##### Table of Contents



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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
 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
    
    59-3501119(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 601 SOUTH HARBOUR ISLAND BOULEVARD, SUITE 220
TAMPA, FLORIDA 33602
 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
  þ o
  o o þ
  o þ




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##### 



PART IItem 1. Financial StatementsConsolidated Balance Sheets at September 30, 2006 (Unaudited) and December 31, 2005
    
    
    3Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2006 and 2005
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART IIItem 1. Legal Proceedings
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27Item 6. Exhibits
    
    
    28Signatures
    
    
    30EX-10.19  AGREEMENT AND PURCHASE & SALE OF ASSETSEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2  SECTION 302 CERTIFICATION OF THE CFOEX-32.1  SECTION 906 CERTFICATION OF THE CEOEX-32.2  SECTION 906 CERTIFICATION OF THE CFO
  2




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TRINSIC, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
  (Unaudited)September 30,
    
    
    December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    435
    
    
    $
    79Accounts receivable, net of allowance for doubtful
accounts of $28,271 and $20,489
    
    
    12,809
    
    
    
    13,713Prepaid expenses and other current assets
    
    
    1,090
    
    
    
    4,713Total current assets
    
    
    14,334
    
    
    
    18,505Property and equipment, net
    
    
    12,056
    
    
    
    19,931Intangible assets, net
    
    
    4,602
    
    
    
    Other assets
    
    
    3,595
    
    
    
    2,884Total assets
    
    $
    34,587
    
    
    $
    41,320Liabilities and Stockholders DeficitCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    35,203
    
    
    $
    40,248Deferred revenue
    
    
    5,211
    
    
    
    6,013Current portion of long-term debt and capital lease
obligations
    
    
    9,012
    
    
    
    2,418Total current liabilities
    
    
    49,426
    
    
    
    48,679Long-term debt and capital lease obligations
    
    
    430
    
    
    
    1,025Total liabilities
    
    
    49,856
    
    
    
    49,704Commitments and contingencies (Notes 7, 9 and 12)Stockholders deficit:Common stock, $0.01 par value; 150,000,000
shares authorized; 18,762,994 and 17,756,944 shares issued;
18,457,496 and 17,518,573 outstanding
    
    
    185
    
    
    
    175Unearned stock compensation
    
    
    (297
    )
    
    
    (360
    )Additional paid-in capital
    
    
    417,037
    
    
    
    416,127Accumulated deficit
    
    
    (432,189
    )
    
    
    (424,321
    )Treasury stock, 305,498 and 238,371 shares at cost
    
    
    (5
    )
    
    
    (5
    )Total stockholders deficit
    
    
    (15,269
    )
    
    
    (8,384
    )Total liabilities and stockholders deficit
    
    $
    34,587
    
    
    $
    41,320
  3




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TRINSIC, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    38,516
    
    
    $
    44,030
    
    
    $
    126,250
    
    
    $
    151,958Operating expenses:Network operations, exclusive of depreciation
and amortization shown below
    
    
    23,302
    
    
    
    23,864
    
    
    
    76,287
    
    
    
    80,697Sales and marketing
    
    
    916
    
    
    
    2,596
    
    
    
    3,588
    
    
    
    11,508General and administrative
    
    
    17,827
    
    
    
    17,014
    
    
    
    46,991
    
    
    
    58,551Loss on impairment of assets
    
    
    2,594
    
    
    
    
    
    
    
    2,594
    
    
    
    Depreciation and amortization
    
    
    5,326
    
    
    
    2,398
    
    
    
    12,502
    
    
    
    9,531Total operating expenses
    
    
    49,965
    
    
    
    45,872
    
    
    
    141,962
    
    
    
    160,287Operating loss
    
    
    (11,449
    )
    
    
    (1,842
    )
    
    
    (15,712
    )
    
    
    (8,329
    )Nonoperating income (expense):Interest and other income
    
    
    11,845
    
    
    
    806
    
    
    
    13,887
    
    
    
    8,100Interest and other expense
    
    
    (1,849
    )
    
    
    (3,514
    )
    
    
    (6,043
    )
    
    
    (7,140
    )Total nonoperating income (expense)
    
    
    9,996
    
    
    
    (2,708
    )
    
    
    7,844
    
    
    
    960Net loss
    
    $
    (1,453
    )
    
    $
    (4,550
    )
    
    $
    (7,868
    )
    
    $
    (7,369
    )Weighted average shares outstanding
    
    
    18,457,497
    
    
    
    5,520,137
    
    
    
    18,150,582
    
    
    
    5,493,993Basic and diluted net loss per share
    
    $
    (0.08
    )
    
    $
    (0.82
    )
    
    $
    (0.43
    )
    
    $
    (1.34
    )
  4




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TRINSIC, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
  Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (7,868
    )
    
    $
    (7,369
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    12,502
    
    
    
    9,531Provision for bad debts
    
    
    10,842
    
    
    
    9,306Loss on impairment of assets
    
    
    2,594
    
    
    
    Gain on sale of building
    
    
    97
    
    
    
    Expense charged for granting of restricted stock
    
    
    983
    
    
    
    157Change in operating assets and liabilities:Increase in accounts receivable
    
    
    (9,938
    )
    
    
    (4,423
    )Decrease (increase) in prepaid expenses
    
    
    2,274
    
    
    
    (1,555
    )Increase in other assets
    
    
    (711
    )
    
    
    (1,686
    )Decrease in accounts payable and accrued liabilities
    
    
    (5,045
    )
    
    
    (5,977
    )Decrease in deferred revenue
    
    
    (802
    )
    
    
    (66
    )Total adjustments
    
    
    12,796
    
    
    
    5,287Net cash provided by (used in) operating activities
    
    
    4,928
    
    
    
    (2,082
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,150
    )
    
    
    (2,206
    )Purchase of customer lists
    
    
    (1,727
    )
    
    
    Net cash used in investing activities
    
    
    (2,877
    )
    
    
    (2,206
    )Cash flows from financing activities:Payments on long-term debt and capital lease obligations
    
    
    (1,149
    )
    
    
    (668
    )Proceeds from sale of building
    
    
    400
    
    
    
    Principal repayments received on notes receivable issued for stock
    
    
    
    
    
    
    250Payments on note payable for customer lists
    
    
    (2,423
    )
    
    
    Proceeds from note payable
    
    
    500
    
    
    
    Proceeds from issuance of preferred stock
    
    
    
    
    
    
    2,500Payoff of asset based loan
    
    
    
    
    
    
    (12,934
    )Proceeds from stand by credit facility
    
    
    977
    
    
    
    13,977Net cash provided by (used in) financing activities
    
    
    (1,695
    )
    
    
    3,125Net increase (decrease) in cash and cash equivalents
    
    
    356
    
    
    
    (1,163
    )Cash and cash equivalents, beginning of period
    
    
    79
    
    
    
    1,363Cash and cash equivalents, end of period
    
    $
    435
    
    
    $
    200Non-cash investing and financing activities:Purchase of customer lists
    
    $
    5,671
    
    
    $
    Conversion of stand by credit facility and accrued interest into preferred stock
    
    $
    
    
    
    $
    21,585Conversion of preferred stock into common stock
    
    $
    
    
    
    $
    24,085
  5




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TRINSIC, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
   DESCRIPTION OF BUSINESS
  LIQUIDITY AND CAPITAL RESOURCES
           6




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RECLASSIFICATION
   (a) Significant Accounting Policies
   7




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(b) Recent Accounting Pronouncements
           8




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DepreciableLives in
    
    September 30,
    
    
    December 31,Years
    
    2006
    
    
    2005Switching equipment
    
    5-10
    
    $
    15,298
    
    
    $
    15,563Computer equipment
    
    5-10
    
    
    38,560
    
    
    
    39,457Software
    
    3
    
    
    58,245
    
    
    
    58,517Furniture and office equipment
    
    5-10
    
    
    8,462
    
    
    
    8,860Leasehold improvements
    
    3-15
    
    
    6,571
    
    
    
    6,430Land and building
    
    20-30
    
    
    3,653
    
    
    
    4,354Construction-in-progress
    
    
    
    
    
    
    
    
    153Vehicles
    
    5
    
    
    20
    
    
    
    20130,808
    
    
    
    133,354Less accumulated depreciation and amortization
    
    
    
    
    (118,752
    )
    
    
    (113,423
    )Property and equipment, net
    
    
    
    $
    12,056
    
    
    $
    19,931
 
    9




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September 30, 2006
    
    
    December 31, 2005Carrying
    
    
    Accumulated
    
    
    Net Intangible
    
    
    Carrying
    
    
    Accumulated
    
    
    Net IntangibleAmount
    
    
    Amortization
    
    
    Assets
    
    
    Amount
    
    
    Amortization
    
    
    AssetsCustomer related intangible assets:Customer list from Touch 1 acquisition
    
    $
    9,145
    
    
    $
    9,145
    
    
    $
    
    
    
    $
    9,145
    
    
    $
    9,145
    
    
    $
    Customer list from acquisition of Sprint lines
    
    
    11,170
    
    
    
    6,568
    
    
    
    4,602
    
    
    
    
    
    
    
    
    
    
    
    $
    20,315
    
    
    $
    15,713
    
    
    $
    4,602
    
    
    $
    9,145
    
    
    $
    9,145
    
    
    $
    Aggregate amortization expense:For the nine months ended September 30, 2006
    
    
    
    
    
    $
    6,568For the nine months ended September 30, 2005
    
    
    
    
    
    $
    457Expected amortization expense for the years ending      December 31,2006
    
    
    
    
    
    $
    3,4522007
    
    
    
    
    
    $
    1,151
      September 30,
    
    
    December 31,2006
    
    
    
    2005RELATED PARTIES:Note payable to Corman Elegre, customer base pledged as collateral, payable in monthly installments,
due
September 2004, interest rate at 6%
    
    $
    
    
    
    $
    360Loan payable to the Fund, secured by a mortgage on real property located in Atmore, AL; due on demand,
interest rate at 12%
    
    
    1,977
    
    
    
    1,000UNRELATED PARTIES:Tax settlement payable to the State of New York, payable in monthly installments through March 2008,
non-interest bearing
    
    
    1,289
    
    
    
    2,050Purchase price for local access lines due to Sprint, payable in monthly installments through July 2007,
non-interest bearing
    
    
    5,671
    
    
    
    Note payable to Access Integrated Netorks, Inc., due August 2007, non-interest bearing
    
    
    500
    
    
    
    Capital leases
    
    
    5
    
    
    
    33$
    9,442
    
    
    $
    3,443Less: Current portion
    
    
    (9,012
    )
    
    
    (2,418
    )Total long-term debt
    
    $
    430
    
    
    $
    1,025
 10




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
    
    Fair market value based on our closing common stock price on the date the option is granted;
    
    Expected option term of 5 years;
    
    Volatility based on the historical stock price over a period consistent with the expected term;
    
    No expected dividend payments on our common stock.
 For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,2005
    
    2005Net loss attributable to common stockholders, as reported
    
    $
    (4,550
    )
    
    $
    (7,369
    )Add: Stock based compensation included in net loss
    
    
    64
    
    
    
    157Deduct: Total stock based employee compensation determined
under the fair value based method for all awards
    
    
    (577
    )
    
    
    (1,856
    )Net loss attributable to common stockholders, pro forma
    
    $
    (5,063
    )
    
    $
    (9,068
    )Basic and Diluted Net Loss per Common ShareAs reported
    
    $
    (0.82
    )
    
    $
    (1.34
    )Pro forma
    
    $
    (0.92
    )
    
    $
    (1.65
    )
    11




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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic and diluted net loss per share:Net loss
    
    $
    (1,453
    )
    
    $
    (4,550
    )
    
    $
    (7,868
    )
    
    $
    (7,369
    )Weighted average shares outstanding:
    
    
    18,457,497
    
    
    
    5,520,137
    
    
    
    18,150,582
    
    
    
    5,493,993Basic and diluted net loss per share
    
    $
    (0.08
    )
    
    $
    (0.82
    )
    
    $
    (0.43
    )
    
    $
    (1.34
    )
  12




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Nine Months Ended September 30,2006
    
    
    2005Unexercised stock options
    
    
    57,389
    
    
    
    102,808Unexercised warrants
    
    
    48,744
    
    
    
    107,878Total potentially dilutive shares of common stock equivalents
    
    
    106,133
    
    
    
    210,686
      13




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14




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As of or for theThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Retail ServicesRevenues
    
    $
    38,133
    
    
    $
    34,045
    
    
    $
    121,611
    
    
    $
    118,378Depreciation and amortization
    
    $
    1,865
    
    
    $
    2,374
    
    
    $
    5,865
    
    
    $
    9,423Segment results
    
    $
    (6,251
    )
    
    $
    (2,873
    )
    
    $
    (4,114
    )
    
    $
    (9,045
    )Capital expenditures
    
    $
    97
    
    
    $
    573
    
    
    $
    1,150
    
    
    $
    2,206Identifiable assets
    
    
    
    
    
    
    
    
    
    $
    29,688
    
    
    $
    47,675
 As of or for theThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Wholesale ServicesRevenues
    
    $
    383
    
    
    $
    9,984
    
    
    $
    4,639
    
    
    $
    33,580Depreciation and amortization
    
    $
    3,461
    
    
    $
    24
    
    
    $
    6,637
    
    
    $
    108Segment results
    
    $
    128
    
    
    $
    3,429
    
    
    $
    904
    
    
    $
    10,247Capital expenditures
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Identifiable Assets
    
    
    
    
    
    
    
    
    
    $
    4,898
    
    
    $
    5,722
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesRetail segment
    
    $
    38,133
    
    
    $
    34,045
    
    
    $
    121,611
    
    
    $
    118,378Wholesale segment
    
    
    383
    
    
    
    9,984
    
    
    
    4,639
    
    
    
    33,580Total consolidated
    
    $
    38,516
    
    
    $
    44,029
    
    
    $
    126,250
    
    
    $
    151,958
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Segment results:Retail segment
    
    $
    (6,251
    )
    
    $
    (2,873
    )
    
    $
    (4,114
    )
    
    $
    (9,045
    )Wholesale segment
    
    
    128
    
    
    
    3,429
    
    
    
    904
    
    
    
    10,247Depreciation and amortization
    
    
    (5,326
    )
    
    
    (2,398
    )
    
    
    (12,502
    )
    
    
    (9,531
    )Total consolidated operating loss
    
    $
    (11,449
    )
    
    $
    (1,842
    )
    
    $
    (15,712
    )
    
    $
    (8,329
    )
   15




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
  OVERVIEW
  RESULTS OF OPERATIONS
  Revenues
 For the three monthsended September 30,
    
    
    Percentage of RevenuesTotal revenues by segment (in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Retail Segment
    
    $
    38.1
    
    
    $
    34.0
    
    
    
    99.0
    %
    
    
    77.3
    %Wholesale segment
    
    
    0.4
    
    
    
    10.0
    
    
    
    1.0
    %
    
    
    22.7
    %Total Revenues
    
    $
    38.5
    
    
    $
    44.0
    
    
    
    100.0
    %
    
    
    100.0
    %
 For the nine months endedSeptember 30,
    
    
    Percentage of RevenuesTotal revenues by segment (in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Retail Segment
    
    $
    121.6
    
    
    $
    118.4
    
    
    
    96.3
    %
    
    
    77.9
    %Wholesale segment
    
    
    4.6
    
    
    
    33.6
    
    
    
    3.7
    %
    
    
    22.1
    %Total Revenues
    
    $
    126.2
    
    
    $
    152.0
    
    
    
    100.0
    %
    
    
    100.0
    %
  16




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Average lines in service
    
    
    Average lines in servicefor the three months ended
    
    
    for the nine months endedSeptember 30,
    
    
    September 30,Type of Service
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Bundled residential services
    
    
    134,305
    
    
    
    132,436
    
    
    
    151,487
    
    
    
    154,453Bundled business services
    
    
    39,311
    
    
    
    44,121
    
    
    
    44,135
    
    
    
    45,2591+ long distance services
    
    
    24,898
    
    
    
    34,509
    
    
    
    26,758
    
    
    
    36,742Wholesale services
    
    
    
    
    
    
    192,942
    
    
    
    17,560
    
    
    
    236,552VoIP
    
    
    3,107
    
    
    
    5,288
    
    
    
    3,269
    
    
    
    3,457Total lines under management
    
    
    201,620
    
    
    
    409,296
    
    
    
    243,208
    
    
    
    476,463
 Ending lines in serviceas ofSeptember 30,Type of Service
    
    2006
    
    
    2005Bundled residential services
    
    
    117,362
    
    
    
    120,262Bundled business services
    
    
    36,245
    
    
    
    43,2181+ long distance services
    
    
    24,334
    
    
    
    33,090Wholesale services
    
    
    
    
    
    
    173,460VoIP
    
    
    3,021
    
    
    
    5,357Total lines under management
    
    
    180,962
    
    
    
    375,387
   For the three months
    
    For the nine months endedended September 30,
    
    September 30,Average revenue per unit in service
    
    2006
    
    2005
    
    2006
    
    2005Bundled residential services
    
    $
    79.17
    
    
    $
    70.73
    
    
    $
    74.45
    
    
    $
    71.65Bundled business services
    
    $
    44.94
    
    
    $
    34.75
    
    
    $
    42.80
    
    
    $
    36.091+ long distance services
    
    $
    12.05
    
    
    $
    12.56
    
    
    $
    12.87
    
    
    $
    12.40
   17




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##### Table of Contents



Retail Segment
 For the three monthsRetail segment revenues by type
    
    ended September 30,
    
    
    Percentage of Revenues(in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Bundled residential services
    
    $
    31.9
    
    
    $
    28.1
    
    
    
    83.7
    %
    
    
    82.7
    %Bundled business services
    
    
    5.3
    
    
    
    4.6
    
    
    
    13.8
    %
    
    
    13.5
    %1+ long-distance services
    
    
    0.9
    
    
    
    1.3
    
    
    
    2.5
    %
    
    
    3.8
    %Total Revenues
    
    $
    38.1
    
    
    $
    34.0
    
    
    
    100.0
    %
    
    
    100.0
    %
 For the nine months endedRetail segment revenues by type
    
    September 30,
    
    
    Percentage of Revenues(in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Bundled residential services
    
    $
    101.5
    
    
    $
    99.6
    
    
    
    83.5
    %
    
    
    84.1
    %Bundled business services
    
    
    17.0
    
    
    
    14.7
    
    
    
    14.0
    %
    
    
    12.4
    %1+ long-distance services
    
    
    3.1
    
    
    
    4.1
    
    
    
    2.5
    %
    
    
    3.5
    %Total Revenues
    
    $
    121.6
    
    
    $
    118.4
    
    
    
    100.0
    %
    
    
    100.0
    %
   Wholesale Segment
 For the three monthsWholesale segment revenues by
    
    ended September 30,
    
    
    Percentage of Revenuestype (in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Sprint
    
    $
    0.4
    
    
    $
    10.0
    
    
    
    100.0
    %
    
    
    100.0
    %Total Revenues
    
    $
    0.4
    
    
    $
    10.0
    
    
    
    100.0
    %
    
    
    100.0
    %
 For the nine months endedWholesale segment revenues by
    
    September 30,
    
    
    Percentage of Revenuestype (in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Sprint
    
    $
    4.6
    
    
    $
    33.6
    
    
    
    100.0
    %
    
    
    100.0
    %Total Revenues
    
    $
    4.6
    
    
    $
    33.6
    
    
    
    100.0
    %
    
    
    100.0
    %
  18




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##### Table of Contents



Network Operations
  Network operations expense, exclusive of
    
    For the three months
    
    
    Percentage of Segmentdepreciation and amortization expense, by
    
    ended September 30,
    
    
    Revenuessegment (in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Retail Segment
    
    $
    23.1
    
    
    $
    18.7
    
    
    
    60.5
    %
    
    
    55.0
    %Wholesale Segment
    
    
    0.2
    
    
    
    5.2
    
    
    
    62.9
    %
    
    
    52.0
    %Total Network Operations Expense
    
    $
    23.3
    
    
    $
    23.9
    
    
    
    60.5
    %
    
    
    54.3
    %
 Network operations expense, exclusive of
    
    For the nine months ended
    
    
    Percentage of Segmentdepreciation and amortization expense, by
    
    September 30,
    
    
    Revenuessegment (in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Retail Segment
    
    $
    73.5
    
    
    $
    63.0
    
    
    
    60.5
    %
    
    
    53.2
    %Wholesale Segment
    
    
    2.8
    
    
    
    17.7
    
    
    
    59.7
    %
    
    
    52.7
    %Total Network Operations Expense
    
    $
    76.3
    
    
    $
    80.7
    
    
    
    60.4
    %
    
    
    53.1
    %
  Network operations expense, exclusive of
    
    For the three months
    
    
    Percentage of Networkdepreciation and amortization, by type (in
    
    ended September 30,
    
    
    Operationsmillions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Bundled residential services
    
    $
    19.1
    
    
    $
    15.2
    
    
    
    82.1
    %
    
    
    63.6
    %Bundled business services
    
    
    3.8
    
    
    
    3.3
    
    
    
    16.2
    %
    
    
    13.8
    %1+ long distance services
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.7
    %
    
    
    0.8
    %Wholesale services
    
    
    0.2
    
    
    
    5.2
    
    
    
    1.0
    %
    
    
    21.8
    %Total
    
    $
    23.3
    
    
    $
    23.9
    
    
    
    100
    %
    
    
    100
    %
 Network operations expense, exclusive of
    
    For the nine months ended
    
    
    Percentage of Networkdepreciation and amortization, by type (in
    
    September 30,
    
    
    Operationsmillions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Bundled residential services
    
    $
    61.1
    
    
    $
    52.1
    
    
    
    80.1
    %
    
    
    64.6
    %Bundled business services
    
    
    12.0
    
    
    
    10.2
    
    
    
    15.7
    %
    
    
    12.6
    %1+ long distance services
    
    
    0.4
    
    
    
    0.7
    
    
    
    0.6
    %
    
    
    0.9
    %Wholesale services
    
    
    2.8
    
    
    
    17.7
    
    
    
    3.6
    %
    
    
    21.9
    %Total
    
    $
    76.3
    
    
    $
    80.7
    
    
    
    100
    %
    
    
    100
    %
  19




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##### Table of Contents



For the three months
    
    For the nine months endedended September 30,
    
    September 30,Average network operations expense per unit
    
    2006
    
    2005
    
    2006
    
    2005Bundled residential services
    
    $
    47.40
    
    
    $
    38.26
    
    
    $
    44.81
    
    
    $
    37.48Bundled business services
    
    $
    32.22
    
    
    $
    24.93
    
    
    $
    30.21
    
    
    $
    25.041+ long distance services
    
    $
    2.68
    
    
    $
    1.93
    
    
    $
    1.66
    
    
    $
    2.12
   Retail Segment
  For the three months
    
    For the nine months endedNetwork operations expense as a
    
    ended September 30,
    
    September 30,percentage of revenues
    
    2006
    
    2005
    
    2006
    
    2005Bundled residential services
    
    
    59.9
    %
    
    
    54.1
    %
    
    
    60.2
    %
    
    
    52.3
    %Bundled business services
    
    
    71.6
    %
    
    
    71.7
    %
    
    
    70.5
    %
    
    
    69.4
    %1+ long distance services
    
    
    16.5
    %
    
    
    15.4
    %
    
    
    14.0
    %
    
    
    17.1
    %
  Wholesale Segment
  Sales and Marketing
  20




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##### Table of Contents



For the three months
    
    
    Percentage of Segmentended September 30,
    
    
    RevenuesSales & marketing expense by segment (in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Retail Segment
    
    $
    0.9
    
    
    $
    2.6
    
    
    
    2.5
    %
    
    
    7.6
    %Wholesale segment
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    0.0
    %Total Sales & Marketing Expense
    
    $
    0.9
    
    
    $
    2.6
    
    
    
    2.5
    %
    
    
    5.9
    %
 For the nine months ended
    
    
    Percentage of SegmentSeptember 30,
    
    
    RevenuesSales & marketing expense by segment (in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Retail Segment
    
    $
    3.6
    
    
    $
    11.5
    
    
    
    3.0
    %
    
    
    9.7
    %Wholesale segment
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    0.0
    %Total Sales & Marketing Expense
    
    $
    3.6
    
    
    $
    11.5
    
    
    
    2.9
    %
    
    
    7.6
    %
 Retail Segment
  Wholesale Segment
  General and Administrative
  For the three months
    
    
    Percentage of SegmentGeneral & administrative expense by
    
    ended September 30,
    
    
    Revenuessegment (in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Retail Segment
    
    $
    17.8
    
    
    $
    15.6
    
    
    
    46.7
    %
    
    
    45.9
    %Wholesale segment
    
    
    0.0
    
    
    
    1.4
    
    
    
    0.0
    %
    
    
    14.0
    %Total General & Administrative Expense
    
    $
    17.8
    
    
    $
    17.0
    
    
    
    46.3
    %
    
    
    38.6
    %
 For the nine months ended
    
    
    Percentage of SegmentGeneral & administrative expense by
    
    September 30,
    
    
    Revenuessegment (in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Retail Segment
    
    $
    46.0
    
    
    $
    52.9
    
    
    
    37.8
    %
    
    
    44.7
    %Wholesale segment
    
    
    1.0
    
    
    
    5.7
    
    
    
    20.8
    %
    
    
    17.0
    %Total General & Administrative Expense
    
    $
    47.0
    
    
    $
    58.6
    
    
    
    37.2
    %
    
    
    38.6
    %
  21




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##### Table of Contents



Retail Segment
   Wholesale Segment
  Loss on Impairment of Assets
   Depreciation and Amortization
  Interest and Other Income
    Interest and Other Expense
   22




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
               23




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##### Table of Contents



DEBT INSTRUMENTS
 Accounts Receivable Financing
   ILEC, IXC AND RELATED DISPUTED CHARGES
  Outstanding Disputes at September 30,2006
    
    
    2005(in millions)Alternatively billed services
    
    $
    0.1
    
    
    $
    6.0Late fees for non-payment of disputed charges
    
    
    0.7
    
    
    
    5.8Billing errors
    
    
    1.6
    
    
    
    4.8All others
    
    
    1.2
    
    
    
    1.8$
    3.6
    
    
    $
    18.4
    RELATED PARTY TRANSACTIONS
   24




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##### Table of Contents



SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
   Remediation of Material Weaknesses
  25




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##### Table of Contents



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)
    2.
    
    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
  26




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##### Table of Contents



3.
    
    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
  4.
    
    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
  5.
    
    Case. No. 3:06-CV-4858-EDL Oracle USA, Inc. and Oracle International
Corporation v. Trinsic Communications, Inc. In the United States
District Court for the Northern District of California, filed August
11, 2006.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1.
    
    To elect the following individuals to the Board of Directors to hold office until their
successors are elected and qualified:
 Number of SharesNominee
    
    For
    
    
    WithheldLawrence C. Tucker
    
    
    14,592,428
    
    
    
    Roy Neel
    
    
    14,592,428
    
    
    
    
  
 27




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##### Table of Contents



ITEM 6. EXHIBITS
 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, 2004.3.3
    
    Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of Trinsic, Inc. Incorporated by reference to Exhibit 3.3 to
our Form 8-K filed September 28, 2005.4.1
    
    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, 3.2 and 3.3. of this report for provisions of the Amended
and Restated Certificate of Incorporation, as amended, and our Bylaws, as
amended, defining rights of security holders.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, 2000.4.11
    
    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, 2001.4.13
    
    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
    
    Amendment No. 2 to Rights Agreement dated as of July 19, 2005, between
Trinsic, 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 July 21, 2005.4.15
    
    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.4.20
    
    Exchange and Purchase Agreement dated July 15, 2005 between Trinsic, Inc.
and The 1818 Fund III, L.P. Incorporated by reference to Exhibit A to our
Form 8-K filed July 20, 2005.10.1
    
    Employment Agreement of Horace J. Trey Davis III, dated August 15, 2005,
as amended January 30, 2006. Incorporated by reference to Exhibits A and B
of our Form 8-K filed April 20, 2006.
 28




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION10.2.1
    
    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
    
    Employment Agreement of Donald C. Davis dated August 15, 2005, as amended
June 1, 2006 and October 10, 2006.10.4
    
    Employment Agreement of Michael M. Slauson dated August 15, 2005.
Incorporated by reference to Exhibit E of our Form 8-K filed April 20, 200610.5
    
    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 Paul T. Kohler dated August 15, 2005. Incorporated
by reference to Exhibit F of our Form 8-K filed April 20, 2006.10.11
    
    Promissory Note, dated September 10, 1999, from Touch 1 Communications, Inc.
to William 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, 2001.10.14
    
    Receivables Sales Agreement, dated as of March 28, 2005, by and between
Trinsic Communications Inc. and Touch 1 Communications s Inc., collectively
as Seller and Subservicer, and Thermo Credit, LLC, as Purchaser and Master
Servicer. Incorporated by reference to Exhibit 10.1 to our o Form 8-K filed
April 5, 2005.10.15
    
    Promissory Note, dated December 15, 2005, from Trinsic, Inc. to The 1818
Fund III, L.P. Incorporated by reference to Exhibit A to Form 8-K filed
December 21, 2005.10.16
    
    Agreement for Purchase and Sale of Customer Access Lines, dated October 25,
2005, by and among Sprint Communications Company L.P., Sprint Communications
Company of Virginia, Inc. and Trinsic, Inc. Incorporated by reference to the
correspondingly numbered exhibit to our Form 10-K filed March 31, 2006.10.17
    
    Agreement for Purchase and Sale of Customer Access Lines, dated as of
February 10, 2006, between Trinsic Communications, Inc. and Access
Integrated Networks, Inc. Incorporated by reference to the correspondingly
numbered exhibit to our Form 10-Q filed May 15, 2006.10.18
    
    Promissory Note, dated August 8, 2006, from Trinsic Communications, Inc. to
Access Integrated Networks, Inc. Incorporated by reference to Exhibit 99.1
to Form 8-K filed August 16, 2006.10.19
    
    Agreement for Purchase and Sale of Assets, dated October 23, 2006, between
Trinsic Communications, Inc. and CommX Holdings, Inc.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
 29




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##### Table of Contents



SIGNATURES
  TRINSIC, INC.
 By:
    
    /s/ HORACE J. DAVIS, IIIHorace J. Davis, IIIChief Executive OfficerBy:
    
    /s/ DONALD C. DAVISDonald C. DavisChief Financial Officer
  30