UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-QSB

|(Mark One)                                        |                                                                                  
|------------------------------------------------- | ---------------------------------------------------------------------------------
|ý                                                 | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the quarterly period ended September 30, 2004
|o                                                 | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934          

For the transition period
from                             to

Commission file number 000-50712

ETS PAYPHONES, INC.(Exact name of small business issuer as specified in its charter)

|Delaware(State or other jurisdiction of
incorporation or organization)                        |  | 58-2131736(I.R.S. Employer Identification No.)
|--------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|1490 Westfork Drive, Suite G, Lithia Springs, Georgia(Address of principal executive offices) |  | 30122-1509(Zip Code)                          

(770) 819-1600(Issuer's telephone number)

Check
whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ý    No o

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes ý    No o

As of September 30, 2004, there were outstanding 4,987,624 shares of the Issuer's common stock $.0001 par value.



---





ETS PAYPHONES, INC.  INDEX TO FORM 10-QSB  SEPTEMBER 30, 2004

|Part I. Financial Information
|-----------------------------
|Item 1.                      
|                             
|                             
|                             
|                             
|Item 2.                      
|Item 3.                      
|Part II. Other Information   
|Item 6.                      
|Signatures                   

2

---





PART I. FINANCIAL INFORMATION

ETS PAYPHONES, INC.
BALANCE SHEET
SEPTEMBER 30, 2004
Unaudited

|ASSETS                               |                                                                                                               
|------------------------------------ | --------------------------------------------------------------------------------------------------------------
|CURRENT ASSETS                       |                                                                                                               
|                                     | Cash                                                                                                          
|                                     | Cash, restricted                                                                                              
|                                     | Accounts receivable, less allowance for doubtful accounts of $1,237,867                                       
|                                     | Inventories                                                                                                   
|                                     | Prepaid expenses                                                                                              
|                                     |                                                                                                               
|                                     |                                                                                                               
|FIXED ASSETS                         |                                                                                                               
|                                     | Payphones                                                                                                     
|                                     | Other property and equipment                                                                                  
|                                     |                                                                                                               
|                                     |                                                                                                               
|                                     | Accumulated depreciation                                                                                      
|                                     |                                                                                                               
|                                     |                                                                                                               
|                                     |                                                                                                               
|OTHER ASSETS                         |                                                                                                               
|                                     | Site licenses, less accumulated amortization of $448,658                                                      
|                                     | Goodwill                                                                                                      
|                                     | Deposits                                                                                                      
|                                     |                                                                                                               
|                                     |                                                                                                               
|                                     |                                                                                                               
|                                     |                                                                                                               
|                                     |                                                                                                               
|LIABILITIES AND SHAREHOLDERS' EQUITY |                                                                                                               
|CURRENT LIABILITIES                  |                                                                                                               
|                                     | Accounts payable                                                                                              
|                                     | Accrued expenses                                                                                              
|                                     | Accrued taxes                                                                                                 
|                                     | 401k payable                                                                                                  
|                                     |                                                                                                               
|                                     |                                                                                                               
|SHAREHOLDERS' EQUITY                 |                                                                                                               
|                                     | Common Stock, par value $.0001 per share; authorized 6,000,000 shares; 4,987,624 shares issued and outstanding
|                                     | Additional Paid in Capital                                                                                    
|                                     | Accumulated deficit                                                                                           
|                                     |                                                                                                               
|                                     |                                                                                                               
|                                     |                                                                                                               
|                                     |                                                                                                               
|                                     |                                                                                                               

The
accompanying notes are an integral part of these financial statements.

3

---



ETS PAYPHONES, INC.
STATEMENTS OF OPERATIONS
Unaudited

|                                                  |                                        | Three Months Ended       |            | Nine Months Ended |          
|------------------------------------------------- | -------------------------------------- | ------------------------ | ---------- | ----------------- | ---------
|
|REVENUE                                           |                                        |                          |            |                   |          
|                                                  | Coin Calls                             |                          | $          | 3,510,763         |          
|                                                  | Non-coin calls                         |                          |            | 1,215,442         |          
|                                                  | Other payphone revenue                 |                          |            | 216,633           |          
|                                                  |                                        |                          |            |                   |          
|                                                  |                                        | Total Revenue            |            |                   | 4,942,838
|                                                  |                                        |                          |            |                   |          
|OPERATING EXPENSES                                |                                        |                          |            |                   |          
|                                                  | Telephone Charges                      |                          |            | 1,504,051         |          
|                                                  | Commissions                            |                          |            | 1,383,704         |          
|                                                  | Service, maintenance and network costs |                          |            | 1,546,661         |          
|                                                  | Depreciation & amortization            |                          |            | 266,330           |          
|                                                  | Selling, general and administrative    |                          |            | 1,271,001         |          
|                                                  |                                        |                          |            |                   |          
|                                                  |                                        | Total Operating Expenses |            |                   | 5,971,747
|                                                  |                                        |                          |            |                   |          
|                                                  | Loss from Operations                   |                          |            | (1,028,909        | )        
|OTHER INCOME (EXPENSE)                            |                                        |                          |            |                   |          
|                                                  | Interest income (expense)              |                          |            | (690              | )        
|                                                  | Reorganization expense                 |                          |            | (28,883           | )        
|                                                  | Gain (Loss) on asset disposition       |                          |            | (37,038           | )        
|                                                  | Other income                           |                          |            | 69,506            |          
|                                                  |                                        |                          |            |                   |          
|                                                  |                                        | Total Other Income       |            |                   | 2,895    
|                                                  |                                        |                          |            |                   |          
|NET LOSS                                          |                                        | $                        | (1,026,014 | )                 | $        
|                                                  |                                        |                          |            |                   |          
|Basic and diluted net loss per common share       |                                        | $                        | (0.21      | )                 | $        
|                                                  |                                        |                          |            |                   |          
|Weighted avg. number of common shares outstanding |                                        |                          | 4,987,624  |                   |          
|                                                  |                                        |                          |            |                   |          

The
accompanying notes are an integral part of these financial statements.

4

---



ETS PAYPHONES, INC.
STATEMENTS OF CASH FLOWS
Unaudited

|                                                 |                                                                               | Nine Months Ended
September 30, 2004                          |                   | Nine Months Ended
September 30, 2003 |           
|------------------------------------------------ | ----------------------------------------------------------------------------- | ------------------------------------------------------------- | ----------------- | ------------------------------------ | ----------
|
|Operating Activities                             |                                                                               |                                                               |                   |                                      |           
|                                                 | Net (Loss)                                                                    |                                                               | $                 | (3,384,420                           | )         
|                                                 | Adjustments to reconcile net (loss) to net cash used by operating activities: |                                                               |                   |                                      |           
|                                                 | Depreciation expense                                                          |                                                               |                   | 1,039,416                            |           
|                                                 | Site licenses written down for sites taken out of service                     |                                                               |                   | 157,751                              |           
|                                                 | Decrease in restricted cash balance                                           |                                                               |                   | 975,844                              |           
|                                                 | Changes in operating assets and liabilities:                                  |                                                               |                   |                                      |           
|                                                 |                                                                               | Decrease in accounts receivable                               |                   |                                      | 1,303,663 
|                                                 |                                                                               | (Increase) Decrease in inventories                            |                   |                                      | 43,983    
|                                                 |                                                                               | (Increase) in prepaid expenses                                |                   |                                      | (69,481   
|                                                 |                                                                               | (Decrease) in accounts payable                                |                   |                                      | (1,022,903
|                                                 |                                                                               | (Decrease) Increase in accrued expenses and other liabilities |                   |                                      | 571,475   
|                                                 |                                                                               | (Increase) Decrease in other non-current assets               |                   |                                      | 11,850    
|                                                 |                                                                               |                                                               |                   |                                      |           
|                                                 |                                                                               |                                                               | Total Adjustments |                                      |           
|                                                 |                                                                               |                                                               |                   |                                      |           
|Net cash used by operating activities            |                                                                               |                                                               | (372,822          | )                                    |           
|                                                 |                                                                               |                                                               |                   |                                      |           
|Investing Activity                               |                                                                               |                                                               |                   |                                      |           
|                                                 | Purchase of fixed assets                                                      |                                                               |                   | (61,954                              | )         
|Financing Activity                               |                                                                               |                                                               |                   |                                      |           
|                                                 | Cash used for stock issuance costs                                            |                                                               |                   | (140,351                             | )         
|Net decrease in cash                             |                                                                               |                                                               | (575,127          | )                                    |           
|CashBeginning of Period, December 31            |                                                                               |                                                               | 1,794,745         |                                      |           
|                                                 |                                                                               |                                                               |                   |                                      |           
|CashEnd of Period, September 30                 |                                                                               | $                                                             | 1,219,618         |                                      | $         
|                                                 |                                                                               |                                                               |                   |                                      |           
|Supplemental Disclosure of Cash Flow Information |                                                                               |                                                               |                   |                                      |           
|                                                 | Cash paid for interest                                                        |                                                               | $                 | 1,597                                |           

The
accompanying notes are an integral part of these financial statements.

5

---





ETS PAYPHONES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Summary Information

Our unaudited interim financial statements presented herein should be read in conjunction with the audited financial statements of our company contained in our
Form 10-SB for the year ended December 31, 2003. Interim results are not necessarily indicative of results to be expected for the entire year.

The Company

ETS Payphones, Inc. ("ETS" or the "Company") is a Delaware corporation that operates, services, and maintains a system of payphones. ETS is one of the
largest independent payphone operators in the United States, currently managing approximately 16,000 payphones from eight branch offices handling 28 states, Washington D.C., and Puerto Rico.

The
Company enters into binding agreements with location owners to operate payphones at locations such as shopping centers, hospitals, hotels, convenience stores, service stations,
grocery stores, restaurants, airports, truck stops and bus terminals. In addition to agreements with private property owners, ETS is party to various agreements with municipalities under which the
Company has been granted the right to provide payphone services on municipal property. In most instances, the site
agreements on location leases entitle the private property owner or municipality to a percentage of revenues as "rent." In other instances, these agreements take the form of franchises pursuant to
which ETS is required to pay either a fixed per phone fee or a percentage of revenues.

Initial Public Filing

The Company filed an initial registration statement, Form 10-SB, with the Securities and Exchange Commission in April, 2004.

Revenue Recognition

The Company derives its revenues from two principal sources: coin calls and non-coin calls. Coin calls represent calls paid for by callers with coins
deposited into the payphone. Coin call revenues are recorded in the amount of coins deposited in the payphones and in the period deposited. We also receive revenues from non-coin calls
made from our payphones. These non-coin calls include credit card, calling card, prepaid calling card, collect and third-party billed calls where the caller dials "0" plus the number or
simply dials "0" for an operator. Non-coin calls often require a number of services, including automated or live operators to answer the call, verifying billing information, validating
calling cards and credit cards, routing and transmitting the call to its destination, monitoring the call's duration and determining the charge for the call, and billing and collecting the applicable
charge. We have contracted with a limited number of operator service providers to handle these calls and perform all associated functions, while paying us a commission on the revenues generated
thereby.

On
August 12, 2004, the FCC released a Report and Order increasing the default compensation rate for certain non-coin calls otherwise known as dial around calls. The
rate will increase from $.24 to $.494 effective September 27, which means the Company expects to receive dial around payments at the new rate beginning in April, 2005. The effect this new FCC
Order will have on the Company's revenues is uncertain at this time and will not be known until the dial around call records for the fourth quarter are processed and remittance is received next year.
The typical remittance pattern for

6

---



dial
around receipts occurs three months after the end of the quarter in which data is submitted for payment.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet. Accordingly, actual results could differ from those
estimates.

Significant
estimates used in preparing these financial statements include those used in estimating the allowance for doubtful accounts. It is at least reasonably possible that these
significant estimates used will change during the current fiscal year.

Net Loss Per Common Share

Basic loss per share is computed based on net loss divided by the weighted average number of common shares outstanding. There were no potential common share
equivalents outstanding during 2003 or 2004, therefore the diluted loss per common share is the same as the basic loss per common share.

Other Income

Other income as shown under the heading "Other Income and Expense" in the Statement of Operations consists of the following:

Q3

Q2

Q1

YTDEstimated tax liability adjustment





487,500

487,500Dial around true-up receipts for prior years' operations

28,768

31,226

262,314

322,308Dial around take-back, prior years



(140,951
)


(140,951
)N.C. BellSouth "New Services Test" refund

39,239





39,239Other miscellaneous income items

1,499

29,027

12,279

42,805Total

69,506

(80,698
)
762,093

750,901


The
"New Services Test" refund received in the current quarter is the result of regulatory rulings related to prior periods in which the Company received a refund of LEC expenses paid in
prior years.

The
dial around take-back in the second quarter was the result of funds taken back by long-distance carriers relating to activity in prior years.

The
estimated tax liability adjustment in the first quarter for $487,500 resulted from an elimination of the liability due for certain fees in New York City. The Company obtained a bond
to cover potential obligations. This bond replaced the former requirement for cash collateral.

7

---



Item 2. Plan of Operation

ETS Payphones, Inc. owns and operates approximately 16,000 public pay telephones in 28 states concentrated primarily in the Eastern and Southern United
States, as well as the District of Columbia and Puerto Rico. We are an independent owner of payphone equipment placed at locations with client site owners that include retail establishments,
convenience stores, hotels, hospitals and other publicly and privately owned businesses. These locations are owned or managed by over 5000 clients that include Fortune 100 companies as well as single
store accounts and municipalities. We also provide other telecommunications products to certain clients.

Our
primary business is to install and operate payphones pursuant to contracts with location owners. We install public payphones in properties owned or controlled by others where
significant demand exists for public payphone services, such as shopping centers, hospitals, hotels, convenience stores, service stations, grocery stores, restaurants, airports, truck stops and bus
terminals. We service and maintain the payphones and collect the revenue generated.

Risk Factors

The following risk factors should be considered carefully in addition to the other information contained in this report.

1.Regulatory Issues

The enactment of the Telecommunications Act significantly altered the regulatory landscape in which payphone companies operate. Although we believe that the
Telecommunications Act, as implemented by the FCC, addressed certain historical inequities in the payphone marketplace, uncertainties relating to the impact and timing of the implementation of the new
regulatory framework still exist. The uncertainty with the greatest potential financial impact relates to revenue from access code calls and toll-free dialed calls, also referred to as
dial-around compensation. Dial-around compensation accounts for a material percentage of our revenues. Additionally, the March 2004 United States Court of Appeals, D.C.
Circuit decision to vacate the FCC Unbundled Network Element rules will have an unknown effect on local line access pricing.

2.Limited Financial Resources

Our future performance and liquidity will depend on a number of factors, including industry performance, general business and economic conditions, the absence of
contingencies, and other matters, many of which are beyond our control. We will have limited financial resources, and it may be the case that we will not have the funds to make capital improvements
arising other than in the ordinary course of business.

3.Dependence Upon Third-Party Providers

We assemble payphones from components provided by outside suppliers. In addition, we rely on outside suppliers for local line access, billing and collection
services, and long-distance and operator services. We believe that multiple suppliers are available to meet all of our product and service needs at competitive prices and rates and expect
the availability of such products and services to continue in the future. However, we cannot assure the continuing availability of alternative sources.

4.Competition

We compete with other telecommunications providers, including providers of wireless services, other payphone providers and long-distance carriers.
Many of these competitors have substantially greater financial, marketing, and other resources than the Company.

8

---



5.Technological Change and New Services

Continuous technological change, frequent service and product innovations, and evolving industry standards characterize the telecommunications industry. We
believe that our future success will depend in part on our ability to anticipate technological changes and respond in a timely and effective manner to meet new industry standards. Any failure to keep
pace with technological change (including the technical support component required to operate payphones) and new customer service demands could have a material adverse effect on our business.

6.Impact of Seasonality

Our revenue from payphone operations is affected by seasonal variations. Because many of our payphones are located outdoors, weather patterns have differing
effects on our revenue depending on the region of the country where the payphones are located and the enclosure housing of the phone. For example, our payphones throughout the midwestern and eastern
United States produce their highest call volumes during the second and third quarters, when the climate tends to be more favorable. Seasonal variations in revenues could have a material adverse effect
on our business. Changes in the geographic distribution of our payphones may in the future result in different seasonal variations in our results.

7.No established market for the Common Stock.

Our Common Stock is not listed on any stock exchange. Our Common Stock was issued to approximately 12,500 individuals and entities. Ownership interests are
tracked by the transfer agent, American Stock Transfer and Trust Company ("AST&T"), and transfers of ownership may be documented through AST&T. The Common Stock is not traded on any recognized stock
exchange, stock market or bulletin board system and there are no market makers for the Common Stock. There can be no assurance that an active or liquid trading market for our shares of Common Stock
will develop or be maintained.

8.Possible discontinuance of operations

If we are unable to achieve profitability, or if operating losses continue in the future, we may not be able to remain a viable company and may have to
discontinue operations. Our expenses have historically exceeded our revenues and we have sustained losses since our bankruptcy reorganization in December 2002.

9

---



Item 3. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer (collectively, the "Certifying Officers") are responsible for establishing and maintaining disclosure
controls and procedures for the Company. Based upon such officers' evaluation of these controls and procedures as of a date within 45 days of the filing of this Quarterly Report, and subject to
the limitations noted hereinafter, the Certifying Officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in this
Quarterly Report is accumulated and communicated to management, including our principal officers as appropriate, to allow timely decisions regarding required disclosure.

The
Certifying Officers have also indicated that there were no significant changes in our internal controls or other factors that could significantly affect such controls subsequent to
the date of their evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses.

Our
management, including each of the Certifying Officers, does not expect that our disclosure controls or our internal controls will prevent all error and fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations on all control systems, no evaluation of
controls can provide absolute assurance that all controls issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two
or more people or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and their can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not
be detected.

10

---





PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

|EXHIBIT
NUMBER |  | DESCRIPTION                                                                   
|-------------- |  | ------------------------------------------------------------------------------
|31.1           |  | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|31.2           |  | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|32.1           |  | Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|32.2           |  | Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

No
reports on Form 8-K were filed in the third quarter of 2004.

11

---





SIGNATURES

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

|                        |  | ETS PAYPHONES, INC.
|----------------------- |  | -------------------
|Date: November 10, 2004 |  | By:                
|                        |  | By:                

12

---



QuickLinks