**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-QSB**
| **(Mark One)**                                         |
|--------------------------------------------------------|
| ** **                                             | ** ** |
| **x**                                                  | **QUARTERLY REPORT UNDER SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                             | ** ** |
| **For the  quarterly period ended September 30, 2006** |
| ** **                                             | ** ** |
| **o**                                                  | **TRANSITION REPORT UNDER SECTION 13 OR  15(d) OF THE EXCHANGE ACT OF 1934** |
|                                                        |  |  |

**For the transition periodfrom                to                **

**Commission file number 000-50712**

**ETS PAYPHONES, INC.**

(Exact name of small business issuer as specified inits charter)

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

**(770) 819-1600**

(Issuer’s telephone number)

Checkwhether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.Yes  x    No  o

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes  o    No  x

**APPLICABLE ONLY TO ISSUERS INVOLVEDIN BANKRUPTCY**

**PROCEEDINGS DURING THE PRECEDING FIVEYEARS**

Checkwhether the registrant filed all documents and reports required to be filed bySection 12, 13 or 15(d) of the Exchange Act after the distribution ofsecurities under a plan confirmed by a court. Yes  x    No  o

TransitionalSmall Business Disclosure Format. Yes  x    No  o

As of September 30, 2006,there were outstanding 4,987,624 shares of the Issuer’s common stock $.0001 parvalue.

 

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**ETS PAYPHONES, INC.**

**INDEX TO FORM 10-QSB**

**SEPTEMBER 30, 2006**

Part I. FinancialInformation

 
| Item 1.                          |   | Financial Statements                                                                                                    |   |
|----------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|
|                             |   | Statement of  Net Assets in Liquidation September 30, 2006 (Unaudited)                                                  |   |
|                             |   | Statements of  Changes in Net Assets in Liquidation for the three and nine months ended  September 30, 2006 (Unaudited) |   |
|                             |   | Statements of  Operations (Going Concern Basis) for the three and nine months ended  September 30, 2005 (Unaudited)     |   |
|                             |   | Statement of  Cash Flows (Going Concern Basis) for the nine months ended September 30, 2005  (Unaudited)                |   |
|                             |   | Notes to  Financial Statements (Unaudited)                                                                              |   |
| Item 2.                          |   | Plan of Operation                                                                                                       |   |
| Item 3.                          |   | Controls and  Procedures                                                                                                |   |
|                             |   |                                                                                                                    |   |
| Part II. Other  Information |   |
| Item 1.                          |   | Legal Proceedings                                                                                                       |   |
| Item 5.                          |   | Other Information                                                                                                       |   |
| Item 6.                          |   | Exhibits                                                                                                                |   |
| Signatures                       |   |                                                                                                                    |

 

2

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**PART I. FINANCIAL INFORMATION**

**Item 1.Financial Statements**

**ETS PAYPHONES, INC.**

**STATEMENT OF NET ASSETS INLIQUIDATION**

**SEPTEMBER 30, 2006**

**(Unaudited)**
| **ASSETS**                                         | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|------------|------------|
| Cash                                               |       | $          | 1,489,988  |   |
| Cash, restricted                                   |       | 82,880     |       |
| Accounts  receivable                               |       | 1,666,742  |       |
| Inventories                                        |       | 402,440    |       |
| Prepaid expenses                                   |       | 37,612     |       |
| Payphones,  property and equipment                 |       | 3,952,305  |       |
| Deposits                                           |       | 159,262    |       |
| Total assets                                       |       | 7,791,229  |       |
|                                               |       |       |       |
| **LIABILITIES**                                    | ** ** | ** ** | ** ** |
| Advance on sale  of business                       |       | 514,286    |       |
| Estimated costs  to be incurred during liquidation |       | 741,954    |       |
| Accounts payable                                   |       | 1,766,244  |       |
| Accrued expenses                                   |       | 4,736,024  |       |
| Accrued  property, excise and sales taxes          |       | 124,280    |       |
| Total  liabilities                                 |       | 7,882,788  |       |
|                                               |       |       |       |
| **Deficiency in net assets in liquidation**        |       | $          | (91,559    | ) |

This statement has been prepared on the liquidationbasis of accounting.

The accompanying notes are an integral part ofthese financial statements.

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**ETS PAYPHONES, INC.**

**STATEMENTS OF CHANGES IN NET ASSETSIN LIQUIDATION**

**FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER30, 2006**

**(Unaudited)**
| ** **                                                     | ** ** | **For the three months  ended September 30,  2006** | ** ** | **For the nine months  ended September 30,  2006** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| **PRE-LIQUIDATION  OPERATIONS**                                | ** ** | ** **                                                                   | ** ** | ** **                                                                  | ** ** |
| **Revenues**                                                   | ** ** | ** **                                                                   | ** ** | ** **                                                                  | ** ** |
| Coin calls                                                     |       | $                                                                            | 1,883,092  |                                                                        | $          | 5,668,010 |   |
| Non-coin calls                                                 |       | 883,118                                                                      |       | 2,934,375                                                                   |       |
| Other payphone revenue                                         |       | 90,861                                                                       |       | 510,543                                                                     |       |
| Total revenue                                                  |       | 2,857,071                                                                    |       | 9,112,928                                                                   |       |
|                                                           |       |                                                                         |       |                                                                        |       |
| **Operating expenses**                                         | ** ** | ** **                                                                   | ** ** | ** **                                                                  | ** ** |
| Direct cost of payphone operations                             |       | 2,476,773                                                                    |       | 8,324,688                                                                   |       |
| Selling, general and administrative                            |       | 614,721                                                                      |       | 2,142,852                                                                   |       |
| Depreciation                                                   |       | —                                                                       |       | 120,104                                                                     |       |
| Total operating expenses                                       |       | 3,091,494                                                                    |       | 10,587,644                                                                  |       |
|                                                           |       |                                                                         |       |                                                                        |       |
| **Loss from operations**                                       |       | (234,423                                                                     | )          | (1,474,716                                                                  | )          |
|                                                           |       |                                                                         |       |                                                                        |       |
| **Other income**                                               |       | 63,059                                                                       |       | 227,611                                                                     |       |
|                                                           |       |                                                                         |       |                                                                        |       |
| **Loss from pre-liquidation operations**                       |       | (171,364                                                                     | )          | (1,247,105                                                                  | )          |
|                                                           |       |                                                                         |       |                                                                        |       |
| **LIQUIDATION  ACTIVITIES**                                    | ** ** | ** **                                                                   | ** ** | ** **                                                                  | ** ** |
| Administrative expenses incurred after entering  liquidation   |       | —                                                                       |       | (2,468,148                                                                  | )          |
| Net unrealized gain on revaluations of assets and  liabilities |       | 41,391                                                                       |       | 1,060,505                                                                   |       |
| **Net income (loss) in liquidation**                           |       | 41,391                                                                       |       | (1,407,643                                                                  | )          |
|                                                           |       |                                                                         |       |                                                                        |       |
| **Net  decrease in net assets**                                |       | (129,973                                                                     | )          | (2,654,748                                                                  | )          |
|                                                           |       |                                                                         |       |                                                                        |       |
| Shareholders’ equity at beginning of period               |       | 38,414                                                                       |       | 2,563,189                                                                   |       |
|                                                           |       |                                                                         |       |                                                                        |       |
| Deficiency in net  assets in liquidation at September 30, 2006 |       | $                                                                            | (91,559    | )                                                                           | $          | (91,559 | ) |

This statement has been prepared on the liquidationbasis of accounting.

The accompanying notes are an integral part ofthese financial statements.

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**ETS PAYPHONES, INC.**

**STATEMENTS OF OPERATIONS (GOINGCONCERN BASIS)**

**FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER30, 2005**

**(Unaudited)**
| ** **                                            | ** ** | **For the Three Months  Ended September 30,  2005** | ** ** | **For the Nine Months  Ended September 30,  2005** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
|                                                  |       |                                                                         |       |                                                                        |       |
| REVENUE                                               |       |                                                                         |       |                                                                        |       |
| Coin Calls                                            |       | $                                                                            | 2,544,373  |                                                                        | $          | 8,448,459 |   |
| Non - coin calls                                      |       | 1,358,523                                                                    |       | 3,822,508                                                                   |       |
| Other payphone revenue                                |       | 169,444                                                                      |       | 544,324                                                                     |       |
| Total Revenue                                         |       | 4,072,340                                                                    |       | 12,815,291                                                                  |       |
|                                                  |       |                                                                         |       |                                                                        |       |
| OPERATING  EXPENSES                                   |       |                                                                         |       |                                                                        |       |
| Telephone Charges                                     |       | 1,303,072                                                                    |       | 4,136,996                                                                   |       |
| Commissions                                           |       | 816,539                                                                      |       | 3,380,776                                                                   |       |
| Service, maintenance and network costs                |       | 1,103,696                                                                    |       | 4,033,910                                                                   |       |
| Depreciation & amortization                       |       | 177,483                                                                      |       | 597,311                                                                     |       |
| Selling, general and administrative                   |       | 1,121,373                                                                    |       | 3,632,040                                                                   |       |
| Total operating expenses                              |       | 4,522,163                                                                    |       | 15,781,033                                                                  |       |
|                                                  |       |                                                                         |       |                                                                        |       |
| Loss from Operations                                  |       | (449,823                                                                     | )          | (2,965,742                                                                  | )          |
|                                                  |       |                                                                         |       |                                                                        |       |
| OTHER INCOME  (EXPENSE)                               |       |                                                                         |       |                                                                        |       |
| Interest income                                       |       | 1,206                                                                        |       | 1,171                                                                       |       |
| Reorganization expense                                |       | (11,920                                                                      | )          | (32,630                                                                     | )          |
| Gain on asset disposition                             |       | 29,430                                                                       |       | 417,162                                                                     |       |
| Other income                                          |       | 420,514                                                                      |       | 1,636,534                                                                   |       |
| Total other income                                    |       | 439,230                                                                      |       | 2,022,237                                                                   |       |
|                                                  |       |                                                                         |       |                                                                        |       |
| NET INCOME (LOSS)                                     |       | $                                                                            | (10,593    | )                                                                           | $          | (943,505 | ) |
|                                                  |       |                                                                         |       |                                                                        |       |
| Basic and  diluted net income (loss) per common share |       | $                                                                            | (0.00      | )                                                                           | $          | (0.19 | ) |
|                                                  |       |                                                                         |       |                                                                        |       |
| Weighted average number  of common shares outstanding |       | 4,987,624                                                                    |       | 4,987,624                                                                   |       |

This statement has been prepared on the going concernbasis of accounting.

The accompanying notes are an integral part ofthese financial statements.

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**ETS PAYPHONES, INC.**

**STATEMENT OF CASH FLOWS (GOINGCONCERN BASIS)**

**FOR THE NINE MONTHS ENDED SEPTEMBER30, 2005**

**(Unaudited)**
| Operating  Activities                                                       |   |      |      |
|-----------------------------------------------------------------------------|--------|-----------|-----------|
| Net Loss                                                                    |   | $         | (943,505  | ) |
| Adjustments to reconcile net loss to net cash used  by operating activities |   |      |      |
| Depreciation and amortization                                               |   | 806,385   |      |
| Decrease in restricted cash balance                                         |   | 404,254   |      |
| Gain from sale of payphones                                                 |   | (380,711  | )         |
| Changes in operating assets and liabilities:                                |   |      |      |
| Decrease in accounts receivable                                             |   | 425,714   |      |
| Decrease in inventories                                                     |   | 18,216    |      |
| Decrease in prepaid expenses                                                |   | 7,698     |      |
| Decrease in accounts payable                                                |   | (661,614  | )         |
| Increase in accrued expenses and other liabilities                          |   | 150,040   |      |
| Increase in other non-current assets                                        |   | (2,289    | )         |
| Total Adjustments                                                           |   | 767,693   |      |
|                                                                        |   |      |      |
| Net cash used by  operating activities                                      |   | (175,812  | )         |
|                                                                        |   |      |      |
| Investing  Activity                                                         |   |      |      |
| Purchase of fixed assets                                                    |   | (21,579   | )         |
|                                                                        |   |      |      |
| Net decrease in  cash                                                       |   | (197,391  | )         |
|                                                                        |   |      |      |
| Cash – December  31, 2004                                              |   | 1,544,999 |      |
| Cash – September  30, 2005                                             |   | $         | 1,347,608 |   |
|                                                                        |   |      |      |
| Supplemental  Disclosure of Cash Flow Information                           |   |      |      |
| Cash received for interest                                                  |   | $         | 1,171     |   |

This statement has been prepared on the going concernbasis of accounting.

The accompanying notes are an integral part ofthese financial statements.

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**ETSPAYPHONES, INC.**

**NOTES TO FINANCIAL STATEMENTS (UNAUDITED)**

**SEPTEMBER30, 2006**

**NOTE A—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

***Summary Information***

The accompanyingunaudited financial statements have been prepared pursuant to therules and regulations of the Securities and Exchange Commission (“SEC”)for interim financial information and the general instructions toForm 10-QSB. Certain information and footnote disclosures, normallyincluded in annual financial statements, have been condensed or omittedpursuant to such SEC rules and regulations. These interim financialstatements should be read in conjunction with our audited financial statementsand notes thereto included in our Annual Report on Form 10-KSB for thefiscal year ended December 31, 2005.

***Basisof Accounting***

The financialstatements for the three and nine months ended September 30, 2005 and thefiscal year ended December 31, 2005, were prepared on the going concernbasis of accounting, which contemplates realization of assets and satisfactionof liabilities in the normal course of business. As a result of ourshareholders’ approval of the sale of substantially all of the Company’s assetsand the imminent nature of the liquidation of our Company, the Company adopted theliquidation basis of accounting effective February 15, 2006. The financialstatements for the three and nine months ended September 30, 2006 were preparedon the liquidation basis of accounting. The liquidation basis of accounting isconsidered appropriate when, among other things, liquidation of a company isprobable and the net realizable values of assets are reasonably determinable.Under this basis of accounting, assets are valued at their estimated netrealizable values and liabilities are stated at their estimated settlementamounts. For financial statement presentation purposes, liquidating activitiesare limited to those relating to the revaluation and disposition of assets andliabilities as well as costs incurred or expected to be incurred specificallyas a result of liquidation.

We are in theprocess of finalizing the disposition of our remaining operating assets andanticipate this process will be completed by the end of 2006. The Company willcontinue in existence until its final dissolution, which is currently expectedto occur during early 2007. All normal operations engaged in during the portionof the wind-down period presented prior to completion of the liquidation areincluded in pre-liquidation activities but do not include estimated futureoperating losses expected to be incurred prior to the final liquidation.

Interim resultsare not necessarily indicative of results to be expected for the entire year.The preparation of financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets, liabilities,revenues and expenses. Actual results could differ from those estimates. In theopinion of management, all adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation have been included.With regard to the liquidating activities, the amounts ultimately realizablefrom the disposition of the remaining assets, including costs to be incurred inconnection with the liquidation, or the amounts that creditors will agree toaccept in settlement of the obligations due them, may differ materiallyfrom the estimated or other amounts shown in the accompanying financialstatements, and the estimates are subject to material change in the near term.

***EstimatedCosts to be Incurred During Liquidation***

Under theliquidation basis of accounting, we accrue for the remaining costs to beincurred during liquidation, including compensation and severance for theremaining employees, board fees, fees of professional service providers, andmiscellaneous other costs. Such costs were estimated at $740,000 as ofSeptember 30, 2006. Our estimates are based on assumptions regarding ourability to settle outstanding obligations to creditors, resolve outstandinglitigation, settle remaining facility leases, and the timing of distributionsto shareholders. If there are delays, or we are not successful, in achievingthese objectives, actual costs incurred may increase, reducing net assetsavailable in liquidation.

***The Company***

ETS Payphones, Inc.(“ETS” or the “Company”) is a Delaware corporation that operates, services, andmaintains a system of payphones. ETS is one of the largest independent payphoneoperators in the United States, and currently manages approximately 9,000payphones from four branch offices handling 32 states, Washington D.C., andPuerto Rico.

7

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The Company enters intobinding agreements with location owners to operate payphones at locations suchas shopping centers, hospitals, hotels, convenience stores, service stations,grocery stores, restaurants, airports, truck stops and bus terminals. Inaddition to agreements with private property owners, ETS is party to variousagreements with municipalities under which the Company has been granted theright to provide payphone services on municipal property. In most instances,the site agreements on location leases entitle the private property owner ormunicipality to a percentage of revenues as “rent.” In other instances, theseagreements take the form of franchises pursuant to which ETS is requiredto pay either a fixed per phone fee or a percentage of revenues.

***Sale of the Company; Winding Down of Operations***

As we havepreviously reported, the Company entered into an Asset Sale Agreement datedNovember 1, 2005 (the “Asset Sale Agreement”), and related agreementsincluding a security agreement and a promissory note to sell substantially allof its operating assets to Empire Payphones, Inc. (“Empire”), anindependent third party. In addition, the Company also entered into a ManagementServices Agreement effective November 1, 2005 (“Management ServicesAgreement”), with Empire in which Empire has agreed to provide managementservices and fund the operational losses of ETS pending consummation of thesale transaction. A summary description of the transactions is below. Thedescription below is qualified in its entirety by the more detailed descriptionin the Current Report on Form 8-K filed by the Company on November 7,2005, the Definitive Proxy Statement filed on January 4, 2006 and theForm 10-KSB for the fiscal year ended December 31, 2005, filed onMarch 31, 2006, and to the exhibits therein.

***Asset Sale Agreement***

Pursuant to theAsset Sale Agreement, the Company has agreed to sell substantially all of itsassets used in its payphone business to Empire. Under the Asset Sale Agreement,the purchase price aggregates $4.5 million and will be paid in installments,some prior to the consummation of the transaction, as follows:(i) $250,000 in cash on November 1, 2005, (ii) payment of certaincommissions under assigned contracts not to exceed $2.4 million in theaggregate and (iii) $1.85 million in cash, payable in monthly installmentsof $132,143 commencing December 1, 2005, with any remaining balance beingpaid at the closing of the transaction.

The closing of theAsset Sale Agreement is subject to a number of conditions, including compliancewith regulatory requirements. The Asset Sale Agreement also includestermination provisions that may require ETS to repay certain amounts paidby Empire under this agreement and the Management Services Agreement discussedbelow.

***Management Services Agreement***

In order toprovide for the funding of operational losses of ETS’ payphone business pendingconsummation of the Asset Sale Agreement, ETS and Empire entered into theManagement Services Agreement. Under the Management Services Agreement, Empirehas agreed to provide to ETS management services and fund operational losses ofthe payphone business of ETS, subject to the oversight of the Board of Directorsof ETS. In consideration for its management services and the use by ETS ofEmpire’s affiliates’ resources, Empire shall be entitled to receive amanagement fee calculated at the end of the initial term of the ManagementServices Agreement and at the end of any renewal term in the amount of thefirst $400,000 of excess revenue, after repayment of, among other amounts, allexpenses of operation and any advances made by Empire to fund operationallosses plus 50% of any excess revenue above $400,000. ETS shall receive theremaining 50% of excess revenue above $400,000. For use of Empire’s affiliates’resources during the term of the Management Agreement, the affiliates shallreceive a monthly resource fee of $92,000.

The ManagementServices Agreement has an initial term of two years and will be automaticallyextended for successive periods of one year unless Empire provides notice priorto the end of any term that the agreement will terminate at the end of suchterm. The Management Services Agreement is also subject to other terminationprovisions, which includes the consummation of the Asset Sale Agreementdetailed above. If the Management Services Agreement is terminated other thanupon the consummation of the Asset Sale Agreement, ETS will be required to repaycertain amounts paid by Empire under the Management Services Agreement.

As of September30, 2006, the Company has not accrued for any unfunded operational losses byEmpire since these shortfall advances are contingent upon the closing of thesale transaction. Once the closing occurs the Company will accrue the amount ofthe shortfall advances due and increase its net assets in liquidationaccordingly. The amount of the unfunded shortfall advances at September 30,2006 was approximately $1.6 million.

8

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***Stockholder Approval; Winding Down of Operations***

Pursuant to theAnnual Meeting of Stockholders held February 15, 2006, the stockholders ofthe Company approved, among other things, the sale of substantially all of ourassets to Empire pursuant to the Asset Sale Agreement and the winding down ofour operations following the sale of substantially all of our assets to Empire.As a result, the Company has changed its basis of accounting to the liquidationbasis as of February 15, 2006, on a go forward basis. Following theconsummation of the Asset Sale Agreement, it is the intention of the Board ofDirectors to dissolve the Company in accordance with applicable laws and todistribute any proceeds remaining after such dissolution to its stockholders.Upon consummation of the Asset Sale Agreement, the Company intends to file acertificate of dissolution with the Secretary of State of Delaware and closethe stock transfer books to discontinue recording transfers of our common stockat the close of business on the date we file the certificate of dissolutionwith the Secretary of State of Delaware.

After consummationof the Asset Sale Agreement our activities will be limited to collectingproceeds from assets not included in the sale, paying off creditors, performingrequirements under applicable law and distributing any remaining proceeds tostockholders. As a result of contingent or unmature liabilities thatmay materialize or mature, dissolution and liquidation may not createvalue to our stockholders or result in any remaining capital for distributionto our stockholders. In addition, claims, liabilities and expenses during thewinding down of our company will continue to be incurred which will reduce theamount of assets available for distribution. Any distributions made by us shallbe made solely to the stockholders of record at the close of business on theFinal Record Date, except as may be necessary to reflect subsequenttransfers recorded on our books as a result of assignments by will, intestatesuccession or operation of law.

***Revenue Recognition***

The Companyderives its revenues from two principal sources: coin calls and non-coin calls.Coin calls represent calls paid for by callers with coins deposited into thepayphone. Coin call revenues are recorded in the amount of coins deposited inthe payphones and in the period deposited. We also receive revenues fromnon-coin calls made from our payphones. These non-coin calls include creditcard, calling card, prepaid calling card, collect and third-party billed calls wherethe 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 liveoperators to answer the call, verifying billing information, validating callingcards and credit cards, routing and transmitting the call to its destination,monitoring the call’s duration and determining the charge for the call, andbilling and collecting the applicable charge. We have contracted with a limitednumber of operator service providers to handle these calls and perform allassociated functions, while paying us a commission on the revenues generatedthereby.

***Net Income (Loss) Per Common Share***

Basic income(loss) per share is computed based on net income (loss) divided by the weightedaverage number of common shares outstanding. There were no potential commonshare equivalents outstanding during 2005; therefore the diluted loss percommon share is the same as the basic loss per common share.

**NOTE B—OTHER INCOME (EXPENSE)**

Other income forthe nine months ended September 30, 2006 and 2005 consists of the following:
| **2006**                                                          | ** ** | **Q3** | ** ** | **Q2** | ** ** | **Q1**  | ** ** | **YTD** | ** ** |
|-------------------------------------------------------------------|------------|--------|------------|--------|------------|---------|------------|---------|------------|
|                                                              |       |   |       |   |       |    |       |    |       |
| Dial around true-up receipts for prior years’  operations    |       | $      | —     |   | $          | 3,761   |       | $       | 90,027     |   | $ | 93,788 |   |
| Local exchange carrier credits from prior years’  operations |       | 5,160  |       | 29,704 |       | 12,372  |       | 47,236  |       |
| Loss recovery                                                     |       | 29,900 |       | 21,000 |       | 1,196   |       | 52,096  |       |
| Reorganization expense                                            |       | — |       | — |       | (43,985 | )          | (43,985 | )          |
| Interest income                                                   |       | 12,053 |       | 17,881 |       | 9,571   |       | 39,505  |       |
| Other miscellaneous income items                                  |       | 15,946 |       | 22,763 |       | 262     |       | 38,971  |       |
|                                                              |       |   |       |   |       |    |       |    |       |
|                                                              |       | $      | 63,059     |   | $          | 95,109  |       | $       | 69,443     |   | $ | 227,611 |   |

 

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| **2005**                                                       | ** ** | **Q3**  | ** ** | **Q2**  | ** ** | **Q1**    | ** ** | **YTD** | ** ** |
|----------------------------------------------------------------|------------|---------|------------|---------|------------|-----------|------------|---------|------------|
|                                                           |       |    |       |    |       |      |       |    |       |
| Dial around true-up receipts for prior years’  operations |       | $       | 4,904      |    | $          | 237,275   |       | $       | 182,074    |   | $ | 424,253 |   |
| MCI bankruptcy settlement                                      |       | —  |       | 276,626 |       | —    |       | 276,626 |       |
| EUCL and other legal settlements                               |       | 342,625 |       | 463,099 |       | —    |       | 805,724 |       |
| Commission true-up for prior years’ operations            |       | 81,592  |       | —  |       | —    |       | 81,592  |       |
| Other miscellaneous income(expense) items                      |       | (8,607  | )          | 23,198  |       | 33,748    |       | 48,339  |       |
|                                                           |       |    |       |    |       |      |       |    |       |
|                                                           |       | $       | 420,514    |    | $          | 1,000,198 |       | $       | 215,822    |   | $ | 1,636,534 |   |

 

***NOTE C - VALUATION OF ASSETS AND LIABILITIES***

***Due to the Company changing to the liquidationbasis of accounting, the valuation of assets and liabilities has been adjustedto reflect the amounts expected in liquidation. The valuation of assets attheir net realizable value and liabilities at their anticipated settlementamounts requires many estimates and assumptions. In addition, there aresubstantial risks and uncertainties associated with carrying out theliquidation of the Company’s existing operations. The valuations presented inthe accompanying Statements of Changes in Net Assets in Liquidation representestimates, based on present facts and circumstances, of the net realizablevalues of assets and costs associated with carrying out the dissolution andliquidation plan. The actual values and costs are expected to differ from theamounts shown herein and could be greater or lesser than the amounts recorded.Accordingly, it is not possible to predict the aggregate amount, if any, thatwill ultimately be distributable to shareholders.***

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**Item2. Plan of Operation**

ETSPayphones, Inc. owns and operates approximately 9,000 public paytelephones in 32 states concentrated primarily in the Eastern and SouthernUnited States, as well as the District of Columbia and Puerto Rico. We are anindependent owner of payphone equipment placed at locations with client siteowners that include retail establishments, convenience stores, hotels,hospitals and other publicly and privately owned businesses. These locationsare owned or managed by over 3,000 clients that include Fortune 100 companiesas well as single store accounts and municipalities.

Our primarybusiness is to install and operate payphones pursuant to contracts withlocation owners. We install public payphones in properties owned or controlledby others where significant demand exists for public payphone services, such asshopping centers, hospitals, hotels, convenience stores, service stations,grocery stores, restaurants, airports, truck stops and bus terminals. Weservice and maintain the payphones and collect the revenue generated.

***Sale of theCompany; Winding Down of Operations***

As we havepreviously reported, the Company entered into an Asset Sale Agreement datedNovember 1, 2005 (the “Asset Sale Agreement”), and related agreementsincluding a security agreement and a promissory note to sell substantially allof its operating assets to Empire Payphones, Inc. (“Empire”), anindependent third party. In addition, the Company also entered into aManagement Services Agreement effective November 1, 2005 (“ManagementServices Agreement”), with Empire in which Empire has agreed to providemanagement services and fund the operational losses of the Company pendingconsummation of the sale transaction. A summary description of the transactionsis below. The description below is qualified in its entirety by the moredetailed description in the Current Report on Form 8-K filed onNovember 7, 2005, the Definitive Proxy Statement filed on January 4,2006 and the Form 10-KSB for the fiscal year ended December 31, 2005,filed on March 31, 2006, and to the exhibits therein.

***Asset Sale Agreement***

Pursuant to theAsset Sale Agreement, the Company has agreed to sell substantially all of itsassets used in its payphone business to Empire. Under the Asset Sale Agreement,the purchase price aggregates $4.5 million and will be paid in installments,some prior to the consummation of the transaction, as follows:(i) $250,000 in cash on November 1, 2005, (ii) payment ofcertain commissions under assigned contracts not to exceed $2.4 million in theaggregate and (iii) $1.85 million in cash, payable in monthly installmentsof $132,143 commencing December 1, 2005, with any remaining balance beingpaid at the closing of the transaction.

The closing of theAsset Sale Agreement is subject to a number of conditions, including compliancewith regulatory requirements. The Asset Sale Agreement also includestermination provisions that may require us to repay certain amounts paidby Empire under this agreement and the Management Services Agreement discussedbelow.

***Management Services Agreement***

In order toprovide for the funding of operational losses of our payphone business pendingconsummation of the Asset Sale Agreement, the Company and Empire entered intothe Management Services Agreement. Under the Management Services Agreement,Empire has agreed to provide to the Company management services and fundoperational losses of our payphone business, subject to the oversight of ourBoard of Directors. In consideration for its management services and the use byus of Empire’s affiliates’ resources, Empire shall be entitled to receive amanagement fee calculated at the end of the initial term of the ManagementServices Agreement and at the end of any renewal term in the amount of thefirst $400,000 of excess revenue, after repayment of, among other amounts, allexpenses of operation and any advances made by Empire to fund operationallosses plus 50% of any excess revenue above $400,000. We shall receive the remaining50% of excess revenue above $400,000. For use of Empire’s affiliates’ resourcesduring the term of the Management Agreement, the affiliates shall receive amonthly resource fee of $92,000.

The ManagementServices Agreement has an initial term of two years and will be automaticallyextended for successive periods of one year unless Empire provides notice priorto the end of any term that the agreement will terminate at the end of suchterm. The Management Services Agreement is also subject to other terminationprovisions, which includes the consummation of the Asset Sale Agreementdetailed above. If the Management Services Agreement is terminated other thanupon the consummation of the Asset Sale Agreement, we will be required to repaycertain amounts paid by Empire under the Management Services Agreement.

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***StockholderApproval;******Winding Down of Operations***

As discussed inItem 4 of Part II in Form 10-KSB for the fiscal year endedDecember 31, 2005, filed March 31, 2006, pursuant to the AnnualMeeting of Stockholders held February 15, 2006, the stockholders of theCompany approved, among other things, the sale of substantially all of ourassets to Empire pursuant to the Asset Sale Agreement and the winding down ofour operations following the sale of substantially all of our assets to Empire.Following the consummation of the Asset Sale Agreement, it is the intention ofthe Board of Directors to dissolve the Company in accordance with applicablelaws and to distribute any proceeds remaining after such dissolution to itsstockholders. Upon consummation of the Asset Sale Agreement, the Companyintends to file a certificate of dissolution with the Secretary of State ofDelaware and close the stock transfer books to discontinue recording transfersof our common stock at the close of business on the date we file thecertificate of dissolution with the Delaware Secretary of State (the “FinalRecord Date”).

After consummationof the Asset Sale Agreement our activities will be limited to collectingproceeds from assets not included in the sale, paying off creditors, performingrequirements under applicable law and distributing any remaining proceeds tostockholders. As a result of contingent or unmature liabilities thatmay materialize or mature, dissolution and liquidation may not createvalue to our stockholders or result in any remaining capital for distributionto our stockholders. In addition, claims, liabilities and expenses during thewinding down of our company will continue to be incurred which will reduce theamount of assets available for distribution. Any distributions made by us shallbe made solely to the stockholders of record at the close of business on theFinal Record Date, except as may be necessary to reflect subsequenttransfers recorded on our books as a result of assignments by will, intestatesuccession or operation of law.

***Liquidation Basis of Accounting***

The condensedfinancial statements for the three and nine months ending September 30, 2006were prepared on the liquidation basis of accounting. Under the liquidationbasis of accounting, assets are stated at their estimated net realizable valuesand liabilities are stated at their estimated settlement amounts. Estimateswill be periodically reviewed and adjusted. Since the Company is in liquidation,the need to present future quarterly Statements of Operations and Statements ofCash Flows is eliminated.

***The valuation of assets at their net realizable value and liabilitiesat their anticipated settlement amounts necessarily requires many estimates andassumptions. In addition, there are substantial risks and uncertaintiesassociated with carrying out the liquidation of the Company’s existingoperations. The valuations presented in the accompanying Statements of Changesin Net Assets in Liquidation represent estimates, based on present facts andcircumstances, of the net realizable values of assets and costs associated withcarrying out the dissolution and liquidation plan based on the assumptions setforth below. The actual values and costs are expected to differ from theamounts shown herein and could be greater or lesser than the amounts recorded.Accordingly, it is not possible to predict the aggregate amount, if any, thatwill ultimately be distributable to shareholders.***

***Factors to Consider***

The followingcharacteristics of our operations or industry may have a material impactupon our future financial performance.

# ***1. Dissolution;Winding Down and Liquidation***

Pursuant to theAnnual Meeting of Stockholders held February 15, 2006, the stockholders ofthe Company approved, among other things, the sale of substantially all of ourassets to Empire pursuant to the Asset Sale Agreement and the winding down ofour operations following the sale of substantially all of our assets to Empire.After consummation of the Asset Sale Agreement our activities will be limitedto collecting proceeds from assets not included in the sale, paying offcreditors, performing requirements under applicable law and distributing anyremaining proceeds to stockholders of record. As a result of contingent orunmature liabilities that may materialize or mature, dissolution andliquidation may not create value to our stockholders or result in anyremaining capital for distribution to our stockholders. In addition, claims,liabilities and expenses during the winding down of our company will continueto be incurred which will reduce the amount of assets available fordistribution. We will close our stock transfer books and discontinue recordingtransfers of our common stock at the close of business on the date we file thecertificate of dissolution with the Delaware Secretary of State which isanticipated to be filed promptly following the consummation of the Asset SaleAgreement. Any distributions made by us shall be made solely to the stockholdersof record at the close of business on the Final Record Date, except asmay be necessary to reflect subsequent transfers recorded on our books asa result of assignments by will, intestate succession or operation of law. Wecannot assure the stockholders of the amount, if any, or timing of anydistribution to our stockholders as a result of the dissolution.

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# ***2.**Possiblediscontinuance of operations***

If we are unableto consummate the sale transaction to Empire pursuant to the Asset SaleAgreement we may not be able to remain a viable company and may haveto discontinue operations. Our expenses have historically exceeded our revenuesand we have sustained losses since our bankruptcy reorganization inDecember 2002. Based on continued erosion of revenue and despitemanagement’s reduction of operating expenses, there is substantial doubt aboutthe Company’s ability to continue as a going concern.

# ***3.**Regulatory Issues***

The enactment ofthe Telecommunications Act significantly altered the regulatory landscape inwhich payphone companies operate. Although we believe that theTelecommunications Act, as implemented by the FCC, addressed certain historicalinequities in the payphone marketplace, uncertainties relating to the impactand timing of the implementation of the new regulatory framework still exist.The uncertainty with the greatest potential financial impact relates to revenuefrom access code calls and toll-free dialed calls, also referred to asdial-around compensation. Dial-around compensation accounts for a materialpercentage of our revenues. Additionally, the March 2004 Court of Appealsdecision to vacate the FCC Unbundled Network Element rules will have anunknown effect on local line access pricing, but is expected to increase pricesto payphone service providers.

# ***4.**Limited Financial Resources***

Our futureperformance and liquidity will depend on a number of factors, includingindustry performance, general business and economic conditions, the absence ofcontingencies, and other matters, many of which are beyond our control. We havelimited financial resources, and it may be the case that we will not havethe funds to make capital improvements arising in the ordinary course ofbusiness.

# ***5.**Dependence Upon Third-Party Providers***

We assemblepayphones from components provided by outside suppliers. In addition, we relyon outside suppliers for local line access, billing and collection services,and long-distance and operator services. We believe that multiple suppliers areavailable to meet all of our product and service needs at competitive pricesand rates and expect the availability of such products and services to continuein the future. However, we cannot assure the continuing availability ofalternative sources.

# ***6.**Competition***

We compete withother telecommunications providers, including providers of wireless services,other payphone providers and long-distance carriers. Many of these competitorshave substantially greater financial, marketing, and other resources than theCompany.

# ***7.**Technological Change and New Services***

Continuoustechnological change, frequent service and product innovations, and evolvingindustry standards characterize the telecommunications industry. We believethat our future success will depend in part on our ability to anticipatetechnological changes and respond in a timely and effective manner to meet newindustry standards. Any failure to keep pace with technological change(including the technical support component required to operate payphones) andnew customer service demands could have a material adverse effect on ourbusiness.

# ***8.**Impact of Seasonality***

Our revenue frompayphone operations is affected by seasonal variations. Because many of ourpayphones are located outdoors, weather patterns have differing effects on ourrevenue depending on the region of the country where the payphones are locatedand the enclosure housing of the phone. For example, our payphones throughoutthe Midwestern and Eastern United States produce their highest call volumesduring the second and third quarters, when the climate tends to be morefavorable. Seasonal variations in revenues could have a material adverse effecton our business. Changes in the geographic distribution of our payphonesmay in the future result in different seasonal variations in our results.

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# ***9.**No established market for the Common Stock***

Our Common Stockis not listed on any stock exchange. Our Common Stock was issued toapproximately 12,500 individuals and entities that entered into agreements withOld ETS to purchase payphones. Ownership interests are tracked by the transferagent, American Stock Transfer and Trust Company (“AST&T”), and transfersof ownership may be documented through AST&T. The Common Stock is nottraded on any recognized stock exchange, stock market or bulletin board systemand there are no market makers for the Common Stock. There can be no assurancethat an active or liquid trading market for our shares of Common Stock willdevelop or be maintained. The number of shares of Common Stock distributed to eachPayphone Investor was determined by formula confirmed by the bankruptcy courtand that formula may not be indicative of the market price for the CommonStock following registration.

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**Item 3. Controls and Procedures**

Our ChiefExecutive Officer and Chief Financial Officer (collectively, the “CertifyingOfficers”) are responsible for establishing and maintaining disclosure controlsand procedures for the Company. Based upon such officers’ evaluation of thesecontrols and procedures as of the end of the period covered by this report, andsubject to the limitations noted hereinafter, the Certifying Officers haveconcluded that our disclosure controls and procedures are effective to ensurethat information required to be disclosed by us in this Quarterly Report isaccumulated and communicated to management, including our principal officers asappropriate, to allow timely decisions regarding required disclosure.

Pursuant to theManagement Services Agreement with Empire, we have been gradually transitioningthe responsibility for accounting, billing, records and collection services toEmpire.  During the three months endedSeptember 30, 2006, in connection with the transition to Empire wesubstantially changed our internal controls over financial reporting and Empireis now primarily responsible for the accounting, billing, collection of allrevenue of ETS and the remittance of all payments and obligations.  In addition, Empire supports and manages ETSemployees, maintains all records, makes payroll and provides administrativeservices in conjunction therewith.  Wehave oversight of Empire’s performance of its duties under the ManagementServices Agreement and regularly receive reports and information from Empire onthe foregoing.  Both prior to andfollowing the transition to Empire, we assessed the effectiveness of ourinternal controls over financial reporting and found such controls, both beforeand after the transition to Empire, to be effective based upon the criteria setforth by the Certifying Officers.

Except as noted inthe preceding paragraph, there were no changes in our internal controls overfinancial reporting that occurred during the three months ended September 30,2006 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.  The summary of the services provided byEmpire as described herein is qualified in its entirety by the more detaileddescription in the Current Report on Form 8-K filed on November 7,2005, the Definitive Proxy Statement filed on January 4, 2006 and theForm 10-KSB for the fiscal year ended December 31, 2005, filed onMarch 31, 2006, and to the exhibits therein.

Our management,including each of the Certifying Officers, does not expect that our disclosurecontrols or our internal controls will prevent all error and fraud. A controlsystem, no matter how well conceived and operated, can provide only reasonable,not absolute, assurance that the objectives of the control system are met. Inaddition, the design of a control system must reflect the fact that there areresource constraints, and the benefits of controls must be considered relativeto their costs. Because of the inherent limitations on all control systems, noevaluation of controls can provide absolute assurance that all controls issuesand instances of fraud, if any, within a company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people or by management override ofthe control. The design of any system of controls also is based inpart upon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions. Over time, control may becomeinadequate because of changes in conditions, or the degree of compliance withthe policies or procedures may deteriorate. Because of these inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.

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**PART II. OTHER INFORMATION**

**Item1.  Legal Proceedings**

The Company isinvolved from time to time in lawsuits that arise in the ordinary courseof our business. In March 2006 Commercial Payphones, Inc., a Floridacorporation, initiated a lawsuit against the Company  in state court inDade County, Florida for an alleged violation of a non-compete agreementalleging damages in excess of $15,000.  We do not believe theallegations have legal merit and are vigorously defending the action and havefiled a motion to quash service or, in the alternative, to dismiss thecomplaint for lack of jurisdiction. However, we cannot predict withcertainty the outcome or effect of this or other litigation in which theCompany is or may become involved.

**Item5. Other Information**

***None***

**Item6. Exhibits**
| 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 |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                          | ETS  PAYPHONES, INC. |
|--------------------------|---------------------------|
|                     |                      |   |
| Date: November  14, 2006 | By:                       | /s/ GUY A. LONGOBARDO |   |
|                     |                      | Guy A. Longobardo |
| * *                 | * *                  | *President and Chief Executive  Officer* |
|                     |                      |   |
|                     | By:                       | /s/ MICHAEL H.  MCCLELLAN |   |
|                     |                      | Michael H. McClellan |
| * *                 | * *                  | *Executive Vice President,* |
| * *                 | * *                  | *Chief Financial Officer and  Treasurer* |

 

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