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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q  þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
 EXCHANGE ACT OF 1934 FOR THE THREE MONTHS ENDED MARCH 31, 2005
 OR o 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: 000-28467 TRINSIC, INC.  DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
    59-3501119
(I.R.S. Employer
Identification Number)
 601 SOUTH HARBOUR ISLAND BOULEVARD, SUITE 220
TAMPA, FLORIDA 33602
(813) 273-6261
(Address, including zip code, and
telephone number including area code, of
Registrants principal executive offices) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER
SHARE, PREFERRED STOCK PURCHASE RIGHTS 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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of
the Exchange Act) Yes o No þ The number of shares of the Registrants Common Stock outstanding as of May 13, 2005 was
approximately 55,184,402.




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TABLE OF CONTENTS PART IItem 1. Financial StatementsConsolidated Balance Sheets at March 31, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART IIItem 1. Legal Proceedings
    
    
    21Signatures
    
    
    26EX-31.1: SECTION 302 CERTIFICATION OF CEOEX-31.2: SECTION 302 CERTIFICATION OF CFOEX-32.1: SECTION 906 CERTIFICATION OF CEOEX-32.2: SECTION 906 CERTIFICATION OF CFO
 2




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TRINSIC, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
  March 31,
    
    
    December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    5,122
    
    
    $
    1,363Accounts receivable, net of allowance for doubtful
accounts of $12,661 and $10,967
    
    
    34,941
    
    
    
    27,242Prepaid expenses and other current assets
    
    
    1,299
    
    
    
    836Total current assets
    
    
    41,362
    
    
    
    29,441Property and equipment, net
    
    
    25,339
    
    
    
    27,829Intangible assets, net
    
    
    
    
    
    
    457Other assets
    
    
    5,354
    
    
    
    3,609Total assets
    
    $
    72,055
    
    
    $
    61,336Liabilities and Stockholders DeficitCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    54,888
    
    
    $
    55,605Deferred revenue
    
    
    7,096
    
    
    
    6,264Current portion of long-term debt and capital lease obligations
    
    
    14,338
    
    
    
    7,536Asset based loan
    
    
    13,880
    
    
    
    12,934Total current liabilities
    
    
    90,202
    
    
    
    82,339Long-term deferred revenue
    
    
    18
    
    
    
    46Long-term debt and capital lease obligations
    
    
    18
    
    
    
    33Total liabilities
    
    
    90,238
    
    
    
    82,418Commitments and contingencies (Notes 7 and 10)Stockholders deficit:Common stock, $0.01 par value; 150,000,000
shares authorized; 55,253,612 shares issued;
55,185,302 shares outstanding
    
    
    552
    
    
    
    553Notes receivable from stockholders
    
    
    (1,269
    )
    
    
    (3,685
    )Unearned stock compensation
    
    
    (376
    )
    
    
    (466
    )Additional paid-in capital
    
    
    392,440
    
    
    
    392,488Accumulated deficit
    
    
    (409,452
    )
    
    
    (409,894
    )Treasury stock, 68,310 shares at cost
    
    
    (78
    )
    
    
    (78
    )Total stockholders deficit
    
    
    (18,183
    )
    
    
    (21,082
    )Total liabilities and stockholders deficit
    
    $
    72,055
    
    
    $
    61,336
 The accompanying notes are an integral part of these consolidated financial statements. 3




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TRINSIC, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
  For the Three Months EndedMarch 31,2005
    
    
    2004Revenues
    
    $
    57,131
    
    
    $
    68,467Operating expenses:Network operations, exclusive of depreciation
and amortization shown below
    
    
    29,833
    
    
    
    34,034Sales and marketing
    
    
    5,220
    
    
    
    5,077General and administrative
    
    
    22,508
    
    
    
    34,001Depreciation and amortization
    
    
    4,179
    
    
    
    5,311Total operating expenses
    
    
    61,740
    
    
    
    78,423Operating loss
    
    
    (4,609
    )
    
    
    (9,956
    )Nonoperating income (expense):Interest and other income
    
    
    6,804
    
    
    
    842Interest and other expense
    
    
    (1,753
    )
    
    
    (1,270
    )Total nonoperating income (expense)
    
    
    5,051
    
    
    
    (428
    )Net income (loss)
    
    
    442
    
    
    
    (10,384
    )Less mandatorily redeemable convertible
preferred stock dividends and accretion
    
    
    
    
    
    
    (4,365
    )Less deemed dividend related to beneficial
conversion feature
    
    
    
    
    
    
    (46
    )Net income (loss) attributable to common stockholders
    
    $
    442
    
    
    $
    (14,795
    )Net income (loss) per share:Basic
    
    $
    0.01
    
    
    $
    (2.05
    )Diluted
    
    $
    0.01
    
    
    $
    (2.05
    )Weighted average shares outstanding:Basic
    
    
    55,185,302
    
    
    
    7,213,318Diluted
    
    
    58,133,478
    
    
    
    7,213,318
 The accompanying notes are an integral part of these consolidated financial statements. 4




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TRINSIC, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
  Three Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    442
    
    
    $
    (10,384
    )Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    4,179
    
    
    
    5,311Provision for bad debts
    
    
    4,377
    
    
    
    1,644Expense charged for granting of stock options
    
    
    41
    
    
    
    Change in operating assets and liabilities:(Increase) decrease in accounts receivable
    
    
    (9,660
    )
    
    
    4,355(Increase) decrease in prepaid expenses
    
    
    (463
    )
    
    
    3,267(Increase) decrease in other assets
    
    
    (1,745
    )
    
    
    71Increase (decrease) in accounts payable and accrued liabilities
    
    
    (717
    )
    
    
    1,458Increase (decrease) in deferred revenue
    
    
    804
    
    
    
    (2,537
    )Total adjustments
    
    
    (3,184
    )
    
    
    13,569Net cash provided by (used in) operating activities
    
    
    (2,742
    )
    
    
    3,185Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,232
    )
    
    
    (2,409
    )Principal repayments received on notes receivable
    
    
    
    
    
    
    40Net cash used in investing activities
    
    
    (1,232
    )
    
    
    (2,369
    )Cash flows from financing activities:Payments on long-term debt and capital lease obligations
    
    
    (376
    )
    
    
    (1,541
    )Principal repayments received on notes receivable issued for stock
    
    
    
    
    
    
    191Payment of preferred stock dividends
    
    
    
    
    
    
    (3
    )Proceeds from asset based loan
    
    
    946
    
    
    
    Proceeds from stand by credit facility
    
    
    7,163
    
    
    
    Proceeds from exercise of stock options and warrants
    
    
    
    
    
    
    386Net cash provided by (used in) financing activities
    
    
    7,733
    
    
    
    (967
    )Net increase (decrease) in cash and cash equivalents
    
    
    3,759
    
    
    
    (151
    )Cash and cash equivalents, beginning of period
    
    
    1,363
    
    
    
    12,013Cash and cash equivalents, end of period
    
    $
    5,122
    
    
    $
    11,862
 The accompanying notes are an integral part of these consolidated financial statements 5




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TRINSIC, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  1. NATURE OF BUSINESS DESCRIPTION OF BUSINESS Trinsic, Inc. and subsidiaries (we or us) is an emerging provider of advanced, integrated
telecommunications services targeted to residential and business subscribers. We provide local and
long distance telephone services in combination with enhanced communication features accessible
through the telephone, the Internet and certain personal digital assistants. We provide these
services in forty-nine states, but our customers are primarily
concentrated in six states. We recently began providing services
utilizing Internet protocol, often referred to as "IP telephony,"
"voice over Internet protocol" or "VolP." We also
provide long-distance telecommunications services to customers on a nationwide basis. We introduced our services on a wholesale basis during the first quarter of 2002. This provides
other companies with the opportunity to provide local, long-distance and enhanced telephone service
to their own residential and business end user customers on a private label basis by utilizing our
telephone exchange services, enhanced services platform, infrastructure and back-office operations. LIQUIDITY AND CAPITAL RESOURCES The accompanying consolidated financial statements were prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of
business. The realization of assets and the satisfaction of liabilities in the normal course of
business is dependent on, among other things, the companys ability to operate profitably, to
generate cash flow from operations and to obtain funding adequate to fund its business. We have a limited operating history and our operations are subject to material risks and
uncertainties, particularly related to the evolution of the regulatory environment, which impacts
our access to and cost of the network elements that we utilize to provide services to our
customers. We have incurred significant losses since our inception as a result of developing our business,
performing ongoing research and development, building and maintaining our network infrastructure
and technology, the sale and promotion of our services, and ongoing administrative expenditures.
As of March 31, 2005, we had an accumulated deficit of approximately $409.5 million and $5.1
million in cash and cash equivalents. We have funded our expenditures primarily through operating
revenues, private securities offerings, various working capital facilities, our standby credit
facility and an initial public offering. For the three months ended March 31, 2005, net cash used in operating activities was $2.7 million
as compared to net cash provided by operating activities of $3.2 million in the prior year period.
The decrease is largely due to the increase in our accounts receivable balance. In April 2004, the company secured an asset based loan facility with Textron Financial Corporation
(Textron), which provided up to $25 million to fund operations. We utilized $13.9 million as of
March 31, 2005, which was approximately the maximum loan availability at that time. Effective
January 27, 2005, we entered into a Modification and Termination Agreement with Textron. Among
other things the Modification and Termination Agreement provided that Textron would forbear from
exercising default rights and remedies until May 31, 2005, would waive the early termination fee
and modify the annual facility fee. We agreed to pay a modification fee of $150,000. On April 4, 2005, we entered into an accounts receivable financing agreement with Thermo Credit,
LLC (Thermo). The agreement provides for the sale of up to $22 million of our accounts
receivable on a continuous basis to Thermo, subject to selection criteria as defined in the
contract. We plan to use this facility to fully replace our credit facility with Textron.
Expected proceeds from this facility will approximate the year end Textron loan balance. On May 6,
2005, we used proceeds from this accounts receivable financing facility to pay off our loan balance
with Textron. By letter dated May 6, 2005, the Nasdaq Stock Market has notified us that the market value of our
common stock remains below the minimum of $35 million required by Marketplace Rule
4310(c)(2)(B)(ii) and accordingly our shares will be delisted from the Nasdaq SmallCap Market at
the opening of business on May 17, 2005. We have appealed the decision. The appeal will stay the
delisting pending a hearing before a hearing panel. At the hearing we will be required to provide
a definitive plan for regaining compliance. We have no definitive plan at this time. 6




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Our net cash used in investing activities decreased by $1.2 million to $1.2 million for the three
months ended March 31, 2005, compared to $2.4 million the prior year period. The reduction was
attributable to the purchasing of less property and equipment during the first quarter of 2005 as
compared to the first quarter of 2004. For the three months ended March 31, 2005, net cash provided by financing activities was $7.7
million as compared to net cash used in financing activities of $1.0 million for the prior year
period. This change is primarily the result of funds drawn on our standby credit facility. As
discussed in Note 4, as of May 9, 2005, the standby credit facility is fully drawn. Management closely monitors liquidity and updates its forecast regularly. While the current
regulatory climate makes the cash forecast very difficult to predict, the most recent forecast for
the remainder of 2005 reflects positive cash flow from operations before interest charges. There
can be no assurance that the forecasted cash flow will occur. The companys inability to operate profitably and to consistently generate cash flows from
operations, its reliance therefore on external funding either from loans or equity raise
substantial doubt about the companys ability to continue as a going concern. 2. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared by us in accordance
with accounting principles generally accepted in the United States of America for interim financial
information and are in the form prescribed by the Securities and Exchange Commissions (SEC)
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes for complete financial statements as required by accounting
principles generally accepted in the United States of America. The interim unaudited financial
statements should be read in conjunction with our audited financial statements as of and for the
year ended December 31, 2004, included in our Annual Report on Form 10-K filed with the SEC on
April 15, 2005. In the opinion of management, all adjustments considered necessary for a fair
statement have been included. Operating results for the three months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2005. RECLASSIFICATION Certain amounts in the consolidated statements of operations for the three months ended March 31,
2004 have been reclassified to conform to the presentation for the three months ended March 31,
2005. 3. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (a) Significant Accounting Policies Our significant accounting policies are included in the Notes to Consolidated Financial Statements
in our Annual Report on Form 10-K for the year ended December 31, 2004. Effective January 1, 2005, we have deferred the fee charged to us by the Independent Local
Exchange Carriers (ILECs) in the activation of our business VoIP customers. This fee and any
acquisition revenue received from the customers are being deferred and amortized over the life of
each customers signed contract At March 31, 2005, unamortized deferred set up fees amounted to
$0.5 million. (b) Recent Accounting Pronouncements In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation Number 47,
Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No.
143 (FIN47). FIN 47 clarifies the term conditional asset retirement obligation as used in
Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement
Obligations, and also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement. FIN 47 is effective no later than the end of
fiscal years ending after December 15, 2005. We do not anticipate that the implementation of FIN
47 will have a material impact on our financial position, results of operations or cash flows. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payments (SFAS No.
123R). SFAS No. 123R requires the recognition of the cost of employee services received in
exchange for an award of equity instruments in the financial statements and measurement based on
the grant-date fair value of the award. It requires the cost to be recognized over the period
during which an employee is required to provide service in exchange for the award. Additionally,
compensation expense will be recognized over the remaining employee service period for the
outstanding portion of any awards for which compensation expense had not been previously recognized
or disclosed under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS
No. 123R replaces SFAS No. 123 and supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25), and its related interpretations. 7




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SFAS No. 123R was originally required to be adopted beginning no later than the third quarter of
2005. However, in April 2005, the Securities and Exchange Commission announced the adoption of a
new rule that amends the compliance dates for SFAS No. 123R. Accordingly, we are required to adopt
SFAS No. 123R no later than January 1, 2006. We are currently assessing the timing and impact of
adopting SFAS No. 123R. 4. STANDBY CREDIT FACILITY AND ACCOUNTS RECEIVABLE AGREEMENT During the first quarter of 2005, we received advances of $3.5 million, $2.5 million and $1.2
million on February 14, 2005, March 4, 2005 and March 24, 2005, respectively, from our standby
credit facility with The 1818 Fund III, LP. We also received an additional advance of $1.3 million
on May 9, 2005. As a result of the advance received on May 9, 2005, the standby credit facility is
fully drawn. On April 4, 2005, we entered into an accounts receivable financing agreement with Thermo Credit,
LLC (Thermo) to replace our Textron credit facility. The agreement provides for the sale of up
to $22 million of our accounts receivable on a continuous basis to Thermo, subject to selection
criteria as defined in the contract. The discount rate is 2.5%. Purchase of the receivables is at
the option of Thermo. On May 6, 2005, we used proceeds from this accounts receivable financing
facility to pay off our loan balance with Textron. 5. RESTRUCTURING CHARGES The following table shows the restructuring charges and related accruals recognized under the
restructuring plans described in the Notes to Consolidated Financial Statements in our Annual
Report on Form 10-K for the year ended December 31, 2004 and the effect on our consolidated
financial position: Employee
    
    
    Lease
    
    
    LeaseTermination
    
    
    Settlement
    
    
    Abandonment
    
    
    AssetBenefits
    
    
    Costs
    
    
    Costs
    
    
    Retirement
    
    
    TotalBalance at January 1, 2002
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Plan Charges
    
    
    913
    
    
    
    325
    
    
    
    623
    
    
    
    
    
    
    
    1,861Cash paid
    
    
    (913
    )
    
    
    (325
    )
    
    
    (72
    )
    
    
    
    
    
    
    (1,310
    )Balance at December 31, 2002
    
    
    
    
    
    
    
    
    
    
    551
    
    
    
    
    
    
    
    551Cash paid
    
    
    
    
    
    
    
    
    
    
    (200
    )
    
    
    
    
    
    
    (200
    )Balance at December 31, 2003
    
    
    
    
    
    
    
    
    
    
    351
    
    
    
    
    
    
    
    351Plan Charges
    
    
    4,527
    
    
    
    
    
    
    
    234
    
    
    
    40
    
    
    
    4,801Cash paid
    
    
    (3,646
    )
    
    
    
    
    
    
    (262
    )
    
    
    
    
    
    
    (3,908
    )Asset disposal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40
    )
    
    
    (40
    )Converted to note payable
    
    
    
    
    
    
    
    
    
    
    (40
    )
    
    
    
    
    
    
    (40
    )Lease termination settlement reversal
    
    
    
    
    
    
    
    
    
    
    (210
    )
    
    
    
    
    
    
    (210
    )Balance at December 31, 2004
    
    
    881
    
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    954Cash paid
    
    
    (455
    )
    
    
    
    
    
    
    (73
    )
    
    
    
    
    
    
    (528
    )Balance at March 31, 2005
    
    $
    426
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    426
 6. STOCK BASED COMPENSATION For employee stock options, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation
requiring entities to recognize as an expense, over the vesting period, the fair value of the
options or utilize the accounting for employee stock options used under APB 25. We apply the
provisions of APB 25 and consequently recognize compensation expense over the vesting period for
grants made to employees and directors only if, on the measurement date, the market price of the
underlying stock exceeds the exercise price. We provide the pro forma net income and earnings per
share disclosures as required under SFAS No. 123 for grants made as if the fair value method
defined in SFAS No. 123 had been applied. We recognize expense over the vesting period of the
grants made to non-employees utilizing the Black-Scholes stock valuation model to calculate the
value of the option on the measurement date. The following table illustrates, in accordance with the provisions of SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, an Amendment of SFAS 123, Accounting for
Stock-Based Compensation, the effect on net income (loss) and earnings per share if we had applied
the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation. 8




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For the three months endedMarch 31,2005
    
    
    2004Net income (loss) attributable to common stockholders, as reported
    
    $
    442
    
    
    $
    (14,795
    )Add:Stock based compensation included in net income (loss)
    
    
    41
    
    
    
    Deduct: Total stock based employee compensation determined
under the fair value based method for all awards
    
    
    (642
    )
    
    
    (756
    )Net loss attributable to common stockholders, pro forma
    
    $
    (159
    )
    
    $
    (15,551
    )Basic Net Income (Loss) per ShareAs reported
    
    $
    0.01
    
    
    $
    (2.05
    )Pro forma
    
    $
    (0.00
    )
    
    $
    (2.16
    )Diluted Net Income (Loss) per ShareAs reported
    
    $
    0.01
    
    
    $
    (2.05
    )Pro forma
    
    $
    (0.00
    )
    
    $
    (2.16
    )
 We calculated the fair value of each grant on the date of grant using the Black-Scholes option
pricing model. In addition to there being no payments of dividends on our common stock, the
following assumptions were used for each respective period: For the three months endedMarch 31,2005
    
    
    2004Discount Rate
    
    
    N/A
    
    
    
    2.8
    %Volatility
    
    
    N/A
    
    
    
    97.2
    %Average Option Expected Life
    
    5 years
    
    5 years
 There were no stock option grants in the first quarter of 2005, so the discount rate and volatility
are shown as Not Applicable. Incremental shares of common stock equivalents are not included in
the calculation of net loss per share for the quarter ended March 31, 2004 as the inclusion of such
equivalents would be anti-dilutive. 7. COMMITMENTS AND CONTINGENCIES We have disputed billings and access charges from certain inter-exchange carriers (IXCs) and
incumbent local exchange carriers (ILECs). We contend that the invoicing and billings of these
access charges are not in accordance with the interconnection, service level, or tariff agreements
between us and certain IXCs and ILECs. We have not paid these disputed amounts and management
believes that we will prevail in these disputes. At March 31, 2005, the total disputed amounts were
approximately $16.9 million. We have accrued for the access charges that we believe, in our
judgment, are valid or that may be deemed valid. We currently have agreements with two long-distance carriers to provide transmission and
termination services for all of our long distance traffic. These agreements generally provide for
the resale of long distance services on a per-minute basis and contain minimum volume commitments.
As a result of not fulfilling all of our volume commitments as outlined in one of these contracts
we agreed to pay an increased per minute charge for minutes until the achievement of certain
minimum minute requirements. Once we meet the new agreed upon minimum minutes we will revert to
the terms of our original agreement. All other terms of the original agreement continue in full
force. On April 15, 2005, Trinsic entered into a Wholesale Advantage Services Agreement with Verizon
Services Company on behalf of Verizons Incumbent Local Exchange Carriers (Verizon ILECs). The
Wholesale Advantage Services Agreement will act as a replacement for Trinsics existing
Interconnection Agreements for the provision of UNE-P services in Verizon service areas. As long
as Trinsic meets certain volume commitments, Verizon will continue to provide a UNE-P like
service at gradually increasing rates for a five year period. In connection with certain of our wholesale services agreements, a portion of customers are
provisioned using our company code. Therefore, we are the customer of record for the Regional Bell
Operating Companies wholesale billing. It is very likely that the state commissions would require
us to continue providing services to our wholesale customers for at least a 90-day period,
regardless of whether our wholesale relationships continue. We
have agreed to certain service level agreements (SLAs) for providing service under our
wholesale agreements. If we were to not fulfill the SLAs after the phase-in period there are
certain remedies including but not limited to financial compensation. We have not had to pay or
accrue any financial compensation as a result of any SLAs since our inception. 9




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8. RELATED PARTY TRANSACTIONS We paid interest on our related party debt in the amount of $0.2 million for the quarter ended
March 31, 2005. No related party interest was paid during the quarter ended March 31, 2004. On September 29, 2004, we signed an agreement with SipStorm, Inc., a company owned by two of our
shareholders and former officers of our company; we transferred selected computer hardware,
software and intellectual property rights to SipStorm. Relative to the purchase, SipStorm assumed
responsibility for certain accounts payable, future maintenance payments and provided a promissory
note in the amount of $2.8 million. The promissory note is collateralized by shares of our common
stock owned by the directors of SipStorm. We have reserved $2.5 million of the note as of March
31, 2005 to reflect its estimated realizable value. 9. COMPUTATION OF NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed by dividing net income (loss) attributable to common
stockholders by the weighted average number of common shares outstanding during the period.
Incremental shares of common stock equivalents are not included in the calculation of diluted net
loss per share for the quarter ended March 31, 2004 as the inclusion of such equivalents would be
anti-dilutive. Net income (loss) per share is calculated as follows: Three Months Ended March 31,2005
    
    
    2004Basic and diluted net income (loss) per share:Net income (loss)
    
    $
    442
    
    
    $
    (10,384
    )Less mandatorily redeemable convertible preferred
stock dividends and accretion
    
    
    
    
    
    
    (4,365
    )Less deemed dividend related to beneficial conversion feature
    
    
    
    
    
    
    (46
    )Net income (loss) attributable to common stockholders
    
    $
    442
    
    
    $
    (14,795
    )Net income (loss) per share:Basic
    
    $
    0.01
    
    
    $
    (2.05
    )Diluted
    
    $
    0.01
    
    
    $
    (2.05
    )Weighted average shares outstanding:Basic
    
    
    55,185,302
    
    
    
    7,213,318Diluted
    
    
    58,133,478
    
    
    
    7,213,318
 For the three months ended March 31, 2004, basic and diluted net loss per share are the same. The
following table includes potentially dilutive items that were not included in the computation of
diluted net loss per share for the three months ended March 31, 2004 because to do so would be
anti-dilutive. The items shown for the three months ended March 31, 2005 were included in the
computation of diluted net income per share: Three Months Ended March 31,2005
    
    
    2004Unexercised stock options
    
    
    1,869,395
    
    
    
    2,711,459Unexercised warrants
    
    
    1,078,781
    
    
    
    2,137,477Mandatorily redeemable preferred stock
convertible into common shares
    
    
    
    
    
    
    6,457,464Total potentially dilutive shares of common
stock equivalents
    
    
    2,948,176
    
    
    
    11,306,400
 10. LEGAL AND REGULATORY PROCEEDINGS During June and July 2001, three separate class action lawsuits were filed against us, certain of
our current and former directors and officers (the D&Os) and firms engaged in the underwriting
(the Underwriters) of our initial public offering of stock (the IPO). The lawsuits, along with
approximately 310 other similar lawsuits filed against other issuers arising out of initial public
offering allocations, have been assigned to a Judge in the United States District Court for the
Southern District of New York for pretrial coordination. The lawsuits against us have been
consolidated into a single action. A consolidated amended complaint was filed on 10




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April 20, 2002. A
Second Corrected Amended Complaint (the Amended Complaint), which is the operative complaint, was
filed on July 12, 2002. The Amended Complaint is based on the allegations that our registration statement on Form S-1,
filed with the Securities and Exchange Commission (SEC) in connection with the IPO, contained
untrue statements of material fact and omitted to state facts necessary to make the statements made
not misleading by failing to disclose that the underwriters allegedly had received additional,
excessive and undisclosed commissions from, and allegedly had entered into unlawful tie-in and
other arrangements with, certain customers to whom they allocated shares in the IPO. The plaintiffs
in the Amended Complaint assert claims against us and the D&Os pursuant to Section 11 of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated by the SEC there under. The plaintiffs in the Amended Complaint assert claims against
the D&Os pursuant to Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the SEC there under. The
plaintiffs seek an undisclosed amount of damages, as well as pre-judgment and post-judgment
interest, costs and expenses, including attorneys fees, experts fees and other costs and
disbursements. Initial discovery has begun. We believe we are entitled to indemnification from our
Underwriters. A settlement has been reached by the respective lawyers for plaintiffs, the issuers and insurers of
the issuers. The principal terms of the proposed settlement are (i) a release of all claims against
the issuers and their officers and directors, (ii) the assignment by the issuers to the plaintiffs
of certain claims the issuers may have against the Underwriters and (iii) an undertaking by the
insurers to ensure the plaintiffs receive not less than $1 billion in connection with claims
against the Underwriters. Hence, under the terms of the proposed settlement our financial
obligations will likely be covered by insurance. The court has given preliminary approval of the
settlement subject to certain modifications. A revised settlement agreement has been submitted to
the court. To be binding, the settlement must be executed by the parties and thereafter submitted
to and approved by the court. The settlement will not be binding upon any plaintiffs electing to
opt-out of the settlement. On October 9, 2003, Trinsic Communications, Inc., our wholly-owned subsidiary corporation, formerly
known as Z-Tel Communications, Inc., filed a lawsuit against SBC Communications, Inc. and several
of its subsidiaries (collectively, SBC) in federal court in Texas, where both SBC and Trinsic do
business. The lawsuit alleges SBCs violation of the federal antitrust laws, the Racketeering
Influenced Corrupt Organizations Act (RICO), the Lanham Act, and other federal and state laws. The
complaint sought damages and an injunction against SBC. On March 30, 2005, the lawsuit against SBC
was settled and dismissed with prejudice. In conjunction with the settlement, our subsidiary
Trinsic Communications, Inc. (formerly Z-Tel Communications, Inc.) received proceeds of $14 million
and the parties mutually resolved certain outstanding billing disputes. From our proceeds, we will
be responsible for expenses and attorneys fees approximating $8 million. The net $6 million is
included in interest and other income in this report. Susan Schad, on behalf of herself and all others similarly situated, filed a class action
lawsuit against Trinsic Communications, Inc. (formerly known as Z-Tel Communications, Inc.), our
wholly-owned subsidiary corporation, on May 13, 2004. The lawsuit alleges that our subsidiary has
engaged in a pattern and practice of deceiving consumers into paying amounts in excess of their
monthly rates by deceptively labeling certain line-item charges as government-mandated taxes or
fees when in fact they were not. The complaint seeks to certify a class of plaintiffs consisting of
all persons or entities who contracted with Trinsic for telecommunications services and were billed
for particular taxes or regulatory fees. The complaint asserts a claim under the Illinois Consumer
Fraud and Deceptive Businesses Practices Act and seeks unspecified damages, attorneys fees and
court costs. On June 22, 2004, we filed a notice of removal in the state circuit court action,
removing the case to the federal district court for the Northern District of Illinois, Eastern
Division, C.A. No. 4 C 4187. On July 26, 2004, Plaintiff filed a motion to remand the case to the
state circuit court. On January 12, 2005, the federal court granted the motion and remanded the
case to the state court. Although we believe the plaintiffs allegations are without merit and
intend to defend the lawsuit vigorously, we cannot predict the outcome of this litigation with any
certainty. On November 19, 2004, the landlord of our principal Tampa, Florida facility sued us a seeking a
declaration of its rights and obligations under the lease and damages for breach of contract. We
assert that the landlord has failed to provide certain services in accordance with the lease,
including maintenance of air conditioning and emergency electrical generating systems crucial to
our operations. We have taken steps necessary to provide this maintenance and have offset the
costs of these measures against the rent, which we believe we are entitled to do under the lease.
Thus far we have withheld approximately $180,000. We also believe we are entitled to reimbursement
from the landlord for approximately $23,000 in costs associated with improvements to the leased
space. On November 19, 2004, a provider of parking spaces for our Tampa facilities sued us for parking
fees in excess of $334,300. Pursuant to our lease we are entitled to a number of free spaces and
we are obligated to pay for additional usage of parking spaces. We believe the provider has
substantially overstated our use of the spaces. We expect to resolve this dispute. 11. SEGMENT REPORTING We have two reportable operating segments: Retail Services and Wholesale Services. The retail services segment includes our residential and business services that offer bundled local
and long-distance telephone services in combination with enhanced communication features
accessible, through the telephone, the Internet and certain personal digital 11




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assistants. We provide these services in forty-nine states, but our customers are concentrated primarily in metropolitan
areas within six states. This segment also includes our Touch 1 residential long-distance offering
that is available on a nation wide basis. The wholesale services segment allows companies to offer telephone exchange and enhanced services
on a private label basis to residential and small business customers. Sprint is our primary
customer within this segment of our business. Management evaluates the performance of each business unit based on segment results, after making
adjustments for unusual items. Special items are transactions or events that are included in our
reported consolidated results but are excluded from segment results due to their nonrecurring or
non-operational nature. It is also important to understand when viewing our segment results that we
only record direct expenses in our wholesale services and therefore, all employee benefits,
occupancy, insurance, and other indirect or overhead related expenses are reflected in the retail
services segment. The following summarizes the financial information concerning our reportable segments for the three
months ended March 31, 2005 and 2004: March 31,2005
    
    
    2004Retail ServicesRevenues
    
    $
    44,025
    
    
    $
    45,304Depreciation and amortization
    
    $
    4,143
    
    
    $
    4,673Segment results
    
    $
    (4,255
    )
    
    $
    (9,271
    )Capital expenditures
    
    $
    1,232
    
    
    $
    2,380Identifiable assets
    
    $
    64,388
    
    
    $
    66,406
 March 31,2005
    
    
    2004Wholesale ServicesRevenues
    
    $
    13,107
    
    
    $
    23,163Depreciation and amortization
    
    $
    36
    
    
    $
    638Segment results
    
    $
    3,826
    
    
    $
    4,626Capital expenditures
    
    $
    
    
    
    $
    29Identifiable Assets
    
    $
    7,667
    
    
    $
    10,617
 The following table reconciles our segment information to the consolidated financial information
for the three months ended March 31, 2005 and 2004: March 31,2005
    
    
    2004Segment results:Total segment results
    
    $
    (430
    )
    
    $
    (4,645
    )Depreciation and amortization
    
    
    (4,179
    )
    
    
    (5,311
    )Total consolidated operating loss
    
    $
    (4,609
    )
    
    $
    (9,956
    )
 12. SUBSEQUENT EVENTS On April 6, 2005 we initiated a reduction in force which terminated the employment of approximately
107 of our employees. We expect to incur a one-time charge during April of approximately $450,000
consisting primarily of post termination wages and salaries we intend to pay to those employees and
the associated payroll taxes. Substantially all of those post termination wages will be paid within
30 days following the reduction in force. On April 15, 2005, we executed a commercial services agreement with Verizon, to be effective May 1,
2005, whereby we can and intend to sell UNE-P like services within the Verizon service area. This
agreement provides for our existing and future UNE-P subscriber lines. This agreement requires
that we maintain certain minimum volume levels over the life of the agreement. The agreement is
for a term of five years. Trident Marketing International, Inc. performed telemarketing services for us. On April 28, 2005,
they sued us claiming we owe them compensation of approximately $836,458, plus additional damages
of $865,448 relating to early termination of their services. We intend to assert certain
counterclaims against Trident. Included in accruals is $836,458 as of March 31, 2005, which we believe is
our minimum liability. 12




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. You should read the following discussion together with the Selected Consolidated Financial Data,
financial statements and related notes included in this document. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those projected in the forward-looking statements as a result of
certain factors, including, but not limited to, those discussed in Item 1. Business, as well as
Cautionary Statements Regarding Forward-Looking Statements, and Risks Related to our Financial
Condition and our Business included in our Form 10-K filed with the Securities and Exchange
Commission on April 15, 2005, and other factors relating to our business and us that are not
historical facts. Factors that may affect our results of operations include, but are not limited
to, our limited operating history and cumulative losses, uncertainty of customer demand, rapid
expansion, potential software failures and errors, potential network and interconnection failure,
dependence on local exchange carriers, dependence on third party vendors, success and profitability
of our wholesale services, dependence on key personnel, uncertainty of government regulation, legal
and regulatory uncertainties, access to capital markets, and competition. We disclaim any obligation to update information
contained in any forward-looking statement. OVERVIEW We are an emerging provider of advanced, integrated telecommunications services targeted to
residential and business customers. We offer local and long distance telephone services in
combination with enhanced communication features accessible through the telephone or the Internet.
These features include Personal Voice Assistant (PVA), Find-Me, Notify-Me, caller
identification, call waiting and speed dialing. PVA allows users to store contacts in a virtual
address book and then access and utilize that information by voice from any telephone. PVA users
can also send voice e-mails. We have successfully deployed Cisco soft switches in the Tampa and New
York City markets and intend on targeting multi-line business customers with our converged IP
telephony services. We also intend on using these soft switches to serve consumers as we continue
to deploy broadband loop concentrators into central offices. In addition to providing our services
on a retail basis, we are providing these services on a wholesale basis. Our wholesale services
provide other companies the ability to utilize our telephone exchange services, enhanced services
platform, infrastructure and back-office operations to provide services to retail and business
customers on a private label basis. For management purposes, we are organized into two reportable
operating segments: retail services and wholesale services. The nature of our business is rapidly
evolving, and we have a limited operating history. In evaluating our financial condition and operating performance the most important matters on which
we focus are lines under management, revenue per unit, cost per unit, bad debt expense, expenses as
a percentage of revenues and results by segment. These measures and other analysis are discussed
in detail throughout the following paragraphs and provide insight into how we analyze and review
our business. RESULTS OF OPERATIONS The following discussion of results of operations is by business segment. Management evaluates the
performance of each business unit based on segment results, after making adjustments for unusual
items. Unusual items are transactions or events that are included in our reported consolidated
results, but are excluded from segment results due to their non-recurring or non-operational
nature. See our segment footnote to our consolidated financial statements for a reconciliation of
segmented results to the consolidated financial information. Revenues For the three monthsended March 31,
    
    
    Percentage of Revenues2005
    
    
    2004
    
    
    2005
    
    
    2004Total revenues by segment (in
millions)Retail Segment
    
    $
    44.0
    
    
    $
    45.3
    
    
    
    77.1
    %
    
    
    66.1
    %Wholesale segment
    
    
    13.1
    
    
    
    23.2
    
    
    
    22.9
    %
    
    
    33.9
    %Total Revenues
    
    $
    57.1
    
    
    $
    68.5
    
    
    
    100.0
    %
    
    
    100.0
    %
 Two significant drivers impact our revenues: number of lines in service and average (monthly)
revenue per unit (ARPU). The more significant driver impacting our changes in revenue is the
number of lines in service. The table below provides a detail break-down of our lines: 13




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Average lines in service
    
    
    Ending lines in servicefor the three months ended
    
    
    as ofMarch 31,
    
    
    March 31,Type of Service
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Bundled residential services
    
    
    190,997
    
    
    
    197,338
    
    
    
    182,548
    
    
    
    189,918Bundled business services
    
    
    47,453
    
    
    
    27,093
    
    
    
    47,378
    
    
    
    32,5931+ long distance services
    
    
    37,916
    
    
    
    68,221
    
    
    
    39,539
    
    
    
    62,022Wholesale services
    
    
    278,467
    
    
    
    318,277
    
    
    
    254,086
    
    
    
    339,729VoIP
    
    
    2,483
    
    
    
    
    
    
    
    3,959
    
    
    
    Total lines under management
    
    
    557,316
    
    
    
    610,929
    
    
    
    527,510
    
    
    
    624,262
 ARPU provides us with a business measure as to the average monthly revenue generation attributable
to each line in service, by business segment. ARPU is calculated by taking total revenues over a
period divided by the number of months in the period to calculate the average revenue per month and
this total is divided by the average lines in service during the period. We use this measure when
analyzing our retail services businesses, but not when assessing our wholesale services business
for the reasons summarized earlier within this section. The following table provides a detail of
our ARPU: For the three monthsended March 31,2005
    
    
    2004Average revenue per unit in serviceBundled residential services
    
    $
    68.57
    
    
    $
    67.49Bundled business services
    
    $
    37.03
    
    
    $
    40.111+ long distance services
    
    $
    11.73
    
    
    $
    10.22
 During the remainder of 2005 we expect to generate moderate consumer line growth, focused in the
Northeast. We still anticipate that our consumer base will account for the largest portion of our
overall revenue stream and our operating cash flow over the full year. We will also continue to
focus on building our IP Telephony business customer base largely focused on the New York Metro and
Tampa metropolitan market areas as liquidity allows. Our VoIP offerings may provide additional
revenues, but will not contribute meaningfully to positive operations or be of a significant nature
until at least 2006. Additionally we will continue to deploy facilities aimed at serving the
consumer market segment as resources permit and look to migrate customers to our own network at a
moderate pace. Retail Segment For the three monthsended March 31,
    
    
    Percentage of Revenues2005
    
    
    2004
    
    
    2005
    
    
    2004Retail segment revenues by type
(in millions)Bundled residential services
    
    $
    37.4
    
    
    $
    40.0
    
    
    
    84.9
    %
    
    
    88.2
    %Bundled business services
    
    
    5.2
    
    
    
    3.3
    
    
    
    11.8
    %
    
    
    7.2
    %1+ long-distance services
    
    
    1.4
    
    
    
    2.1
    
    
    
    3.3
    %
    
    
    4.6
    %Total Revenues
    
    $
    44.0
    
    
    $
    45.3
    
    
    
    100.0
    %
    
    
    100.0
    %
  
    During 2005, the decrease in retail revenue of $1.3 million as compared to 2004, was
primarily the result of the decline in residential UNE-P lines and 1+ long distance lines
as well as a decline in access fee revenue (charges that we bill to other carriers for
carrying their traffic to our customers). These decreases were partially mitigated by
increases in bundled business revenue which was directly attributable to line growth. 14




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Wholesale Segment For the three monthsended March 31,
    
    
    Percentage of Revenues2005
    
    
    2004
    
    
    2005
    
    
    2004Wholesale segment revenues by
type (in millions)Sprint
    
    $
    13.1
    
    
    $
    23.0
    
    
    
    100.0
    %
    
    
    99.0
    %MCI
    
    
    
    
    
    
    0.1
    
    
    
    0.0
    %
    
    
    0.6
    %Other
    
    
    
    
    
    
    0.1
    
    
    
    0.0
    %
    
    
    0.4
    %Total Revenues
    
    $
    13.1
    
    
    $
    23.2
    
    
    
    100.0
    %
    
    
    100.0
    %
  
    Sprint lines have decreased significantly from March 31, 2004 to 2005, resulting in a
decline in wholesale revenue. We expect that our wholesale lines in service will continue to decline steadily during 2005. While
revenues are expected to decline as well over this period, the amount of decline may not directly
correspond to the reduction in line count. The degree of revenue attrition will be directly tied
to the number of departing Sprint end users whose ILEC local service arrangements were billed
through Trinsic versus the number of departing Sprint end users whose ILEC local service
arrangements were billed directly to Sprint by the ILEC. We employ the gross accounting method for recognizing revenue within the wholesale service business
segment; therefore, where ILEC billings are passed through Trinsic, we record revenue for certain
services that we provide to Sprint at our cost and record the off-setting expense in one of the
respective operating cost lines within our income statement when we are the primary obligor. These
revenues (and cost pass-through items) result in no contribution to operating profit. The largest
revenue component that is treated in this manner is the charge from the ILECs, which are recorded
in network operations and general and administrative expense. Also our stated accounts payable
will decrease as we will no longer be incurring this liability. Therefore, to the extent that
departing Sprint end users are concentrated among the base billed for ILEC services through
Trinsic, the amount of revenue loss per departing end users will be greater than for departing
Sprint end users who are direct billed by the ILEC to Sprint. The direct impact of the loss of
Sprint end users upon profitability to Trinsic has no relationship to whether the ILEC bills are
passed through Trinsic or direct billed to Sprint. We intend to migrate the portion of the lines that we serve on a wholesale basis off of our own
ILEC service arrangement with Verizon within a reasonable period of time. For the portion that we
serve we will experience a decline in reported revenue, although this one event should have no
material impact on our operating earnings. Network Operations Our network operations expense primarily consists of fixed and variable transmission expenses for
the leasing of the UNE-P components from the ILECs, domestic and international charges from service
level agreements with IXCs, and the USF and certain other regulatory charges to be consistent with
industry practice. The following table shows the break-down by segment of network operations
expense: For the three months
    
    
    Percentage ofended March 31,
    
    
    Segment Revenues2005
    
    
    2004
    
    
    2005
    
    
    2004Network operations expense, exclusive of
depreciation and amortization expense, by
segment (in millions)Retail Segment
    
    $
    22.9
    
    
    $
    22.6
    
    
    
    52.1
    %
    
    
    49.9
    %Wholesale Segment
    
    
    6.9
    
    
    
    11.4
    
    
    
    52.7
    %
    
    
    49.2
    %Total Network Operations Expense
    
    $
    29.8
    
    
    $
    34.0
    
    
    
    52.2
    %
    
    
    49.7
    %
 15




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The following table shows the break-down by type of network operations expense: For the three months
    
    
    Percentage ofended March 31,
    
    
    Network Operations2005
    
    
    2004
    
    
    2005
    
    
    2004Network operations expense, exclusive of
depreciation and amortization, by type (in
millions)Bundled residential services
    
    $
    19.1
    
    
    $
    20.5
    
    
    
    64.0
    %
    
    
    60.2
    %Bundled business services
    
    
    3.6
    
    
    
    1.7
    
    
    
    12.0
    %
    
    
    5.0
    %1+ long distance services
    
    
    0.2
    
    
    
    0.4
    
    
    
    0.8
    %
    
    
    1.2
    %Wholesale services
    
    
    6.9
    
    
    
    11.4
    
    
    
    23.1
    %
    
    
    33.6
    %Total
    
    $
    29.8
    
    
    $
    34.0
    
    
    
    100
    %
    
    
    100
    %
  
    During 2005, network operations expense decreased as compared to 2004 for residential,
1+ long distance services and wholesale services primarily because lines in service have
also decreased. Network operations expense increased for bundled business services in 2005
as compared to 2004 due to the line growth experienced. We also analyze the average expense per unit (AEPU) for network operations, similar to the ARPU
calculation for revenues. AEPU is calculated by taking total network operations expense over a
period divided by the number of months in the period to calculate the average expense per month and
this total is divided by the average lines in service during the period. The following details
AEPU for network operations expense. For the three monthsended March 31,2005
    
    
    2004Average network operations expense per
unitBundled residential services
    
    $
    33.35
    
    
    $
    34.63Bundled business services
    
    $
    25.16
    
    
    $
    20.921+ long distance services
    
    $
    2.15
    
    
    $
    1.99
 Fluctuations in AEPU are the net result of four offsetting factors: (1) increased usage as a result
of our customers choosing our unlimited product which generally results in increased domestic
long-distance charges; (2) changes in per line costs as our customer base continues to become more
geographically diverse resulting in some changes to the average cost experienced as a result of
having more lines in higher or lower priced UNE-P states and zones; (3) our auditing and analysis
of network operations and improving the synchronization of our billing systems to help reduce
network costs on a per unit basis; and (4) changes in ILEC rates. We expect network operations expense to increase during the remainder of 2005 due to rate increases
that are associated with the FCCs recent UNE-P ruling and due to the agreed upon rates contained
within the commercial services agreements that we have with Qwest and Verizon as well as any other
rate increases that we may incur by entering into any additional interconnection agreements with
other ILECs. We also expect our network operations expense to increase as a result of the
associated fixed cost structure that we will incur related to our VoIP offering. Effective January 1, 2005, we have deferred the fee charged to us by the Independent Local Exchange
Carriers (ILECs) in the activation of our business VoIP customers. This fee and any acquisition
revenue received from the customers are being deferred and amortized over the life of each
customers signed contract At March 31, 2005, unamortized deferred set up fees amounted to $0.5
million. Retail Segment The following table provides a detail of network operations expense as a percentage of revenues by
the respective revenue types. This table excludes an analysis of the wholesale services business
segment because management does not evaluate this measure, given that network expenses related to
wholesale services are intended to be zero-margin direct cost pass-through in nature. 16




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##### Table of Contents



For the three monthsended March 31,2005
    
    
    2004Network operations expense as a
percentage of revenuesBundled residential services
    
    
    51.1
    %
    
    
    51.3Bundled business services
    
    
    68.7
    %
    
    
    52.2
    %1+ long distance services
    
    
    16.9
    %
    
    
    19.5
    %
  
    In the first quarter of 2005, network operations expense related to bundled residential
services and 1+ long distance services decreased as a percentage of revenues primarily as a
result of continued geographical dispersion of customers to less expensive pricing zones
and states and our auditing and analysis of network operations. Network operations expense
related to bundled business services as a percentage of revenues increased due to increased
usage, increased ILEC rates and changes in geographic distribution of our customer base. Wholesale Segment  
    Network operations expense from the wholesale segment decreased by $4.5 million for the
three months ended March 31, 2005 as compared to the same period in 2004. Sprint elected
to become the customer of record for billing purposes from the ILECs for a significant
portion of their total wholesale lines in service. This caused a decrease in network
operations expense which was further reduced by the drop in wholesale lines in service for
the three months ended March 31, 2005 as compared to the same period in 2004. Sales and Marketing The sales and marketing expense primarily consists of telemarketing, direct mail, brand awareness
advertising and independent sales representative commissions and salaries and benefits paid to
employees engaged in sales and marketing activities. The following table shows the break-down by
segment of sales and marketing expense: For the three months
    
    
    Percentage ofended March 31,
    
    
    Segment Revenues2005
    
    
    2004
    
    
    2005
    
    
    2004Sales & marketing expense by segment (in
millions)Retail Segment
    
    $
    5.2
    
    
    $
    5.0
    
    
    
    11.9
    %
    
    
    11.1
    %Wholesale segment
    
    
    
    
    
    
    0.1
    
    
    
    0.0
    %
    
    
    0.3
    %Total Sales & Marketing Expense
    
    $
    5.2
    
    
    $
    5.1
    
    
    
    9.1
    %
    
    
    7.4
    %
 Retail Segment  
    The increase in sales and marketing expense during 2005 as compared to 2004 was
primarily due to the additional sales teams we added to begin selling our new VoIP
products. This increase was largely offset by significant decreases in advertising
expense, marketing expense and commissions paid to independent sales representatives.
    At the end of 2004, we hired additional sales and marketing personnel which increased
sales and marketing expense by $0.8 million for the three months ended March 31, 2005 as
compared to 2004. This increase was mostly offset by decreases in advertising expense,
marketing expense and commissions paid to independent sales representatives. Wholesale Segment We are not actively seeking any new wholesale relationships at this time, therefore we are not
currently expending any effort. General and Administrative General and administrative expense primarily consists of employee salaries and benefits, outsourced
services, bad debt expense, billing and collection costs, occupancy costs, legal and provisioning
costs. The following table shows the break-down by segment of general and administrative expense: 17




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For the three months
    
    
    Percentage ofended March 31,
    
    
    Segment Revenues2005
    
    
    2004
    
    
    2005
    
    
    2004General & administrative expense by
segment (in millions)Retail Segment
    
    $
    20.1
    
    
    $
    27.0
    
    
    
    45.7
    %
    
    
    59.6
    %Wholesale segment
    
    
    2.4
    
    
    
    7.0
    
    
    
    18.2
    %
    
    
    30.1
    %Total General & Administrative Expense
    
    $
    22.5
    
    
    $
    34.0
    
    
    
    39.4
    %
    
    
    49.6
    %
  
    The decrease of $11.5 million in general and administrative expenses in the first
quarter of 2005 as compared to the same period in 2004 is explained by decreases in payroll
and payroll related expenses, contract development, legal expenses, billing, collections,
professional and consulting fees, tax and licenses expenses and incorrect dispatch
expenses. We have improved our operating costs and overall operations, which has contributed to improved per
line administrative cost factors. We anticipate general and administrative expenditures will
decrease in total into the future as management continues to rationalize operating costs. However,
this will be offset to some extent by our expected increase in VoIP during 2005. We will continue
to evaluate our operations for efficiencies and our employee staffing requirements as they relate
to increased efficiencies or needs to expand or outsource services. We expect to see continued
improvements to the reductions of general and administrative expense as a percentage of total
reported revenue in 2005 relative to 2004. Retail Segment  
    General and administrative expense decreased $6.9 million for the quarter ended March
31, 2005 as compared to the prior year period. The largest decreases occurred in payroll
and payroll related expenses, incorrect dispatch expenses, legal expenses, billing expenses
and contract development expenses.
    These decreases were slightly offset by an increase in bad debt expense due to the $2.5
million reserve that we booked against the SipStorm note, as mentioned in footnote 8 in the
Notes to Consolidated Financial Statements Related Party Transactions. Included in the retail services general and administrative expense are all employee benefits
expenses, occupancy, insurance, and other indirect or overhead-related expenses as only direct
costs are recorded within our wholesale services business segment. Wholesale Segment  
    The decrease in general and administrative expense for the quarter ended March 31, 2005
as compared to the same period in 2004 is a direct result of decreased wholesale lines in
service. The expense line items that decreased most significantly are payroll and payroll
related expenses, billing expenses, incorrect dispatch expenses and outsourced collection
expenses. We expect to steadily decrease headcount related to supporting the subscriber lines of our existing
wholesale customers. We may transfer existing employees from our wholesale services business to
our retail services unit. We have not recorded any bad debt expense for our wholesale services and
have not had any material write-offs of receivables. We will continue to monitor our wholesale
services and determine the appropriate bad debt methodology based on each individual wholesale
contract, but we do not expect any material changes to our current approach. Depreciation and Amortization  
    Depreciation and amortization expense decreased $1.1 million for the quarter ended March
31, 2005 as compared to the prior year period. The decrease was the result of decreased
capital spending, asset disposals and an increase in the number of assets which became
fully depreciated during 2004. Interest and Other Income  
    Interest and other income primarily consists of interest charged to our bundled
residential and business customers for not paying their bills on time and income from
interest earned on our cash balances.
    During the quarter ended March 31, 2005, interest and other income also includes $6
million of lawsuit proceeds from our settlement with SBC. (See
footnote 10 in the Notes to
Consolidated Financial Statements Legal and Regulatory Proceedings.) 18




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Interest and Other Expense Interest and other expense includes late fees for vendor payments, interest related to the asset
based loan with Textron and our standby credit facility, capital leases and our other debt
obligations.  
    The increase in interest and other expense during the quarter ended March 31, 2005 as
compared to 2004 was primarily attributable to the interest we incurred on our asset based
loan with Textron and our standby credit facility, as well as an increase in late fees for
vendor payments. Net Income (Loss) Attributable to Common Stockholders  
    Net income (loss) attributable to common stockholders increased by $15.2 million during
the three months ended March 31, 2005 as compared to 2004. In addition to the increases in
our operating income and legal settlement discussed above, an additional $4.4 million was attributable to the
preferred stock conversion that occurred at the end of 2004. LIQUIDITY AND CAPITAL RESOURCES The accompanying consolidated financial statements were prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of
business. The realization of assets and the satisfaction of liabilities in the normal course of
business is dependent on, among other things, the companys ability to operate profitably, to
generate cash flow from operations and to obtain funding adequate to fund its business. We have a limited operating history and our operations are subject to material risks and
uncertainties, particularly related to the evolution of the regulatory environment, which impacts
our access to and cost of the network elements that we utilize to provide services to our
customers. We have incurred significant losses since our inception as a result of developing our business,
performing ongoing research and development, building and maintaining our network infrastructure
and technology, the sale and promotion of our services, and ongoing administrative expenditures.
As of March 31, 2005, we had an accumulated deficit of approximately $409.5 million and $5.1
million in cash and cash equivalents. We have funded our expenditures primarily through operating
revenues, private securities offerings, various working capital facilities, our standby credit
facility and an initial public offering. For the three months ended March 31, 2005, net cash used in operating activities was $2.7 million
as compared to net cash provided by operating activities of $3.2 million in the prior year period.
The decrease is largely due to the increase in our accounts receivable balance. In April 2004, the company secured an asset based loan facility with Textron Financial Corporation
(Textron), which provided up to $25 million to fund operations. We utilized $13.9 million as of
March 31, 2005, which was approximately the maximum loan availability at that time. Effective
January 27, 2005, we entered into a Modification and Termination Agreement with Textron. Among
other things the Modification and Termination Agreement provided that Textron would forbear from
exercising default rights and remedies until May 31, 2005, would waive the early termination fee
and modify the annual facility fee. We agreed to pay a modification fee of $150,000. On April 4, 2005, we entered into an accounts receivable financing agreement with Thermo Credit,
LLC (Thermo). The agreement provides for the sale of up to $22 million of our accounts
receivable on a continuous basis to Thermo, subject to selection criteria as defined in the
contract. We plan to use this facility to fully replace our credit facility with Textron.
Expected proceeds from this facility will approximate the year end Textron loan balance. On May 6,
2005, we used proceeds from this accounts receivable financing facility to pay off our loan balance
with Textron. By letter dated May 6, 2005, the Nasdaq Stock Market has notified us that the market value of our
common stock remains below the minimum of $35 million required by Marketplace Rule
4310(c)(2)(B)(ii) and accordingly our shares will be delisted from the Nasdaq SmallCap Market at
the opening of business on May 17, 2005. We have appealed the decision. The appeal will stay the
delisting pending a hearing before a hearing panel. At the hearing we will be required to provide
a definitive plan for regaining compliance. We have no definitive plan at this time. Our net cash used in investing activities decreased by $1.2 million to $1.2 million for the three
months ended March 31, 2005, compared to $2.4 million the prior year period. The reduction was
attributable to the purchasing of less property and equipment during the first quarter of 2005 as
compared to the first quarter of 2004. For the three months ended March 31, 2005, net cash provided by financing activities was $7.7
million as compared to net cash used in financing activities of $1.0 million for the prior year
period. This change is primarily the result of funds drawn on our standby credit facility. Management closely monitors liquidity and updates its forecast regularly. While the current
regulatory climate makes the cash 19




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forecast very difficult to predict, the most recent forecast for
the remainder of 2005 reflects positive cash flow from operations before interest charges. There
can be no assurance that the forecasted cash flow will occur. The companys inability to operate profitably and to consistently generate cash flows from
operations, its reliance therefore on external funding either from loans or equity raise
substantial doubt about the companys ability to continue as a going concern. CASH MANAGEMENT Merit increases are scheduled for the 2nd quarter of 2005. Certain employees will be
granted restricted stock in lieu of payroll increases. DEBT INSTRUMENTS AR Financing On April 4, 2005, we entered into an accounts receivable financing agreement with Thermo Credit,
LLC (Thermo) to replace our Textron credit facility. The agreement provides for the sale of up
to $22 million of our accounts receivable on a continuous basis to Thermo, subject to selection
criteria as defined in the contract. The discount rate is 2.5%. Purchase of the receivables is at
the option of Thermo. On May 6, 2005, we used proceeds from this accounts receivable financing
facility to pay off our loan balance with Textron. ILEC, IXC AND RELATED DISPUTED CHARGES Since our existence we have disputed and continue to dispute significant charges from the various
ILECs, IXCs, and certain other carriers providing us services. We have a policy of treating all
charges that we believe are without merit, but are still being presented on a bill to us as
disputes, regardless of the age of the dispute. We believe that the majority of these disputes
have significant merit; however, we accrue the amount of the charges we believe represent valid
charges against us. Our outstanding disputes at March 31, 2005 totaled $16.9 million and are best
summarized in the following table: Outstanding Disputesat March 31, 2005(in millions)Alternatively billed services
    
    $
    5.9Late fees for non-payment of disputed charges
    
    
    4.9Billing errors
    
    
    4.3All others
    
    
    1.8$
    16.9
 Alternatively billed services are primarily charges for certain 1-800, collect and information
service calls. These disputes are largely historic in nature. We settled certain of these
disputes in Texas with Southwestern Bell Telephone Company. We remit all monies collected
associated with these services but do not pay the charges unless we collect from our customers. We
believe that our liability related to these charges should be capped at the amount remitted by our
end users; however, some of our settlements have included payments in excess of payments from our
customers. The late fees are accumulating from all of our disputes as we do not pay for disputed items and
therefore incur and accumulate late fees for these disputed billings. We believe that we have adequately accrued for our disputes and we believe our maximum exposure for
these charges is $16.9 million. However, we do not believe that these charges are valid and intend
to continue our dispute and non-payment of these charges. RELATED PARTY TRANSACTIONS We paid interest on our related party debt in the amount of $0.2 million for the quarter ended
March 31, 2005. No related party interest was paid during the quarter ended March 31, 2004. On September 29, 2004, we signed an agreement with SipStorm, Inc., a company owned by two of our
shareholders and former officers of our company; we transferred selected computer hardware,
software and intellectual property rights to SipStorm. Relative to the purchase, SipStorm assumed
responsibility for certain accounts payable, future maintenance payments and provided a
promissory note in the amount of $2.8 million. The promissory note is collateralized by shares of
our common stock owned by the directors of SipStorm. We have reserved $2.5 million of the note as
of March 31, 2005 to reflect its estimated realizable value. 20




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not enter into financial instruments for trading or speculative purposes and do not currently
utilize derivative financial instruments. Our operations are conducted primarily in the United
States and as such are not subject to material foreign currency exchange rate risk. The fair value of our investment portfolio or related income would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature
of the major portion of our investment portfolio. We have no material future earnings or cash flow exposures from changes in interest rates on our
long-term debt obligations, as substantially all of our long-term debt obligations are fixed rate
obligations. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to ensure that material information related
to us, including our consolidated subsidiaries, is recorded, processed, summarized and reported in
accordance with SEC rules and forms. Our management, with the participation of Chief Executive
Officer and Chief Financial Officer, Horace J. Davis, III, has evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this report. Based upon
that evaluation, Mr. Davis has concluded that our disclosure controls and procedures are effective
in causing material information to be recorded, processed, summarized, and reported so as to ensure
the quality and timeliness of our public disclosures in compliance with SEC rules and forms. Changes in Internal Control over Financial Reporting We also maintain a system of internal control over financial reporting. Our internal control over
financial reporting is a process designed under the supervision of our chief executive officer and
our chief financial officer and effected by our board of directors, management and other personnel
to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that (1) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets and (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance
with authorizations of our management and directors. There was no change in our internal control over financial reporting that occurred during our most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect
our internal control over financial reporting. 
 Part II 
 ITEM 1. LEGAL PROCEEDINGS  1.
    Master File Number 21 MC 92; In re Initial Public Offering Securities Litigation., in the United States District Court for
the Southern District of New York (filed June 7, 2001) During June and July 2001, three separate class action lawsuits were filed against us, certain of
our current and former directors and officers (the D&Os) and firms engaged in the underwriting
(the Underwriters) of our initial public offering of stock (the IPO). The lawsuits, along with
approximately 310 other similar lawsuits filed against other issuers arising out of initial public
offering allocations, have been assigned to a Judge in the United States District Court for the
Southern District of New York for pretrial coordination. The lawsuits against us have been
consolidated into a single action. A consolidated amended complaint was filed on April 20, 2002. A
Second Corrected Amended Complaint (the Amended Complaint), which is the operative complaint, was
filed on July 12, 2002. The Amended Complaint is based on the allegations that our registration statement on Form S-1,
filed with the Securities and Exchange Commission (SEC) in connection with the IPO, contained
untrue statements of material fact and omitted to state facts necessary to make the statements made
not misleading by failing to disclose that the underwriters allegedly had received additional,
excessive and undisclosed commissions from, and allegedly had entered into unlawful tie-in and
other arrangements with, certain customers to whom they allocated shares in the IPO. The plaintiffs
in the Amended Complaint assert claims against us and the D&Os pursuant to Section 11 of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated by the SEC there under. The plaintiffs in the Amended Complaint assert claims against
the D&Os pursuant to Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the SEC there under. The
plaintiffs seek an undisclosed amount of damages, as well as pre-judgment and post-judgment
interest, costs and expenses, including attorneys fees, experts fees and other costs and
disbursements. Initial discovery has begun. We believe we are entitled to indemnification from our
Underwriters. 21




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##### Table of Contents



A settlement has been reached by the respective lawyers for plaintiffs, the issuers and insurers of
the issuers. The principal terms of the proposed settlement are (i) a release of all claims against
the issuers and their officers and directors, (ii) the assignment by the issuers to the plaintiffs
of certain claims the issuers may have against the Underwriters and (iii) an undertaking by the
insurers to ensure the plaintiffs receive not less than $1 billion in connection with claims
against the Underwriters. Hence, under the terms of the proposed settlement our financial
obligations will likely be covered by insurance. The court has given preliminary approval of the
settlement subject to certain modifications. A revised settlement agreement has been submitted to
the court. To be binding, the settlement must be executed by the parties and thereafter submitted
to and approved by the court. The settlement will not be binding upon any plaintiffs electing to
opt-out of the settlement.  2.
    C.A. No5:03CV229, Z-Tel Communications Inc. v. SBC Communications,
Inc., in the United States District Court for the Eastern District of
Texas, filed October 9, 2003. On October 9, 2003, Trinsic Communications, Inc., our wholly-owned subsidiary corporation, formerly
known as Z-Tel Communications, Inc., filed a lawsuit against SBC Communications, Inc. and several
of its subsidiaries (collectively, SBC) in federal court in Texas, where both SBC and Trinsic do
business. The lawsuit alleges SBCs violation of the federal antitrust laws, the Racketeering
Influenced Corrupt Organizations Act (RICO), the Lanham Act, and other federal and state laws. The
complaint sought damages and an injunction against SBC. On March 30, 2005, the lawsuit against SBC
was settled and dismissed with prejudice. In conjunction with the settlement, our subsidiary
Trinsic Communications, Inc. (formerly Z-Tel Communications, Inc.) received proceeds of $14 million
and the parties mutually resolved certain outstanding billing disputes. From our proceeds, we will
be responsible for expenses and attorneys fees approximating $8 million. The net $6 million is
included in interest and other income in this report.  3.
    C.A. No. 04CH07882, Susan Schad, on behalf of herself and all others
similarly situated, v. Z-Tel Communications, Inc., In the Circuit
Court of Cook County, Illinois, Illinois County Department, Chancery
Division, filed May 13, 2004; Susan Schad, on behalf of herself and all others similarly situated, filed a class action lawsuit
against Trinsic Communications, Inc. (formerly known as Z-Tel Communications, Inc.), our
wholly-owned subsidiary corporation, on May 13, 2004. The lawsuit alleges that our subsidiary has
engaged in a pattern and practice of deceiving consumers into paying amounts in excess of their
monthly rates by deceptively labeling certain line-item charges as government-mandated taxes or
fees when in fact they were not. The complaint seeks to certify a class of plaintiffs consisting of
all persons or entities who contracted with Trinsic for telecommunications services and were billed
for particular taxes or regulatory fees. The complaint asserts a claim under the Illinois Consumer
Fraud and Deceptive Businesses Practices Act and seeks unspecified damages, attorneys fees and
court costs. On June 22, 2004, we filed a notice of removal in the state circuit court action,
removing the case to the federal district court for the Northern District of Illinois, Eastern
Division, C.A. No. 4 C 4187. On July 26, 2004, Plaintiff filed a motion to remand the case to the
state circuit court. On January 12, 2005, the federal court granted the motion and remanded the
case to the state court. Although we believe the plaintiffs allegations are without merit and
intend to defend the lawsuit vigorously, we cannot predict the outcome of this litigation with any
certainty.  4.
    Case. No. 0410453, Wilder Corporation of Delaware, Inc. v. Trinsic
Communications, Inc., In the Circuit Court of the Thirteenth Judicial
Circuit in and for Hillsborough County, Florida, Civil Division,
Division G, filed November 19, 2004 On November 19, 2004, the landlord of our principal Tampa, Florida facility sued us a seeking a
declaration of its rights and obligations under the lease and damages for breach of contract. We
assert that the landlord has failed to provide certain services in accordance with the lease,
including maintenance of air conditioning and emergency electrical generating systems crucial to
our operations. We have taken steps necessary to provide this maintenance and have offset the
costs of these measures against the rent, which we believe we are entitled to do under the lease.
Thus far we have withheld approximately $180,000. We also believe we are entitled to reimbursement
from the landlord for approximately $23,000 in costs associated with improvements to the leased
space.  5.
    Case. No. 0410441, Beneficial Management Corporation of America. v.
Trinsic Communications, Inc., In the Circuit Court of the Thirteenth
Judicial Circuit in and for Hillsborough County, Florida, Civil
Division, Division F, filed November 19, 2004 On November 19, 2004, a provider of parking spaces for our Tampa facilities sued us for parking
fees in excess of $334,300. Pursuant to our lease we are entitled to a number of free spaces and
we are obligated to pay for additional usage of parking spaces. We believe the provider has
substantially overstated our use of the spaces. We expect to resolve this dispute.  6.
    Case. No. 05-3845, Trinsic Marketing International, Inc. v. Trinsic
Communications, Inc., In the Circuit Court in and for Hillsborough
County, Florida, Civil Division, Division K, filed April 28, 2005 Trident Marketing International, Inc. performed telemarketing services for us. On April 28, 2005,
they sued us claiming we owe them compensation of approximately $836,458, plus additional damages
of $865,448 relating to early termination of their services. Included
in accruals is $836,458 as of March 31, 2005, which we believe is our
minimum liability. 22




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ITEM 6. EXHIBITS (a) The following exhibits are filed as part of this report: EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    Amended and Restated Certificate of Incorporation of Trinsic, Inc. as amended.
Incorporated by reference to the correspondingly numbered exhibit to our Annual
Report on Form 10-K for the year ended December 31, 2004 filed April 15, 2005.3.2
    
    Amended and Restated Bylaws of Trinsic, as amended. Incorporated by reference to
the correspondingly numbered exhibit to our Quarterly report on Form 10-Q for the
quarter ended September 30, 2004 filed November 15, 2004.4.1
    
    Form of Common Stock Certificate. Incorporated by reference to the correspondingly
numbered exhibit to our Annual Report on Form 10-K for the year ended December 31,
2004 filed April 15, 2005.4.2
    
    See Exhibits 3.1 and 3.2 of this Form for provisions of the Amended and Restated
Certificate of Incorporation, as amended, and our Bylaws, as amended, defining rights
of security holders.4.6
    
    Form of Warrant for the purchase of shares of our common stock by each of the
purchasers of our Series D Convertible Preferred Stock. Incorporated by reference to the
correspondingly numbered exhibit to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, filed on August 14, 2000.4.7
    
    Stock and Warrant Purchase Agreement, dated October 19, 2000, by and among us and
The 1818 Fund III, L.P. Incorporated by reference to the correspondingly numbered
exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30,
2000, filed on November 14, 2000.4.9
    
    Registration Rights Agreement between and among us and The 1818 Fund III, L.P.
Incorporated by reference to the correspondingly numbered exhibit to our Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000, filed on November 14,
2000.4.10
    
    Warrant issued to The 1818 Fund III, L.P. for the purchase of shares of our common
stock. Incorporated by reference to the correspondingly numbered exhibit to our
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, filed on
November 14, 2000.4.11
    
    Certificate of Designation of Series F Junior Participating Preferred Stock. Incorporated
by reference to the correspondingly numbered exhibit to our Annual Report on Form
10-K for the year ended December 31, 2000, filed on March 30, 2001.4.12
    
    Rights Agreement dated as of February 19, 2001 between Z-Tel Technologies, Inc. and
American Stock Transfer & Trust Company, as Rights Agent, as amended July 2, 2001
incorporated be reference to the correspondingly numbered exhibit to our quarterly
report on Form 10-Q for the quarter ended June 30, 20014.13
    
    Amendment No. 1 to Rights Agreement dated as of November 19, 2004 between Z-Tel
Technologies, Inc. and American Stock Transfer & Trust Company, as Rights Agent,
incorporated by reference to Exhibit 4.1 to our registration statement on form 8-A/A
filed on December 6, 2004.4.14
    
    Stock and Warrant Purchase Agreement, dated as of July 2, 2001, by and between us,
D. Gregory Smith, and others. Incorporated by reference to Exhibit 1 to Amendment
No. 1 of the Schedule 13D filed July 12, 2001 with respect to our common stock by,
among other persons, The 1818 Fund III, L.P.4.15
    
    Warrant for the Purchase of Shares of Common Stock of Trinsic, dated as of July 2,
2001. Incorporated by reference to Exhibit 2 to Amendment No. 1 of the Schedule 13D
filed July 12, 2001 with respect to our common stock by, among other persons, The
1818 Fund III, L.P.4.16
    
    Backup Purchase Agreement, dated as of July 2, 2001, by and among Z-Tel
 23




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION4.16
    
    Communications, Inc., a Delaware corporation and our wholly owned subsidiary, Touch
1 Communications, Inc., an Alabama corporation and our wholly owned subsidiary, D.
Gregory Smith and others. Incorporated by reference to Exhibit 4 to Amendment No. 1
of the Schedule 13D filed July 12, 2001 with respect to our common stock by, among
other persons, The 1818 Fund III, L.P.4.17
    
    Additional Investor Registration Rights Agreement, dated as of July 2, 2001, between
Z-Tel, D. Gregory Smith and others. Incorporated by reference to Exhibit 5 to the
Schedule 13D filed July 24, 2001 with respect to our common stock by, among other
persons, D. Gregory Smith.4.18
    
    Voting Agreement, dated as of June 29, 2001, between us and certain of our
stockholders. Incorporated by reference to Exhibit 5 to Amendment No. 1 of the
Schedule 13D filed July 12, 2001 with respect to our common stock by, among other
persons, The 1818 Fund III, L.P.10.1
    
    Standby Credit Facility Agreement, dated August 24, 2004, by and among Trinsic, Inc.
and The 1818 Fund III, L.P. Incorporated by reference to Form 8-K filed on August 26,
200410.2.1
    
    1998 Equity Participation Plan. Incorporated by reference to the correspondingly
numbered exhibit to our Registration Statement on Form S-1 (File No. 333-89063),
originally filed October 14, 1999, as amended and as effective December 14, 1999.10.2.2
    
    2000 Equity Participation Plan, as amended. Incorporated by reference to the
correspondingly numbered exhibit to our Annual Report on Form 10-K for the year
ended December 31, 2004 filed April 15, 2005.10.2.3
    
    2004 Stock Incentive Plan. Incorporated by reference to Exhibit 4.1 to our Registration
Statement on Form S-8 filed May 8, 2005.10.3
    
    Loan and Security Agreement, dated April 22, 2004, by and between Textron Financial
Corporation and Z-Tel. Incorporated by reference to Exhibit 10.2 of our Registration
Statement on Form S-3 (File No. 333-116747), originally filed June 22, 2004, as
amended and as effective July 15, 2004.10.4
    
    Receivables Sales Agreement dated as of July 27, 2000 by and between Z-Tel
Communications, Inc., as seller and subservicer, Touch 1 Communications, Inc., as
seller and subservicer, and RFC Capital Corporation, as purchaser. Incorporated by
reference to the correspondingly numbered exhibit to our Quarterly Report on Form 10-
Q for the quarter ended June 30, 2000, filed on August 14, 2000, with an amendment
extending the agreement until July 27, 2004.10.5
    
    Form of Indemnification Agreement for our executive officers and directors.
Incorporated by reference to the correspondingly numbered exhibit to our Annual
Report on Form 10-K for the year ended December 31, 2000, filed on March 30, 2001.10.6
    
    Employment Agreement of Horace J. Trey Davis III, dated August 14, 2002.
Incorporated by reference to the correspondingly numbered exhibit to our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2004, filed on May 17, 2004. By
amendment dated October 5, 2004, the annual salary was increased to $300,000. The
amendment is incorporated by reference to Exhibit 99.1 to Form 8-K filed October 12,
2004.10.7
    
    Modification and Termination Agreement dated January 27, 2005 with Textron
Financial Corporation modifying our Loan and Security Agreement dated April 22,
2004. Incorporated by reference to Exhibit 10.4 to Form 8-K filed February 2, 2005.10.8
    
    Asset Sale and Purchase Agreement dated September 29, 2004, between and among
Sipstorm, Inc. and us. Incorporated by reference to Exhibit 99.1 to October 6, 2004.10.11
    
    Promissory Note, dated September 10, 1999, from Touch 1 Communications, Inc. to
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EXHIBITNUMBER
    
    DESCRIPTIONWilliam F. Corman (First Revocable Trust). Incorporated by reference to the
correspondingly numbered exhibits to our Annual Report on Form 10-K for the year
ended December 31, 2000, filed on March 30, 2001.10.12
    
    Promissory Note, dated September 10, 1999, from Touch 1 Communications, Inc. to
James F. Corman. Incorporated by reference to the correspondingly numbered exhibits
to our Annual Report on Form 10-K for the year ended December 31, 2000, filed on
March 30, 2001.10.13
    
    Agreement for Resale of Local Wireline Telecommunications Services and Provision of
Ancillary Services, dated February 4, 2003, between Z-Tel Communications, Inc. and
Sprint Communications L.P. Incorporated by reference to Exhibit 10.14 of our Annual
Report on Form 10-K for the year ended December 31, 2003, filed March 30, 2004.
Portions of this exhibit have been omitted pursuant to a request for confidential
treatment10.14
    
    Receivables Sales Agreement, dated as of March 28, 2005, by and between Trinsic
Communications, Inc. and Touch 1 Communications, Inc., collectively as Seller and
Subservicer, and Thermo Credit, LLC, as Purchaser and Master Servicer. Incorporated
by reference to Exhibit 10.1 to our Form 8-K filed April 5, 2005.31.1
    
    Certification of the Chief Executive Officer31.2
    
    Certification of the Chief Financial Officer32.1
    
    Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.ss.135032.2
    
    Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C.ss.1350
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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized, as of the 16th day of April 2005. TRINSIC, INC. By:
    /s/ Horace J. Davis, IIIHorace J. Davis, IIIActing Chief Executive Officer and Chief
Financial Officer A signed original of this report has been provided to Trinsic, Inc. and will be retained by the
Trinsic, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.