable financial information.

As discussed in Item 9A, Controls and Procedures of our Annual Report on Form 10-K for the year ended December 31, 2006, we identified and reported to our Audit Committee and independent registered public accounting firm six material weaknesses in our internal control over financial reporting, as of December 31, 2006.

These material weaknesses included the following:

• We did not maintain sufficient staffing of operational and financial resources;

• We did not always effectively communicate information to our finance department;

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

• We did not maintain effective controls over the determination and accuracy of equipment revenue and related accounts receivable;

• We did not maintain effective controls over the accuracy and completeness of consumer product rebate liabilities; and

• We did not maintain effective controls over the accuracy and completeness of costs of goods sold and amounts due from vendors.

As a result of these material weaknesses, we determined that our internal control over financial reporting was not effective as of December 31, 2006. These material weaknesses resulted in adjustments to our revenue, accounts receivable, inventories and cost of sales that caused us to restate our unaudited financial statements for the quarterly periods ended March 31, 2006, June 30, 2006 and September 30, 2006 each as filed on Form 10-Q as well as the unaudited financial results for the quarter and year-ended December 31, 2006 included in the our earnings release issued on February 22, 2007.

The effectiveness of our controls and procedures could be limited by a variety of factors, and the remedial measures that we adopted in response to the weaknesses identified may not be successful to prevent similar events from recurring. These factors could include the following:

• Faulty human judgment and simple error, omission or mistake;

• Fraudulent action of an individual or collusion of two or more people;

• Inappropriate override of procedures; and

• The possibility that our enhanced controls and procedures may still not be adequate to assure the timely and accurate preparation of information and the timely filing of our periodic reports with the SEC.

A failure to successfully implement and maintain effective internal control over financial reporting, including any ineffectiveness of the remedial measures we have implemented to address the material weaknesses in internal control over financial reporting, could result in a material misstatement of our financial statements that would not be prevented or detected or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

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Ongoing consolidation among wireless carriers could result in revenue and pricing pressure and adversely impact our results of operations.

In recent years, there has been a trend in the wireless industry toward consolidation of wireless carriers. Ongoing consolidation among the wireless carriers would reduce the number of companies whose wireless services we offer, which could adversely affect our results of operations. We rely on the leading wireless carriers for a substantial portion of our revenue, and we expect this to continue for the foreseeable future. We may be subject to pricing pressures that may result from a further consolidation among wireless carriers, which could have an adverse effect on our operations. If consolidation continues, the commissions and bonuses paid to us by wireless carriers could decrease or the prices charged to us for the supply of wireless devices could increase, resulting in a decrease in our gross margin.

A failure to continue to improve our customer experience could adversely affect our operating results.

We operate in a very competitive environment and we believe that maintaining high overall customer satisfaction is a critical part of our ongoing efforts to promote the use of our own branded websites, as well as the private-labeled websites that we create and manage for our marketers, and to improve our operating results. We have had certain problems with our customer support operations and in fulfillment of orders and experienced some customer satisfaction issues related to rebates. To date, these problems have resulted in several lawsuits and federal and state investigations. If the efforts we have undertaken to improve our customer experience are unsuccessful, we could be subject to additional customer complaints, litigation, and investigations by state and federal regulatory authorities, which could be costly, could divert the attention of our management from our core business and could damage our reputation. If these issues are not resolved, our revenues and results of operations could be adversely affected.

In the event we do not meet our financial or affirmative covenants under our term loan, we cannot ensure the receipt of a waiver of or extension of time to comply with our covenants

We have recently entered into six amendments of our credit facility that among other matters, extended the date for compliance with the requirement to deliver audited financial statements for the year-ended December 31, 2006 and unaudited financial statements for the quarter-ended March 31, 2007. Although we have been able to obtain an extension of the period for compliance with this covenant in the past, there is no assurance that we will be in compliance with our covenants in the future, and if we are not in compliance, that our lenders will agree to amend them.

A decrease in the growth rate of our wireless service activations could adversely affect our operating results.

A substantial portion of our revenue consists of commissions we earn from the wireless carriers for the activation of new customer accounts. We may also receive bonuses for meeting volume and other performance based targets. If the growth rate in the number of new activations declines or the customer churn rates increase, we may not earn these additional bonuses and our revenue could decline in the future.

We require access to significant working capital and trade credit to fund our day-to-day operations.

We rely on trade credit available from wireless carriers and handset manufacturers to maintain adequate inventory of wireless devices. If our rate of collection of activation commissions and bonus revenue declines, or the rate of chargeback of our customers increases, such that our trade credit proves insufficient, we may not be able to maintain adequate levels of inventory to fulfill wireless device activations. Our trade lines of credit are generally terminable by the vendor at any time. Any significant termination of these arrangements could adversely impact our ability to deliver fulfill orders for wireless devices and reduce our working capital availability.

We may require additional cash to operate our business, which may not be available on terms acceptable to us, or at all.

Since our inception, our operating and investing activities have used more cash than they have generated. We expect our uses of cash over the next 12 months to include funding our operations, expanding our customer base, maintaining and enhancing our e-commerce platform and focusing on customer service. As of March 31, 2007, we had cash and cash equivalents of $53.4 million, including borrowings under our term loan of $75.0 million. While we believe that our current cash and cash equivalents, short-term investments, and amounts available under our term loan and trade credit available from wireless carriers and handset manufacturers will be sufficient to fund our near-term working capital and capital expenditures, our revenue may not meet our expectations, we may be unable to control costs or we may incur additional expenses, including capital expenditures.

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To remain competitive, we must continue to use cash to enhance and improve the functionality and features of our e-commerce platform and the websites we create and manage. If competitors introduce new services embodying new technologies, or if new industry standards and practices emerge, we may have to spend resources on the purchase or development of new functionalities or technologies. If we incur additional expenses or experience a revenue shortfall, our current resources may not be sufficient. We may then find it necessary to obtain additional financing. In the event that additional financing is required, we may not be able to raise it on terms acceptable to us, if at all.

The market for our services is becoming increasingly competitive with the emergence of additional retail and online distributors of wireless services and devices, which could adversely affect our business.

We face substantial competition in the wireless services industry. We expect competition to intensify as a result of the entrance of new competitors and the development of new technologies, products and services. We compete with wireless carriers’ retail stores and online websites, as well as other retail stores and online businesses that provide similar products and services in competition with us. All of our agreements with wireless carriers and wireless device suppliers are non-exclusive, and these parties may provide the same or similar services and devices to our competitors on terms more favorable than ours. Due to the low barriers to entry in this industry, with sufficient time and capital, it would be possible for additional competitors to replicate our services.

Many of our existing and potential competitors have substantially greater financial, technical and marketing resources than we do. Additionally, many of these companies have greater name recognition and more established relationships in many of our market segments. These competitors may be able to adopt more aggressive pricing policies and offer customers more attractive terms than we can. We may face increasing price pressure from the wireless carriers. In addition, current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to compete more effectively.

Increasing costs of online advertising and or misjudgments in making advance commitments to purchase online advertising could have an adverse affect on our financial results.

Online advertising, the cost of which continues to increase, composes a significant portion of our marketing expenses. If the effectiveness of our online advertising does not keep pace with the increased costs, our financial results could be adversely affected. In addition, in order to secure more favorable terms or advertising placement, we sometimes make significant advanced financial commitments for advertising purchases based upon our anticipated needs. If our actual needs do not match such financial commitments, our results could be adversely affected.

We depend on Internet search engines to attract a substantial portion of the customers who use our websites, and losing these customers would adversely affect our revenue and financial results.

Many consumers access our services by clicking through on search results displayed by Internet search engines. Internet search engines typically provide two types of search results, algorithmic listings and purchased listings. Algorithmic listings cannot be purchased, and instead are determined and displayed solely by a set of formulas designed by the search engine. Purchased listings can be purchased by advertisers in order to attract users to their websites. We rely on both algorithmic and purchased listings to attract and direct consumers to our websites. Search engines revise their algorithms from time to time in an attempt to optimize their search results. If one or more search engines which we rely on for algorithmic listings modifies its algorithms, resulting in fewer consumers clicking through to our websites, we would need to increase our marketing expenditures or we would experience a reduction in our revenue, which would adversely affect our financial results. If one or more of the search engines which we rely on for purchased listings modifies or terminates its relationship with us, our expenses could rise and our financial results may suffer.

Any unanticipated increase in our rate of deactivation of active accounts could result in a decrease in our revenue.

Under our agreements with wireless carriers, commissions are not earned if the customer’s service is deactivated with the carrier before a pre-determined period of time, usually between 90 and 180 calendar days. We maintain a reserve to cover the commissions expected to be lost through deactivations based upon our historical experience. We monitor a number of factors in determining this reserve. For example, our experience has been that customers who participate in a promotion that allows them to obtain a phone and activate an account with no up-front payment have a higher deactivation rate than customers who pay amounts in advance. If the rate of our deactivations increases in excess of our historical experience, we would have to increase our deactivation reserve, which, in turn, would cause our revenue to decline. Further, if our estimates vary materially for a future period or periods in relation to revenue and/or net income so that we conclude that our method of determining estimates is not sufficiently accurate, we may be required to change our method of accounting for these estimates. While a change in accounting for deactivations would have no impact on our cash flow, any such change may negatively impact our net income for particular periods and cause a decline in stock price. An increase in our deactivation rate could also cause carriers to modify the commission terms with us or even terminate our agreements.

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If we do not continue to attract customers through our existing online marketing programs, our revenue may be affected adversely and our marketing expenses may increase.

We obtain a large portion of our customers through incentive-based online marketing programs. We engage third parties to acquire customers through different marketing initiatives, including the use of websites that we create and manage under our marketers’ brands. We also use online advertising and other forms of direct marketing. Our marketers may not continue to participate in our marketing programs if the programs do not provide sufficient value, our competitors offer better terms, the third parties elect to provide these products and services directly or the market for incentive-based advertising decreases. If our marketers do not market our services to their customers, our revenues will not grow as anticipated and our marketing expenses may increase.

We face inventory risk.

We are exposed to inventory risks as a result of seasonality, new product launches by equipment manufacturers, rapid changes in product cycles and changes in consumer tastes with respect to wireless devices. In order to be successful, we must accurately predict these trends and avoid overstocking or under-stocking wireless devices. Demand for wireless devices, however, can change significantly between the time we order the wireless devices and the date we sell these to customers. As a result, we may have too many or too few of certain inventory items, which may affect our revenues and ability to meet customer demands.

The acquisition of certain types of inventory, or inventory from certain sources, may require significant lead-time and prepayment, and such inventory may not be returnable. We carry a broad selection of wireless devices and maintain significant inventory levels of certain popular devices and we may be unable to sell products in sufficient quantities or during the relevant selling seasons.

Any one of the inventory risk factors set forth above may adversely affect our operating results.

Announcements and delays relating to the release of new wireless devices could adversely affect our revenue.

From time to time, the wireless industry is significantly affected by the introduction of new wireless devices that quickly capture a large share of the market. Announcements of new devices can result in customers deferring purchase decisions until such devices are available. Likewise, our ability to have access to a sufficient supply of such devices when available is important in order for us to meet customer demand. If customers delay purchases due to the announcement of new products or if we do not have access to a sufficient supply of new products to meet demand, it could have an adverse effect on our revenues and results of operations.

An interruption in the supply of wireless devices could hinder our ability to fulfill customer orders and cause a decline in our revenue.

We rely on wireless carriers and wireless device suppliers in fulfilling customer orders for wireless devices. These suppliers may experience difficulty in providing us sufficient wireless devices to meet our needs or they may terminate or fail to renew contracts for supplying us these devices on terms we find acceptable. Our agreements with these suppliers are non-exclusive, and these suppliers have entered into similar agreements with our competitors, which may be on more favorable terms. From time to time, we may experience delays in receiving shipments of wireless devices from one or more of the wireless device suppliers, thereby preventing us from offering a wireless device until the shipment is received. Any significant interruption in the supply of any of these devices could hinder our ability to fulfill customer orders and result in the loss of customers, causing a decline in our revenues.

If our distribution operations are interrupted for any significant period of time, our business and results of operations would be substantially harmed.

Our success depends on our ability to successfully receive and fulfill orders and to promptly deliver our products to our customers. Our packaging, labeling and product return processes are performed both internally through our own distribution operations and to a lesser extent, by a third party. Our distribution operations are located in a single facility that is susceptible to damage or interruption from human error, fire, flood, power loss, telecommunications failure, theft, terrorist attacks and similar events. In 2003, we experienced a one-day interruption in our distribution operations due to Hurricane Isabel. Any future interruptions in our distribution center operations for a significant period of time could damage our reputation and substantially harm our business and results of operations.

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Interruptions or delays in service from third parties could impair our service offerings.

We rely on third parties for both our primary network operations hosting center and our back-up facility. Any disruption of our access to Internet service could result in delays in our ability to receive information or transact business. We also rely on third-party software, suppliers and wireless carriers to process applications for credit approval and to bill our customers. If we are unable to process credit applications in a timely manner or if our billing software fails and we are unable to bill customers on a timely basis, our business will be affected adversely. While we do have backup systems for certain aspects of our operations, our systems are not fully redundant and our disaster recovery planning may not be sufficient for all eventualities. From time to time we have experienced interruptions in these or other third-party services and if such disruptions were to occur in the future or their performances were to deteriorate, it could impair the quality of our services. If our arrangement with any of these third parties was terminated or if a third party ceased operations, discontinued business or altered the terms on which it does business with us, we might not be able to find an alternative provider on a timely basis or on reasonable terms, which would adversely affect our operating results.

We have grown rapidly, and we must manage additional growth and the demands on our resources and personnel in order to be successful.

We began operations in October 1999 and have grown rapidly since that time. Our growth has resulted, and any future growth will result, in increased responsibility for our management and increased demands on our resources. Our business strategy is based on the assumption that we will continue to retain qualified personnel who can expand our customer base and continue to develop and deliver innovative customer-driven solutions. We must continue to enhance and expand our business processes, information systems and operations to accommodate this growth. To manage future growth, we will need to:

• implement additional and improved management information systems;

• retain qualified personnel to manage our operating, administrative, financial and accounting systems;

• maintain and expand our wireless service and device activation capacity;

• continue to train, motivate, manage and retain our existing employees and attract and integrate new employees;

• expand our sales force to sell our new and existing offerings; and

• maintain close coordination among our executive, information technology, accounting and finance, sales and operations organizations.

If we are unable to manage future expansion, our ability to provide a high quality customer experience could be harmed, which would damage our reputation and substantially harm our business and results of operations.

If we do not adequately protect our intellectual property, others could copy aspects of our services and operational technology, which could force us to become involved in expensive and time-consuming litigation.

Our ability to compete and continue to provide technological innovation is substantially dependent upon our technology. We rely on a combination of intellectual property laws and confidentiality agreements to protect our technology. We generally enter into confidentiality and nondisclosure agreements with our employees, consultants and prospective and existing marketers. In addition, we seek to control access to our proprietary information. Despite our efforts to protect our intellectual property, unauthorized parties may attempt to copy or otherwise obtain and use our services or technology. Although we are not aware of any unauthorized use of our intellectual property to date, effectively policing against the unauthorized use of our technology is time consuming and costly, and we cannot assure you that the steps taken by us will prevent misappropriation of our technology. Our failure to adequately protect our intellectual property rights could harm our business by making it easier for others to duplicate our services.

If we are unable to maintain the integration of our services with the wireless carriers’ existing credit and activation systems, we will be unable to process orders in a timely manner and our business may suffer.

To activate wireless services for customers, we rely on access to the wireless carriers’ proprietary credit and activation systems through direct data, online and telephone interfaces. If, as a result of technology enhancements or upgrades of these systems by the wireless carriers, we are unable to integrate our services with these systems, we could be required to redesign or upgrade our information systems or software which could be costly and negatively affect our operating results. If we are unable to gain access to these systems, we would be unable to process orders, the wireless carriers could terminate their underlying agreements with us, and our business may suffer.

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Our failure to protect our customers’ confidential information and our network against security breaches could damage our reputation and substantially harm our business and results of operations.

A significant barrier to online commerce is concern regarding the secure transmission of confidential information over public networks. Currently, a majority of our wireless service activations and device sales are billed to our customers’ credit card accounts directly. We rely on encryption and authentication technology licensed from third parties to securely transmit confidential information, including credit card numbers. Advances in computing capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology used by us to protect customer transaction data. Although we are not aware of any security breaches, any compromise of our security could damage our reputation and expose us to a risk of loss or litigation and possible liability which would substantially harm our business and results of operations. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be imposed. In addition, anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches.

If the technology we use infringes upon the proprietary rights of others, we may be forced to seek expensive licenses, reengineer our services, engage in expensive and time-consuming litigation or stop selling our services.

If we were to discover that our services violated or potentially violated the proprietary rights of others, we might not be able to obtain licenses to continue offering those services without substantial reengineering. Any reengineering effort may not be successful, nor can we be certain that any licenses would be available on commercially reasonable terms. Although we have not been named a party in any litigation concerning the infringement of another party’s rights, a claim of infringement against us, with or without merit, could be time consuming and expensive to litigate or settle, and could divert management’s attention from executing our business plan. An adverse determination against us could prevent us from offering our services. From time to time, we receive notices from others claiming we have infringed upon their intellectual property rights. The number of these claims may increase. Responding to these claims may require us to seek expensive licenses, reengineer our services, engage in expensive and time-consuming litigation or stop selling our services.

If we are unable to attract and retain management and key personnel, we may not be able to implement our business plan.

We believe that the successful implementation of our business plan will depend on our management team, particularly the chairman of our board of directors and our chief executive officer, David A. Steinberg. Losing the services of one or more members of our management team could adversely affect our business and our expansion efforts, and possibly prevent us from further improving our information management, financial and operational systems and controls. As we continue to grow, we may need to hire and retain qualified sales, marketing, administrative, operating and technical personnel with knowledge of the wireless services industry and online marketing, and to train and manage new personnel. We may not be able to identify and hire qualified personnel due to competition for such personnel. The failure to hire and retain these personnel would have an adverse effect on our business.

Our failure to identify and integrate successfully any businesses or technologies that we acquire may increase our costs and reduce our revenue.

As part of our business strategy, we continue to seek to expand our service offerings through investments in, or acquisitions of, other businesses or technologies that we believe are complementary to our business. Although we regularly engage in discussions relating to potential acquisitions, we may not be able to identify, negotiate or finance any future acquisitions. If we do identify acquisitions, it may be necessary for us to raise additional funds to finance those acquisitions. Additional funds may not be available on terms that are favorable to us, or at all. If we issue our stock as consideration, our stockholders would experience dilution of their percentage ownership in our stock. Upon completion of any acquisitions, we may be unsuccessful in integrating and operating such acquired businesses profitably or otherwise implementing our strategy successfully. If we are unable to integrate any newly-acquired entities or technologies effectively, our business and results of operations could suffer. The time and expense associated with finding suitable and compatible businesses, technologies or services could also disrupt our ongoing business and divert our management’s attention. In addition, we may be required to reduce the carrying amount on our balance sheet of any acquired intangible assets; this reduction would adversely affect our financial results in the period in which it occurs.

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Vendors in India support our operating activities. Any difficulties experienced with these services could result in additional expense or loss of customers and revenue.

We have outsourcing agreements with vendors in India to provide additional activation and call center support. As a result, we rely on these vendors to provide customer service and interface with our customers. If these vendors are unable to perform satisfactory customer service, we could lose customers and would have to pursue alternative strategies to provide these services, which could result in delays, interruptions, additional expense and loss of customers. A variety of proposed federal and state legislation, if enacted, could restrict or discourage U.S. companies from outsourcing their services to companies outside the U.S. This legislation, if enacted, may impact our ability to use internationally outsourced services to support our call center activities.

Risks Related to Our Industry

If the online market for wireless services and devices does not gain widespread acceptance, our business would suffer.

Our success will depend in part on our ability to attract consumers who have historically purchased wireless services and devices through traditional retail stores. Furthermore, we may have to incur significantly higher and more sustained advertising and promotional expenditures or price our products more competitively than we currently anticipate in order to attract additional online consumers and sell wireless services and devices to more customers. Specific factors that could deter consumers from purchasing wireless services and devices from us include:

• concerns about buying wireless devices without a face-to-face interaction with sales personnel and the ability to physically handle and examine the devices;

• pricing that does not meet their expectations;

• concerns about the security of online transactions and the privacy of personal information;

• delivery time associated with Internet orders;

• delayed shipments or shipments of incorrect or damaged products;

• inconvenience associated with returning or exchanging purchased items;

• inability to maintain good standing with business rating services;

• failure to provide a positive customer experience for consumers; and

• possible disruptions, computer viruses or other damage to the Internet servers or to the consumers’ computers.

We may be exposed to risks associated with credit card fraud and identity theft that could cause us to incur unexpected expenditures and loss of revenue.

Under current credit card practices, a merchant is liable for fraudulent credit card transactions when, as is the case with the transactions we process, that merchant does not obtain a cardholder’s signature. Any failure to prevent fraudulent credit card transactions would adversely affect our business and our revenue. We do not currently carry insurance to protect us against this risk. We do not receive any revenue from fraudulently placed orders. We bear the risk of future losses as a result of orders placed with fraudulent credit card data or fraudulent identity information, even though the associated financial institution approved payment of the orders. In the event our credit card chargebacks from the processors exceed levels set by VISA, Mastercard or other credit card companies, we may lose our ability to process transactions which would have an adverse effect on our business.

Our net sales may be negatively affected if we are required to charge taxes on purchases.

We are not required to collect or are not subject to sales or other taxes related to the products we sell, except for certain corporate level taxes and sales taxes with respect to purchases by customers located in a limited number of states. However, one or more states or foreign countries may seek to impose sales or other tax collection obligations on us in the future. A successful assertion by one or more states or foreign countries that we should be collecting sales or other taxes on the sale of our products could result in substantial tax liabilities for past sales, discourage customers from purchasing products from us, decrease our ability to compete with traditional retailers or otherwise substantially harm our business and results of operations. Currently, decisions of the U.S. Supreme Court restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However, a number of states, as well as the U.S. Congress, have been considering various initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales. If any of these initiatives addressed the Supreme Court’s constitutional concerns and resulted in a reversal of its current position, we could be required to collect

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sales and use taxes in additional states. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on all of our online competitors and decrease our future sales.

Government regulation of the Internet and e-commerce is evolving and unfavorable changes could substantially harm our business and results of operations.

We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce. Existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet and e-commerce. Laws or regulations may be enacted that prohibit use of mass emails or similar marketing activities. We may not be able to support the marketing of our products and services by mass email or other online means if such activities are adverse to our business. Even if no relevant law or regulation is enacted, we may discontinue use or support of these activities if we become concerned that customers deem them intrusive or they otherwise adversely affect our goodwill. Unfavorable resolution of these issues may substantially harm our business and results of operations.

The wireless services industry may experience a decline in new subscriber growth rate.

The wireless services industry has faced an increasing number of challenges, including a slowdown in new subscriber growth. According to Ovum, total annual gross subscriber additions will decrease slightly, for example showing a decrease in gross additions from 72.8 million in 2006 to 71.9 million in 2010. If the wireless services industry experiences a decline in subscribers, our business may suffer.

We may be unable to effectively market our wireless services if wireless carriers do not deliver acceptable wireless networks and service plans, which would cause our revenue to decline.

The success of our business depends on the capacity, affordability and reliability of wireless voice and data access provided by wireless carriers. Growth in demand for wireless voice and data services may be limited if wireless carriers fail to maintain sufficient capacity to meet demand for these services, delay the expansion of their wireless networks and services, fail to offer and maintain reliable wireless network services or fail to market their services effectively. We also depend on wireless carriers to provide credit verification and approval to activate wireless service for customers. If wireless carriers are unable to verify credit information in a timely manner, we may lose marketers and customers.

Use of wireless devices may pose health risks or cause injuries, which could increase our exposure to litigation and result in increased operating expenses.

Radio frequency emissions from wireless devices may be linked to various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers. In addition, there have been reports that people have been injured by explosions of refurbished batteries in wireless devices. The actual or perceived risk of radio frequency emissions from wireless devices or the potential for battery explosions or other injuries could adversely affect our business through a decline in sales of wireless services and increased exposure to potential litigation.

Other Risks

The market price of our common stock has been and will likely continue to be subject to fluctuation.

We have a rapidly evolving and unpredictable business model. The trading price of our common stock fluctuates significantly. Trading prices of our common stock may fluctuate in response to a number of events and factors, such as:

• quarterly and seasonal variations in operating results;

• changes in financial estimates and ratings by securities analysts;

• announcements by us or our competitors of new product and service offerings, significant contracts, acquisitions or strategic relationships;

• publicity about our company, our products and services, our competitors or e-commerce in general;

• additions or departures of key personnel;

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• any future sales of our common stock or other securities; and

• stock market price and fluctuations in trading volume of publicly-traded companies in general and Internet-related companies and specialty retailers in particular.

The trading prices of Internet-related companies and e-commerce companies have been especially volatile. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may be the target of similar litigation in the future. Securities litigation could result in significant costs and divert management’s attention and resources, which could substantially harm our business and results of operations.

If securities or industry analysts do not continue to publish research or reports about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to regularly publish reports on us, interest in the purchase of our stock could decrease, which could cause our stock price or trading volume to decline.

Anti-takeover provisions and other restrictions in our certificate of incorporation, bylaws and applicable law might discourage, delay or prevent a change of control of our company or changes in our management that our stockholders might find desirable.

Our certificate of incorporation and bylaws provide for, among other things:

• a classified board of directors;

• restrictions on the ability of our stockholders to call special meetings of stockholders;

• restrictions on the ability of our stockholders to act by written consent;

• restrictions on the ability of our stockholders to remove any director or the entire board of directors without cause;

• restrictions on the ability of our stockholders to fill a vacancy on the board of directors; and

• advance notice requirements for stockholder proposals.

These provisions may have the effect of delaying or preventing an acquisition of us or changes in our management, even if stockholders of our company deem such changes to be advantageous. In addition, our board of directors is permitted to authorize the issuance of undesignated capital stock without any vote or further action by the stockholders. Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. These provisions and other provisions of the Delaware General Corporation Law applicable to us may restrain large stockholders, in particular those owning 15% or more of our outstanding voting stock, from consummating a merger or business combination with us without the approval of the board of directors, even if doing so would benefit our stockholders.

Our ability to utilize net operating loss carryforwards to offset future taxable income may be limited.

As of March 31, 2007, we had approximately $273.2 million of federal and state net operating loss carryforwards. Under the provisions of the Internal Revenue Code, substantial changes in our ownership may limit the amount of net operating loss carryforwards that can be utilized annually in the future to offset taxable income. If such a change in our ownership occurs, our ability to use our net operating loss carryforwards in any fiscal year may be significantly limited under these provisions.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND ISSUER PURCHASES OF EQUITY SECURITIES

The following table provides information about purchases we made during the quarter ended March 31, 2007, of equity securities that are registered by us pursuant to Section 12 of the Exchange Act (1):

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	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan
Period
January 1, 2007 to January 31, 2007	92,960	$	10.98	92,960	$	25,743,747
February 1, 2007 to February 28, 2007	—		—	—		25,743,747
March 1, 2007 to March 31, 2007	464,114		11.43	464,114		20,438,924
First Quarter 2007 Totals	557,074	$	11.35	844,574	$	20,438,924

(1) Share purchases, if any, are made pursuant to the stock repurchase plan announced in November 2006 authorizing the purchase of up to $30 million of our common stock. The plan expires in August 2007.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibit No.	Description
31.1	Rule 13a-14(a) Certification of Principal Executive Officer.
31.2	Rule 13a-14(a) Certification of Principal Financial Officer.
32.1	Section 1350 Certification of Chief Executive Officer.
32.2	Section 1350 Certification of Chief Accounting Officer.

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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 Chief Accounting Officer

Date: June 19, 2007

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