**Exhibit99.1**

**HELIO,INC. and HELIO LLC**

**INDEX TOCOMBINED FINANCIAL STATEMENTS**

 
|                                                                                                                                                                              | ** ** | **Page** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report of Independent Auditors                                                                                                                                               |       | 2        |
|                                                                                                                                                                         |       |     |
| Combined Balance Sheets as of December 31, 2005  and 2006                                                                                                               |       | 3        |
|                                                                                                                                                                         |       |     |
| Combined Statements of Operations for the period  inception (January 27, 2005) to December 31, 2005 and year ended  December 31, 2006                                   |       | 4        |
|                                                                                                                                                                         |       |     |
| Combined Statements of Stockholders’ and Partners’  Equity for the period inception (January 27, 2005) to December 31, 2005 and  year ended December 31, 2006 |       | 5        |
|                                                                                                                                                                         |       |     |
| Combined Statements of Cash Flows for the period  inception (January 27, 2005) to December 31, 2005 and the year ended  December 31, 2006                               |       | 6        |
|                                                                                                                                                                         |       |     |
| Notes to Combined Financial Statements                                                                                                                                       |       | 8        |

 

1

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**REPORT OFINDEPENDENT AUDITORS**

The Board of Directors andStockholders of HELIO, Inc. and HELIO LLC

We have audited the accompanying combined balance sheets ofHELIO, Inc. and affiliate (collectively the “Company”) as of December 31, 2006and 2005, and the related combined statements of operations, stockholders’ andpartners’ equity, and cash flows for the year ended December 31, 2006, and forthe period January 27, 2005 (inception) through December 31, 2005.  Thesefinancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements basedon our audits.

We conducted our audits in accordance with auditing standardsgenerally accepted in the United States. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting.Our audits included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that our audits provide a reasonable basis forour opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the combined financial positionof HELIO, Inc. and affiliate at December 31, 2006 and 2005, and the combinedresults of its operations and its cash flows for the year ended December 31,2006, and for the period January 27, 2005 (inception) through December 31, 2005in conformity with U.S. generally accepted accounting principles.

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern. As more fully described in Note 1, theCompany has incurred substantial recurring operating losses since inception andmanagement anticipates that it will continue to incur substantial losses fromits operating and investing activities, and the Company may not have sufficientworking capital and or outside financings available to meet its plannedoperating activities over the next twelve months. These conditions raisesubstantial doubt about the Company’s ability to continue as a going concern.Management’s plans in regard to these matters also are described inNote 1. The 2006 combined financial statements do not include any adjustmentsto reflect the possible future effects on the recoverability and classificationof assets or the amounts and classification of liabilities that may result fromthe outcome of this uncertainty.

As discussed in Note 2 to the combined financial statements, effective January 1, 2006, the Company changed its accounting for stock-based compensation in connection with the adoption of Statement of Financial Standards No. 123(R), “Share-Based Payment”.

/s/ Ernst & Young LLP

Los Angeles, CaliforniaMarch 15, 2007

 

2

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**HELIO, INC.and HELIO LLC**

**COMBINEDBALANCE SHEETS**

**(inthousands, except share/unit data)**

** **
| ** **                                                                                                                                                                               | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2005**              | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                                                                                               | ** ** | ** **            | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                          |       |                  |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                               |       | $                     | 51,095     |                  | $          | 111,066 |   |
| Marketable  securities                                                                                                                                                                   |       | 94,700                |       | 27,917                |       |
| Accounts  receivable, net of allowance of $773 and $5,543 as of December 31, 2005  and 2006, respectively                                                                           |       | 1,336                 |       | 10,191                |       |
| Prepaid expenses                                                                                                                                                                         |       | 3,672                 |       | 13,556                |       |
| Inventory                                                                                                                                                                                |       | 3,814                 |       | 11,725                |       |
| Restricted cash                                                                                                                                                                          |       | 2,000                 |       | 7,850                 |       |
| Other assets                                                                                                                                                                             |       | 2,450                 |       | 1,709                 |       |
| Total current assets                                                                                                                                                                     |       | 159,067               |       | 184,014               |       |
|                                                                                                                                                                                     |       |                  |       |                  |       |
| Restricted cash — long  term                                                                                                                                                        |       | 5,310                 |       | 5,647                 |       |
| Property and equipment                                                                                                                                                                   |       | 25,229                |       | 50,456                |       |
| Other intangible assets                                                                                                                                                                  |       | 30,892                |       | 21,031                |       |
| Goodwill                                                                                                                                                                                 |       | 3,449                 |       | 3,449                 |       |
| Other long term assets                                                                                                                                                                   |       | —                |       | 373                   |       |
| Total assets                                                                                                                                                                             |       | $                     | 223,947    |                  | $          | 264,970 |   |
|                                                                                                                                                                                     |       |                  |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  AND PARTNERS’ EQUITY**                                                                                                                        | ** ** | ** **            | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                                                                     |       |                  |       |                  |       |
| Accounts payable                                                                                                                                                                         |       | $                     | 619        |                  | $          | 13,330 |   |
| Accrued expenses                                                                                                                                                                         |       | 16,443                |       | 44,892                |       |
| Due to partners                                                                                                                                                                          |       | 297                   |       | 17,864                |       |
| Deferred revenue  and other current liabilities                                                                                                                                          |       | 553                   |       | 2,803                 |       |
| Total current  liabilities                                                                                                                                                               |       | 17,912                |       | 78,889                |       |
|                                                                                                                                                                                     |       |                  |       |                  |       |
| Member deposits and  credit fees                                                                                                                                                         |       | 56                    |       | 2,730                 |       |
| Other non-current  liabilities                                                                                                                                                           |       | 2,338                 |       | 2,123                 |       |
| Total  liabilities                                                                                                                                                                       |       | 20,306                |       | 83,742                |       |
|                                                                                                                                                                                     |       |                  |       |                  |       |
|  Commitments and contingencies                                                                                                                                                      |       |                  |       |                  |       |
|                                                                                                                                                                                     |       |                  |       |                  |       |
| Stockholders’ and  partners’ equity:                                                                                                                                           |       |                  |       |                  |       |
| Convertible  preferred membership units (100,000,000 authorized, issued, outstanding and  convertible into Class A Common Stock at a 1:1 conversion rate at December  31, 2005 and 2006) |       | 244,000               |       | 401,000               |       |
| Serial preferred  stock ($0.01 par value; 20,000,000 authorized; -0- shares issued and  outstanding at December 31, 2005 and 2006)                                                       |       | —                |       | —                |       |
| Class B common  stock ($0.01 par value; 2 shares authorized, issued and outstanding at  December 31, 2005 and 2006)                                                                      |       | —                |       | —                |       |
| Class A common  stock, par value $0.01 (180,000,002 shares authorized; -0- and 5,337,900  shares issued and outstanding at December 31, 2005 and 2006, respectively)                     |       | —                |       | 54                    |       |
| Additional  paid-in capital                                                                                                                                                              |       | 1,664                 |       | 13,952                |       |
| Accumulated  deficit                                                                                                                                                                     |       | (42,023               | )          | (233,778              | )          |
| Total  stockholders’ and partners’ equity                                                                                                                                      |       | 203,641               |       | 181,228               |       |
| Total liabilities and stockholders’ and partners’ equity                                                                                                                       |       | $                     | 223,947    |                  | $          | 264,970 |   |

 

The accompanying notes are an integral part of these combined financialstatements.

3

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**HELIO, INC.and HELIO LLC**

**COMBINEDSTATEMENTS OF OPERATIONS**

**(Inthousands)**

 
| ** **                                                | ** ** | **Period of  Inception  (January 27, 2005)  to December 31,  2005** | ** ** | **Year ended  December 31,  2006** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                                                                   | ** ** | ** **                                   | ** ** |
| Revenue:                                                  |       |                                                                                         |       |                                         |       |
| Service revenue                                           |       | $                                                                                            | 13,154     |                                         | $          | 32,030 |   |
| Equipment sales  and other revenue                        |       | 3,211                                                                                        |       | 14,550                                       |       |
| Total revenue                                             |       | 16,365                                                                                       |       | 46,580                                       |       |
|                                                      |       |                                                                                         |       |                                         |       |
| Cost of sales:                                            |       |                                                                                         |       |                                         |       |
| Cost of services                                          |       | 9,512                                                                                        |       | 27,903                                       |       |
| Cost of  equipment sales                                  |       | 8,474                                                                                        |       | 33,401                                       |       |
| Total cost of sales                                       |       | 17,986                                                                                       |       | 61,304                                       |       |
| Gross margin (loss)                                       |       | (1,621                                                                                       | )          | (14,724                                      | )          |
|                                                      |       |                                                                                         |       |                                         |       |
| Operating expenses:                                       |       |                                                                                         |       |                                         |       |
| Operations and  member service                            |       | 14,283                                                                                       |       | 69,788                                       |       |
| Sales and  marketing                                      |       | 8,686                                                                                        |       | 77,319                                       |       |
| General and  administrative                               |       | 21,025                                                                                       |       | 37,466                                       |       |
| Stock  compensation                                       |       | 43                                                                                           |       | 1,969                                        |       |
|                                                      |       |                                                                                         |       |                                         |       |
| Total operating  expenses                                 |       | 44,037                                                                                       |       | 186,542                                      |       |
|                                                      |       |                                                                                         |       |                                         |       |
| Operating loss before  interest income and other expenses |       | (45,658                                                                                      | )          | (201,266                                     | )          |
|                                                      |       |                                                                                         |       |                                         |       |
| Other income:                                             |       |                                                                                         |       |                                         |       |
| Interest income  and other                                |       | 3,635                                                                                        |       | 9,511                                        |       |
|                                                      |       |                                                                                         |       |                                         |       |
| Loss before  provision for income taxes                   |       | (42,023                                                                                      | )          | (191, 755                                    | )          |
|                                                      |       |                                                                                         |       |                                         |       |
| Provision  (benefit) for income taxes                     |       | —                                                                                       |       | —                                       |       |
|                                                      |       |                                                                                         |       |                                         |       |
| Net loss                                                  |       | $                                                                                            | (42,023    | )                                            | $          | (191,755 | ) |

 

The accompanyingnotes are an integral part of these combined financial statements.

4

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**HELIO, INC.and HELIO LLC**

**COMBINEDSTATEMENTS OF STOCKHOLDERS’ AND PARTNERS’ EQUITY**

**(Inthousands, except share/unit data)**

** **
| ** **                                                                                                                                                                       | ** ** | ** **                     | ** ** | ** **            | ** **  | ** **            | ** ** | ** **     | ** ** | ** **      | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **  | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------|-------------|-----------------------|------------|----------------|------------|-----------------|------------|-----------------------------|------------|--------------------------|------------|-------------|------------|------------|------------|
| ** **                                                                                                                                                                       | ** ** | **Convertible Preferred** | ** ** | **Class B**      | ** **  | **Class A**      | ** ** | ** **     | ** ** | ** **      | ** ** | **Stockholders’  and** | ** ** |
| ** **                                                                                                                                                                       | ** ** | **Membership Units**      | ** ** | **Common Stock** | ** **  | **Common Stock** | ** ** | **Additional** | ** ** | **Accumulated** | ** ** | **Partners’**          | ** ** |
| ** **                                                                                                                                                                       | ** ** | **Units**                      | ** ** | **Amount**            | ** **  | **Shares**            | ** ** | **Amount**     | ** ** | **Shares**      | ** ** | **Amount**                  | ** ** | **Paid-in Capital** | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
| **Balance, Inception (January 27,  2005)**                                                                                                                                       | ** ** | **—**                     | ** ** | **$**                 | **—**  | ** **            | **—** | ** **     | **$**      | **—**      | ** ** | **—**                  | ** ** | **$**                    | **—** | ** **  | **$**      | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |
| Issuance of Convertible  Preferred Membership Units to the Partners in exchange for $440,000 funding  commitment of cash and contributed assets (see Note 9)                     |       | 100,000,000                    |       | 244,000               |        | —                |       | —         |       | —          |       | —                      |       | —                   |       | —      |       | 244,000    |       |
| Issuance of Class B Common  Stock to the Partners in March 2005                                                                                                                  |       | —                         |       | —                |        | 2                     |       | —         |       | —          |       | —                      |       | —                   |       | —      |       | —     |       |
| Warrant issued in 2005  to a Partner to purchase 1,995,000 shares of the Company’s Class A Common  Stock at $1.71 per share                                                 |       | —                         |       | —                |        | —                |       | —         |       | —          |       | —                      |       | 43                       |       | —      |       | 43         |       |
| Supplemental  compensation paid on behalf of certain employees by a Partner                                                                                                      |       | —                         |       | —                |        | —                |       | —         |       | —          |       | —                      |       | 1,621                    |       | —      |       | 1,621      |       |
| Net loss                                                                                                                                                                         |       |                           |       | —                |        | —                |       | —         |       | —          |       | —                      |       | —                   |       | (42,023     | )          | (42,023    | )          |
| ** **                                                                                                                                                                       | ** ** | ** **                     | ** ** | ** **            | ** **  | ** **            | ** ** | ** **     | ** ** | ** **      | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** Balance at  December 31, 2005**                                                                                                                                     | ** ** | **100,000,000**                | ** ** | **$**                 | **244,000** | ** **            | **2**      | ** **     | **$**      | **—**      | ** ** | **—**                  | ** ** | **$**                    | **—** | ** **  | **$**      | **1,664**  | ** ** | **$** | **(42,023** | **)** | **$** | **203,641** | ** ** |
|                                                                                                                                                                             |       |                           |       |                  |        |                  |       |           |       |            |       |                        |       |                     |       |        |       |       |       |
| Funding received from  the Partners (see Note 9)                                                                                                                                 |       | —                         |       | 157,000               |        |                  |       |           |       |            |       |                        |       |                     |       |        |       | 157,000    |       |
|                                                                                                                                                                             |       |                           |       |                  |        |                  |       |           |       |            |       |                        |       |                     |       |        |       |       |       |
|  Exercise of employee stock options during  2006                                                                                                                            |       | —                         |       | —                |        | —                |       | —         |       | 7,500           |       | —                      |       | 13                       | ** ** | **—**  |       | 13         |       |
| Stock expense pertaining  to vested portion of a warrant issued in 2005 to a Partner to purchase  1,995,000 shares of the Company’s Class A Common Stock at $1.71 per share |       | —                         |       | —                |        | —                |       | —         |       | —          |       | —                      |       | 623                      |       | —      |       | 623        |       |
| Employee stock  compensation expense                                                                                                                                             |       | —                         |       | —                |        | —                |       | —         |       | —          |       | —                      |       | 1,372                    |       | —      |       | 1,372      |       |
| Supplemental  compensation paid on behalf of certain employees by a Partner                                                                                                      |       | —                         |       | —                |        | —                |       | —         |       | —          |       | —                      |       | 1,213                    |       | —      |       | 1,213      |       |
| Issuance of 650,000  shares of Class A Common Stock to a Partner in 2006 valued at $1.71 per share                                                                               |       | —                         |       | —                |        | —                |       | —         |       | 650,000         |       | 7                           |       | 1,105                    |       | —      |       | 1,112      |       |
| Warrant issued to a  Partner in 2006 to purchase 65,000 shares of the Company’s Class A Common  Stock at $1.71 per share                                                    |       | —                         |       | —                |        | —                |       | —         |       | —          |       | —                      |       | 5                        |       | —      |       | 5          |       |
| Issuance of 4,680,400  shares of Series A Common Stock at $1.71 per share                                                                                                        |       | —                         |       | —                |        | —                |       | —         |       | 4,680,400       |       | 47                          |       | 7,957                    |       | —      |       | 8,004      |       |
| Net loss                                                                                                                                                                         |       | —                         |       | —                |        | —                |       | —         |       | —          |       | —                      |       | —                   |       | (191,755    | )          | (191,755   | )          |
|                                                                                                                                                                             |       |                           |       |                  |        |                  |       |           |       |            |       |                        |       |                     |       |        |       |       |       |
| **Balance at December 31, 2006**                                                                                                                                            | ** ** | **100,000,000**                | ** ** | **$**                 | **401,000** | ** **            | **2**      | ** **     | **$**      | **—**      | ** ** | **5,337,900**               | ** ** | **$**                    | **54**     | ** **  | **$**      | **13,952** | ** ** | **$** | **(233,778** | **)** | **$** | **181,228** | ** ** |

 

The accompanyingnotes are an integral part of these combined financial statements.

5

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**HELIO, INC.and HELIO LLC**

**COMBINEDSTATEMENTS OF CASH FLOWS**

**(Inthousands)**

** **
| ** **                                                                                       | ** ** | **Period**            | ** ** | ** **            | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **Inception**         | ** ** | ** **            | ** ** |
| ** **                                                                                       | ** ** | **(January 27,** | ** ** | ** **            | ** ** |
| ** **                                                                                       | ** ** | **2005) to**     | ** ** | **Year ended**   | ** ** |
| ** **                                                                                       | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                       | ** ** | **2005**              | ** ** | **2006**              | ** ** |
| **Operating activities**                                                                         | ** ** | ** **            | ** ** | ** **            | ** ** |
| Net loss                                                                                         |       | $                     | (42,023    | )                     | $          | (191,755 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                     |       |                  |       |                  |       |
| Depreciation and  amortization                                                                   |       | 6,766                 |       | 21,533                |       |
| Disposal of  property and equipment                                                              |       | —                |       | 50                    |       |
| Stock based  compensation                                                                        |       | 43                    |       | 2,000                 |       |
| Other non-cash  activities                                                                       |       | 1,621                 |       | 2,325                 |       |
| Changes in  operating assets and liabilities:                                                    |       |                  |       |                  |       |
| Accounts  receivable                                                                             |       | (1,336                | )          | (8,855                | )          |
| Inventory                                                                                        |       | (3,814                | )          | (7,911                | )          |
| Prepaid expenses  and other assets                                                               |       | (6,122                | )          | (9,516                | )          |
| Restricted cash                                                                                  |       | (7,310                | )          | (6,187                | )          |
| Accounts payable                                                                                 |       | 619                   |       | 12,711                |       |
| Accrued liabilities                                                                              |       | 16,443                |       | 28,394                |       |
| Accrued partner  obligations                                                                     |       | 297                   |       | 8,056                 |       |
| Deferred revenue  and other liabilities                                                          |       | 2,947                 |       | 4,709                 |       |
| Net cash used in  operating activities                                                           |       | (31,869               | )          | (144,446              | )          |
|                                                                                             |       |                  |       |                  |       |
| **Investing activities**                                                                         | ** ** | ** **            | ** ** | ** **            | ** ** |
| Purchases of  property and equipment                                                             |       | (26,166               | )          | (27,383               | )          |
| Purchases of  domain names (intangible assets)                                                   |       | (170                  | )          | —                |       |
| Purchases of  marketable securities                                                              |       | (148,900              | )          | (1,066,917            | )          |
| Proceeds from  disposition of marketable securities                                              |       | 54,200                |       | 1,133,700             |       |
| Net cash (used in)  provided by investing activities                                             |       | (121,036              | )          | 39,400                |       |
|                                                                                             |       |                  |       |                  |       |
| **Financing activities**                                                                         | ** ** | ** **            | ** ** | ** **            | ** ** |
| Partner cash  contributions in HELIO LLC in exchange for convertible preferred membership  units |       | 204,000               |       | 157,000               |       |
| Exercise of  employee common stock options                                                       |       | —                |       | 13                    |       |
| Issuance of  common stock                                                                        |       | —                |       | 8,004                 |       |
| Net cash provided by  financing activities                                                       |       | 204,000               |       | 165,017               |       |
|                                                                                             |       |                  |       |                  |       |
| Net increase in cash  and cash equivalents                                                       |       | 51,095                |       | 59,971                |       |
| Cash and cash  equivalents, beginning of period                                                  |       | —                |       | 51,095                |       |
| Cash and cash  equivalents, end of period                                                        |       | $                     | 51,095     |                  | $          | 111,066 |   |

 

The accompanyingnotes are an integral part of these combined financial statements.

6

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** **
| ** **                                                                                     | ** ** | **Period**            | ** ** | ** **          | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                                     | ** ** | **Inception**         | ** ** | ** **          | ** ** |
| ** **                                                                                     | ** ** | **(January 27,** | ** ** | ** **          | ** ** |
| ** **                                                                                     | ** ** | **2005) to**     | ** ** | **Year ended** | ** ** |
| ** **                                                                                     | ** ** | **December 31,** | ** ** | **December**        | ** ** |
| ** **                                                                                     | ** ** | **2005**              | ** ** | **31, 2006**   | ** ** |
| **Supplemental Disclosure on  Non-cash Operating, Investing and Financing Activities:**        | ** ** | ** **            | ** ** | ** **          | ** ** |
| ** **                                                                                     | ** ** | ** **            | ** ** | ** **          | ** ** |
| **Non-cash operating activities**                                                              | ** ** | ** **            | ** ** | ** **          | ** ** |
| Supplemental  compensation paid by a Partner to certain employees                              |       | $                     | 1,621      |                | $          | 1,213 |   |
|                                                                                           |       |                  |       |                |       |
| **Non-cash investing activities**                                                              | ** ** | ** **            | ** ** | ** **          | ** ** |
| Assets and  goodwill contributed by a Partner in conjunction with the Company’s formation |       | $                     | 40,000     |                | $          | — |   |
| Accrued property  and equipment purchases                                                      |       |                  |       | 9,566               |       |
| Disposal of  property and equipment                                                            |       | —                |       | 50                  |       |
|                                                                                           |       |                  |       |                |       |
| **Non-cash financing activities**                                                              |       |                  |       |                |       |
| Warrants issued  to a Partner to purchase common stock in exchange for services                |       | $                     | 43         |                | $          | 628 |   |
| Issuance of  common stock to a Partner in exchange for services                                |       | —                |       | 1,112               |       |

 

The accompanyingnotes are an integral part of these combined financial statements.

7

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**HELIO, INC. and HELIO LLC**

**NOTESTO COMBINED FINANCIAL STATEMENTS**

**1. Description of Business and Basis of Presentation**

HELIO, Inc. is a Delawarecorporation formed on January 27, 2005 as a joint venture between EarthLink,Inc. (“EarthLink”) and SK Telecom Co., Ltd. and its subsidiaries and oraffiliates (“SKT”) (collectively, the “Partners”) for the purposes ofdeveloping and marketing branded wireless telecommunication services, includingbut not limited to handsets, voice services, data services, stand-alone andother wireless services within the United States of America.  HELIO, Inc. is the sole general managingpartner of HELIO LLC, a Delaware limited liability company (“HELIO LLC” or the “OperatingCompany”).  HELIO LLC is the operatingcompany of HELIO, Inc. and is owned by the Partners’ respective ownershipinterests in HELIO, Inc.  The financialstatement presentation of the operating results, balance sheets and cash flowsof HELIO, Inc. and HELIO LLC (collectively, the “Company”) are presented on acombined basis as of and for the period from inception to December 31, 2005 andthe period ended December 31, 2006.  ThePartners owned approximately 100% and 95.5% of the Company at December 31, 2005and 2006, respectively.

As of December 31, 2006,HELIO, Inc. had 5,337,900 shares of Class A Common Stock issued and outstandingand 2 shares of Class B Common Stock issued and outstanding.  As of December 31, 2006, HELIO LLC had100,000,000 Convertible Preferred Membership Units issued and outstanding, ofwhich 50,000,000 were held by each Partner, and 5,337,902 Common MembershipUnits held by HELIO, Inc. (collectively, the “Membership Units”).  Each of the Membership Units may beexchanged, at the option of the holder, at any time and from time-to-time, forvalidly issued, fully paid and non-assessable shares of HELIO, Inc.’s Class ACommon Stock.  The number of shares of Class A Common Stock obtained fromsuch an exchange of Membership Units is determined by multiplying the number ofMembership Units to be exchanged by the Unit Exchange Rate then in effect asmore fully described in Note 9.  See Note 9 for a description of theCompany’s capitalization and voting rights.

The Company is anon-facilities-based mobile virtual network operator (“MVNO”) offering mobilecommunications services and handsets to U.S. consumers.  As a MVNO, the Company does not own licensedfrequency spectrum; rather, it leases and resells its wireless services throughoutside wireless carriers’ networks. During the period from inception to December 31, 2005, the Company’sprimary operations revolved around the sale and servicing of its EarthLink®Wireless member and handset brand operations that were contributed by EarthLink in conjunction with theformation of the Company (Note 2).  InApril 2006, the Company commenced operations and launched its core services anddevice sales under its HELIOTM brand.

Upon the Company’sformation, the Partners agreed to contribute cash and assets with an aggregatevalue of $440.0 million beginning in March 2005 through August 2007 (SKTcommitted to contribute cash in the aggregate of $220.0 million and EarthLinkcommitted to contribute cash in the aggregate of $180 million and assets valuedat $40.0 million).  As of December 31,2006, cumulative Partner funding received by the Company was $401.0 million,comprised of $361.0 million in cash and $40 million in contributed assets.  In addition, the Company receivedapproximately $8.0 million of funding from outside investors.  In February 2007, the Company received $27.0million of funding from the Partners and anticipates the remaining $12.0million will be received by August 2007 (see also Note 9 and Note 17).

Through December 31,2006, the Company’s primary source of liquidity was funding received from itsPartners and outside investors.  TheCompany will need additional capital to meet its operating requirements. Sincethe Company’s inception, cumulative cash flow used from combined operating andinvesting activities, excluding marketable securities activities, wasapproximately $230.0 million and cumulative cash funding received from itsPartners and outside investors were $369.0 million.  At December 31, 2006, unrestricted cash, cashequivalents and marketable securities available to the Company wasapproximately $139.0 million and working capital was approximately $105.1million.  To date, the Company has beenoperating at negative gross margins. Over the next twelve months, management anticipates that it willcontinue to incur substantial losses from its operating and investingactivities, and the Company may or may not have sufficient working capital andor outside financings available to meet its

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planned operatingactivities over the same period.  Toaddress future planned working capital deficiencies in fiscal 2007, managementplans on securing sufficient cash financing from its Partners, and potentialoutside investors; however, management cannot be certain as to the likelihoodof generating sufficient cash flows to meet planned working capitalrequirements during this period.  Thesecombined factors raise doubt as to the ability of the Company to continue as agoing concern.  The financial statementsdo not include any adjustments relating to the recoverability andclassification of recorded asset amounts or the amount and classification ofliabilities that might be necessary should the Company be unable to continue asa going concern.

The combinedfinancial statements include the accounts of HELIO, Inc. and HELIO LLC, both ofwhich are jointly controlled by the Partners and are under commonmanagement.  The Partners have theunilateral ability to implement major operating and financial policies forHELIO, Inc. and HELIO LLC.   Allsignificant intercompany transactions are eliminated in the combinationprocess.   See also Note 18 for furtherdetails on the combination of the Company. The combined financial statements include certain expenses from SKT andEarthLink pursuant to various related party agreements.  As more fully discussed in Note 16, theseexpenses are considered to be a reasonable reflection of the value of servicesprovided for and or the benefits received by the Company.

**2. Summary of Significant Accounting Policies**

*Use of Estimates in Preparation of Financial Statements*

The preparation ofthe financial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe amounts reflected in the combined financial statements and accompanyingnotes.  The Company bases its estimateson experience, where applicable, and other assumptions that management believesare reasonable under the circumstances. Actual results could differ from those estimates.  Estimates are generally used when accountingfor certain accrued expenses and deferred revenues, allowance for doubtful accounts,useful lives of property and equipment, inventory return reserves, amortizationperiods of intangible assets, legal and tax contingencies, fair value ofintangible assets, goodwill and investments, stock compensation expense, assetimpairment charges and the recording of fair value of assets upon formation ofthe joint venture.

*Segments*

The Companymanages the business as one reportable business segment, wirelesscommunications and data services, which is also a single operatingsegment.  The Company operates primarilyin the United States of America.

*Related Party Transactions*

From time to time,the Company enters into agreements with its Partners and or relatedaffiliates.  Management believes thesetypes of related party transactions are consummated on terms equivalent tothose that prevail in arm’s-length transactions.   The Company complies with the disclosureprovisions of Statement of Financial Accounting Standards No. 57, *Related Party Disclosures. *SeeNote 16 for further detail on the Company’s related party transactions.

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*Revenue Recognition and Deferred Revenue*

The Companyrecognizes revenue in accordance with Securities and Exchange Commission StaffAccounting Bulletin No. 104, *RevenueRecognition*(“SAB 104”)*,*andthe Emerging Issues Task Force No. 00-21, *RevenueArrangements with Multiple Deliverables* (“EITF 00-21”).  TheCompany classifies its revenues into two types of revenue streams: (i) servicerevenues and (ii) equipment sales and other revenue.  The Company also considers the criteria forrevenue recognition and rights of return as prescribed under Statement ofFinancial Accounting No. 48, *Revenue Recognition WhenRight of Return Exists*(“SFAS 48”).

*ServiceRevenue*

Service revenuegenerally includes airtime minutes, content (including but not limited tomusic, video, games downloads), data usage, messaging and other services, netof related member account credits.  TheCompany earns service revenue by providing its members airtime minutes, data,messaging and content downloads on its HELIOTM devices over dedicated wirelessnetworks.  All services provided arebilled throughout any given month according to the bill cycle in which aparticular member is placed.  Monthlyairtime services are billed at the beginning of each bill cycle and in advanceof services based upon minute rate plans selected by members.  Monthly airtime minutes that exceed minuterate plans selected by the member and content downloads are billed in arrearsand in the billing cycle following usage. For members not on unlimited data and messaging service plans, suchservice items are billed in arrears in the billing cycle following usage.

Service revenuealso includes separate charges for members who roam outside of their selectedcoverage area, “411” dialing charges, international calling minutes and whenapplicable, activation fees.

Service revenue isrecognized in the period of use.  As aresult of bill cycle cut-off times, the Company is required to make estimatesfor airtime service revenue earned but not yet billed as of the end of anygiven month, and for monthly service revenue billed in advance.  Estimates for airtime usage are based uponhistorical minutes, messages, and or megabytes of usage.  The Company generally defers any revenuebased upon the portion of unused plan minutes that are billed and collected inadvance of services provided.   Contentrevenue is recognized when consumed (downloaded).

*Equipmentand Other Revenue*

Equipment revenuegenerally includes device and accessory sales, net of any related device pricesubsidies offered to members at the point of sale, and inventory returnreserves.  Devices and accessories aresold to members through (i) direct sales channels, including but not limited todirect sales to end-members over the Company’s website and through the Company’sowned retail stores, and (ii) indirect sales channels, including but notlimited to third-party agents and national retail chains for resale toend-members.  For direct channels, deviceand accessory revenue is recognized when an end member purchases a device, netof any upfront subsidy.  In most cases,direct channel device sales occur at the same time a member activates theCompany’s wireless services.  Forindirect channels, device and accessory revenues are recognized upon shipment,net of any upfront price subsidy, taking into account individual member rightsof returns, historical collections, and member sell-through history asprescribed under SAB 104 and SFAS 48.   In the event a third-party agent or national retail chain has theability to return devices and or has limited history with the Company, all or aportion of the related device revenue generally is deferred until an end-memberactivates service.

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The Company offersa 30-day happiness guarantee to its members, whereby if a member is unsatisfiedwith their device or service, they can return their device for a full refundwithin 30 calendar days after purchase. The Company estimates the amount of device returns in any given periodand records a reserve for device sales as an offset to equipment revenue.

Other revenuegenerally includes revenue that is considered non-recurring in nature,including but not limited to revenue from device insurance, early terminationfees, late payment fees, and when applicable, activation fees.  Early termination fees, which are generatedwhen a member breaks a service contract prior to its completion, are recognizedon a cash basis as collection is not certain.

*ActivationFees*

The Companydetermined that the sale of its wireless services along with its devicesconstitutes a revenue arrangement with multiple deliverables under EITF 00-21.**  The Company accounts for these arrangementsas separate units of accounting, whereby the device and related services can beunbundled from one another and treated as separate units of accounting.  Activation fees, which are one-timenon-refundable charges to members to active service, however, do not meet thecriteria as set-forth under EITF 00-21 to be treated as a separate unit ofaccounting and are therefore recognized into revenue under the relative fairvalue accounting principle, whereby activation fees may be (i) recognizedupfront with the device sale (the delivered item) to the extent the aggregatedevice and activation fee proceeds do not exceed the fair value of the deviceor (ii) deferred upon activation and recognized evenly over the service term(the undelivered item) to the extent the aggregate device and activation feeproceeds exceed the fair value of the device. For the periods ended December 31, 2005 and 2006, activation fees of$0.1 million and $2.1 million, respectively, were recognized upfront with thecorresponding device sales and included in equipment and other revenue in theCompany’s combined statements of operations.

*Cost of Services and Cost of Equipment Sales*

Cost of servicesgenerally include the Company’s costs of airtime, data and content usage.  Airtime and data costs are recorded in theperiod of use.  As a result of bill cyclecut-off times, the Company is required to make estimates for airtime and datausage consumed but not yet billed as of the end of any given month.  Estimates for airtime usage are based uponhistorical minutes, messages, and or megabytes of usage.  The amounts of these cost of services isbased on contractual rates set forth in the Company’s carrier agreements.  Content costs are largely comprised of coststo outside content partners for usage of specific content on wireless devicesand are recognized when incurred.

Cost of equipmentsales generally includes the cost of the Company’s devices and accessories,excluding device subsidies (see equipment revenue), which are generallyrecorded upon device and or accessory shipment to an end member, third partyagent or national retailer.   Other costsincluded in cost of equipment sales generally include the cost of shippingaccessories and devices to outside agents and national retailers and deviceinsurance.

*Operations and Member ServiceCosts*

Operations andmember service costs are generally comprised of product development expenses,including but not limited to outside research and development on software andproducts pertaining to the Company’s devices and services, informationtechnology costs, supply chain management and member support.   Product development costs are charged toexpense as incurred.

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*Sales and Marketing Costs*

Sales andmarketing costs are generally comprised of costs of outside bounties, salescommissions, co-op advertising, general marketing expenses, media advertising,lease expenses associated with company-owned retail stores, amortization ofcertain intangible assets and website development expenses (expensed under theprovisions of Emerging Issues Task Force No. 00-2, *WebsiteDevelopment Costs*).

Advertising costsare expensed as incurred and amounted to approximately $1.2 million and $21.6million during the periods ended December 31, 2005 and 2006, respectively.  Significant production costs incurred inadvance of advertising airing are capitalized as a prepaid asset until thefirst airing of the underlying advertising occurs.  Prepaid advertising costs of $0 and $11.2million are included in prepaid expenses in the Company’s combined balancesheets at December 31, 2005 and 2006, respectively.

*General and Administrative Costs*

General andadministrative costs are generally comprised of facilities, professional legaland outside accounting fees, costs of personnel recruitment and bad debtexpense.

*Income Tax*

The vast majorityof the Company’s operating results and losses since its inception throughDecember 31, 2006 are included in the operating results of HELIO LLC, theoperating company.  HELIO LLC is not ataxable entity for federal or state income tax purposes.  Rather these taxes are included in the  respective Partners’ federal and state incometax returns.  To the extent that certainstates impose income taxes upon non-corporate legal entities, the Companygenerally records a provision (benefit) for these state income taxes andrecognizes deferred tax assets and liabilities based on differences between thefinancial reporting and tax bases of assets and liabilities, applying enactedstatutory rates. Pursuant to the provisions of SFAS No. 109,*  AccountingFor Income Taxes*, the Company generally provides valuationallowances for deferred tax assets for which it does not consider realizationof such assets to be more likely than not. See Note 12 for further information.

*Member Sales and Use Taxes*

The Company is responsible for billing, collecting and paying varioussales and service usage taxes on behalf of its members.   The Company accounts for these pass-throughtax arrangements in accordance with Emerging Issues Task Force No. 06-3,*How Taxes Collected from Customers andRemitted to Governmental Authorities Should Be Presented in the IncomeStatement (Gross versus Net Presentation*)*,*whereby theCompany records a liability for amounts collected and reports such taxes on anet basis in its combined statement of operations for such amounts*.*

*Cash and Cash Equivalents*

Cash and cashequivalents consist of cash on hand and marketable securities with originalmaturities of three months or less.  Excluded from cash and cash equivalents are restricted cash of $7.3million and $13.5 million at December 31, 2005 and 2006, respectively.

*Investments in Marketable Securities*

Investments inmarketable securities are accounted for in accordance with SFAS No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*.   The Company hasclassified all short term investments in marketable securities asavailable-for-sale. Available-for-sale securities are carried at fair value,with any unrealized gains and losses, net of tax, recorded as othercomprehensive income. Realized gains and losses are included in interest incomein the combined statements of operations.

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*Accounts Receivable, Credit Fees and Deposits andAllowance for Doubtful Accounts*

Accountsreceivable consists principally of trade accounts receivable from members andare generally unsecured and due within 30 days from invoice date.  The Company maintains an allowance fordoubtful accounts for estimated losses resulting from the inability of itsmembers to make timely payments.  Inassessing the adequacy of the allowance for doubtful accounts, managementconsiders multiple factors including the aging of its receivables, historicalwrite-offs and the general economic environment. If the financial condition ofthe Company’s members were to deteriorate, resulting in an impairment of theirability to make payments, additional allowances may be required. Credit lossesrelating to these receivables have been within management’s expectations.Expected credit losses are recorded as an allowance for doubtful accounts inthe combined balance sheets.   Estimatesof expected credit losses are based primarily on write-off experience, net ofrecoveries, and on the aging of the accounts receivable balances. Thecollection policies and procedures of the Company vary by credit class andpayment history of members.  The Company’sallowance for doubtful accounts was $0.8 million and $5.5 million at December31, 2005 and 2006, respectively.  Provisions for uncollectible receivable are included in general andadministrative expenses.  For the periodsended December 31, 2005 and 2006, the Company recorded related bad debt expenseof $0.5 million and $5.3 million, respectively.

From April throughSeptember 2006, the Company required certain credit challenged members to remita fully refundable deposit at the point of service activation.   Beginning in September 2006 the Companyrequired its credit challenged members to remit a non-refundable deposit at thepoint of service activation.  Suchdeposits and fees are initially deferred and recorded as a liability uponcollection.  In the event members subjectto deposits or credit fees were to become delinquent and or no longer continueto make payments on amounts when due, the Company offsets these accounts withthe related member’s deposit or credit fee, as applicable.  Non-refundable credit fees are recognized inrevenue upon a member remaining in good credit standing through theircontractual service period, generally 24 months after a member’s originalin-service date.  Fully refundabledeposits are refunded back to a member upon the member demonstrating goodcredit standing with the Company after a certain period of time.

*Inventories*

Inventoriesconsist principally of wireless devices and accessories and are valued at thelower of cost or market value. Market value is determined using currentreplacement cost.    Determining marketvalue of inventories involves numerous judgments, including projections ofinventory returns and current and forecasted sales volumes and demand.  As a result of these analyses and on no lessthan a quarterly basis, the Company periodically records charges to cost ofsales and corresponding inventory obsolescence reserves to state its inventoryat fair market value.

*Property and Equipment*

Property andequipment are stated at historical cost, less accumulated depreciation.  Costs of additions and or substantialimprovements are capitalized. Expenditures for maintenance and repairs are charged to operatingexpenses as incurred.  Depreciationexpense is determined using the straight-line method over the estimated usefullives of the various asset classes, which are generally three years forhardware and software.  Leaseholdimprovements and other are generally depreciated using the straight-line methodover the shorter of their estimated useful lives or the remaining term of theunderlying lease.

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*Software Development Costs*

The Company capitalizescertain costs incurred in connection with developing or obtaining internal usesoftware in accordance with American Institute of Certified Public AccountantsStatement of Position No. 98-1,*Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use*andEmerging Issues Task Force No. 00-2, *Website Development Costs.* Capitalized costs includedirect development costs associated with internal use software and websitedevelopment costs, including internal direct labor costs and external costs ofmaterials and services. These capitalized costs are included in property andequipment in the combined balance sheets and are generally amortized on astraight-line basis over a period of three years. Costs incurred during thepreliminary project stage, as well as maintenance and training costs, areexpensed as incurred.

**Costs incurred in connection with developing or obtaining internal usesoftware to be used, consumed and or marketed in conjunction with the Company’sdevices or services are accounted for pursuant to Statement of FinancialAccounting Standards No. 86, *Accounting for the Costsof Computer Software to Be Sold, Leased, or Otherwise Marketed***(“SFAS 86”). Under SFAS 86, these software costs are charged to expenseup until the point of technological feasibility.   As the vast majority if not all, of thesesoftware costs are incurred up to the point of technological feasibility, theCompany charges these types of software costs to expense as incurred.

*Goodwill and Purchased Intangible Assets*

In conjunctionwith the formation of the Company, EarthLink contributed its then-existingwireless assets valued by the Partners at $40 million (the “EarthLink WirelessAssets”).  In fiscal 2005 an independentthird party performed a valuation analysis of the fair value of the contributedEarthLink Wireless Assets and determined that of the total $40 million value,$36.6 million was attributable to intangible assets and the remaining $3.4million was classified as goodwill.  Theintangible assets primarily consisted of the implied value of contributedcarrier and customer relationships, subscribers, which includes an agreementbetween EarthLink and the Company to prospectively market the Company’sservices (the “Marketing Services”), and billing systems transferred over tothe Company upon formation.  With theexception of the Marketing Services, the Company amortizes its intangibles on astraight-line basis over the shorter of their contractual terms or intendeduseful lives, generally between three to five years beginning in March2005.   The Marketing Services areamortized on a straight-line basis through December 31, 2008 or as theunderlying services are provided, whichever is greater.  In accordance with Statement of FinancialAccounting Standards No. 142, *Goodwilland Other Intangible Assets,*goodwill and other indefinite-livedintangible assets are not amortized.

The Company testsgoodwill and intangible assets for impairment in accordance with Statement ofFinancial Accounting Standards No. 142, *Goodwilland Other Intangible Assets*(“SFAS142”).**Under SFAS 142,goodwill and intangible assets are tested for impairment on an annual basis, orsooner if events or changes in circumstances indicate that an asset may beimpaired, including but not limited to significant changes in a businessclimate, legal factors, operating performance indicators, and or competition.

In accordance withEmerging Issues Task Force No. 02-7, *Unit ofAccounting for Testing Impairment of Indefinite Lived Intangible Assets,*theCompany tests its goodwill on an aggregate basis, consistent with the Company’smanagement of its business.  The Companyuses a fair value approach, incorporating discounted cash flows, to completethe test.  During the periods endedDecember 31, 2005 and 2006, the Company’s tests indicated its goodwill andother indefinite life intangible assets were not impaired.

From inception toDecember 31, 2005, and for the year ended December 31, 2006, the Companyrecognized amortization expense of approximately $5.8 million and $9.9 million,respectively, related to its finite-lived intangible assets.

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*Valuation of Long-lived Assets*

Long-lived assets,including property and equipment and intangible assets with finite lives arereviewed for impairment in accordance with Statement of Financial AccountingStandards No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets* (“SFAS 144”) wheneverevents or changes in circumstances indicate that the carrying amount may not berecoverable.  It is reasonably possiblethat these assets could become impaired as a result of technological or otherindustry changes.  In analyzing potentialimpairments, the Company uses projections of future cash flows.  These projections are based upon the Company’sviews of forecasted growth rates, anticipated future economic conditions,appropriate discount rates relative to risk and estimates of residualvalues.  If the total of the expectedfuture undiscounted cash flows from the assets is less than its carryingamount, a loss is recognized for the difference between the fair value and itscarrying amount.  The asset grouprepresents the lowest level for which identifiable cash flows are largelyindependent of the cash flows of other assets and or liabilities.

*Leases*

The Companyaccounts for lease agreements in accordance with Statement of FinancialAccounting Standards No. 13, *Accountingfor Leases*, which requires categorization of leases at theirinception as either operating or capital leases depending on certain criteria.The Company recognizes rent expense for operating leases on a straight-linebasis over the lease term.  The Companyrecords leasehold improvements funded by landlords under operating leases asleasehold improvements.

*Stock Based Compensation*

In December 2004,the Financial Accounting Standard Board issued SFAS No. 123(R), *Share Based Payment* (“SFAS 123(R)”)*,*which replaced SFAS No. 123, *Stock Based Compensation*(“SFAS 123”) andsuperseded Accounting Principles Board (“APB”) Opinion No. 25, *Employee Based Stock Compensation. *Prior to the adoption of SFAS123(R), the Company accounted for its employee stock-based awards using theintrinsic value method in accordance with APB 25, as allowed under SFAS123.   Under the intrinsic method, no employeestock-based compensation was recognized in the Company’s statements ofoperations prior to January 1, 2006. Under the modified prospective transition method as prescribed underSFAS 123(R) and adopted by the Company effective January 1, 2006, the combinedfinancial statements prior to 2006 were not restated to reflect, and do notinclude, the impact of adopting SFAS 123(R).

The Companyaccounts for equity instruments issued to non-employees in accordance with theprovisions of EITF No. 96-18, *Accountingfor Equity Instruments That Are Issued to Other Than Employees forAcquiring, or in Conjunction with Selling, Goods or Services* (“EITF 96-18”). The equityinstruments, consisting of warrants to purchase the Company’s common stock, arevalued using the Black-Scholes valuation model, and, as applicable, themeasurement of expense is subject to periodic mark-to-market adjustments ineach reporting period.

*Recently Issued Accounting Pronouncements*

In September 2006, the SEC staff issued SABNo. 108, *Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements* (“SAB108”). SAB 108 was issued in order to eliminate the diversity inpractice surrounding how public companies quantify financial statementmisstatements. SAB 108 requires that registrants quantify errors using both abalance sheet and income statement approach and evaluate whether eitherapproach results in a misstated amount that, when all relevant quantitative andqualitative factors are considered, is material. SAB 108 must be implemented bythe end of the Company’s fiscal 2007. The Company does not believe that the adoption of SAB 108 will have amaterial impact on the Company’s financial position, results of operations orcash flows.

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In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements* (“SFAS 157”).SFAS 157 provides a common definition of fair value and establishes a frameworkto make the measurement of fair value in generally accepted accountingprinciples more consistent and comparable. SFAS 157 also requires expandeddisclosures to provide information about the extent to which fair value is usedto measure assets and liabilities, the methods and assumptions used to measurefair value, and the effect of fair value measures on earnings. SFAS 157 iseffective for the Company’s 2009 fiscal year, although early adoption ispermitted. The Company is currently assessing the potential effect of SFAS 157on its financial statements.

In July 2006, the FASB issued FIN No. 48, *Accounting for Uncertainty in Income Taxes* (“FIN 48”). FIN 48 clarifies theaccounting for income taxes by prescribing a minimum probability threshold thata tax position must meet before a financial statement benefit is recognized.The minimum threshold is defined in FIN 48 as a tax position that is morelikely than not to be sustained upon examination by the applicable taxingauthority, including resolution of any related appeals or litigation processes,based on the technical merits of the position. The tax benefit to be recognizedis measured as the largest amount of benefit that is greater than fifty percentlikely of being realized upon ultimate settlement. FIN 48 must be applied toall existing tax positions upon initial adoption. The cumulative effect ofapplying FIN 48 at adoption, if any, is to be reported as an adjustment toopening retained earnings for the year of adoption. FIN 48 is effective for theCompany’s 2007 fiscal year, although early adoption is permitted. The Companyis currently assessing the potential effect of FIN 48 on its financialstatements.

InFebruary 2006, the FASB issued SFAS No. 155, *Accounting for Certain Hybrid Financial Instrument*(“SFAS 155”), which amends SFASNo. 133, *Accounting for DerivativesInstruments and Hedging Activities*and SFAS No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishment of Liabilities*. SFAS 155 amends SFAS 133to narrow the scope exception for interest-only and principal-only strips ondebt instruments to include only such strips representing rights to receive aspecified portion of the contractual interest or principle cash flows. SFAS 155also amends SFAS 140 to allow qualifying special-purpose entities to hold apassive derivative financial instrument pertaining to beneficial interests thatitself is a derivative instrument. The Company does not believe the adoption ofSFAS 155 will have a material impact on the Company’s financial position,results of operations or cash flows.

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**3.   Cash, CashEquivalents and Marketable Securities**

Cash, cash equivalents and marketable securitiesconsist of the following (in thousands):

|                                                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2005**              | ** ** | **2006**              | ** ** |
| Cash, money  market and certificates of deposit          |       | $                     | 51,095     |                  | $          | 111,066 |   |
| Total cash and cash equivalents                          |       | 51,095                |       | 111,066               |       |
|                                                     |       |                  |       |                  |       |
| Marketable  securities:                                  |       |                  |       |                  |       |
| Auction rate securities and other                        |       | 94,700                |       | 27,917                |       |
| Total marketable  securities                             |       | 94,700                |       | 27,917                |       |
| Total cash, cash  equivalents, and marketable securities |       | $                     | 145,795    |                  | $          | 138,983 |   |

 

The Company hasnot experienced any realized gains or losses on its investments in the periodspresented.  The following tablesummarizes the estimated fair value of the Company’s marketable securitiesclassified by the stated maturity date of the security (in thousands):

|                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **           | ** ** | **2005**              | ** ** | **2006**              | ** ** |
| Due within one  year |       | $                     | 94,700     |                  | $          | 27,917 |   |
|                      |            |                       |            |                       |            |  |  |

 

**4. Property and Equipment**

Property andequipment is recorded at cost and consisted of the following (in thousands):

|                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2005**              | ** ** | **2006**              | ** ** |
| Software                          |       | $                     | 18,187     |                  | $          | 46,513 |   |
| Hardware                          |       | 6,502                 |       | 9,925                 |       |
| Leasehold  improvements and other |       | 1,477                 |       | 6,627                 |       |
|                              |       | 26,166                |       | 63,065                |       |
| Less:  accumulated depreciation   |       | (937                  | )          | (12,609               | )          |
| Total property  and equipment     |       | $                     | 25,229     |                  | $          | 50,456 |   |

 

Estimated usefullives for property and equipment range from three to five years. Depreciationexpense, which is included in the Company’s statement of operations inoperations and member service, sales and marketing and general and administrativeexpenses on the income statement depending on the nature and use of the asset,was $0.9 million and $11.7 million for the periods ended December 31, 2005 and2006, respectively.

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**5.  Inventory**

The Company’sinventory is comprised of the following (in thousands):

|                                                                        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                             | ** ** | **2005**              | ** ** | **2006**              | ** ** |
| Devices (net of  $0.9 million and $2.7 million reserves, respectively) |       | $                     | 3,787      |                  | $          | 11,123 |   |
| Accessories (net  of $0 and $0.5 million reserves, respectively)       |       | 27                    |       | 602                   |       |
| Total inventory                                                        |       | $                     | 3,814      |                  | $          | 11,725 |   |

 

**6.  Restricted Cash**

The Company isrequired to maintain certain cash deposits in certificate of deposit accountsin connection with various lease and operating arrangements, which the Companyclassifies as restricted cash.  As ofDecember 31, 2005 and 2006, the Company had aggregate restricted cashbalances of approximately $7.3 million and $13.5 million, respectively.  Classification between current and long-termrestricted cash on the Company’s combined balance sheet is based upon theunderlying terms and restrictions of each lease and operating agreement.

**7.  Goodwill, Contributed and PurchasedIntangibles**

*Contributed and Purchased IntangibleAssets and Goodwill*

The followingtable presents the components of the Company’s identifiable intangible assetsand goodwill included in the accompanying Combined balance sheets (inthousands):

|                                       | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2005**              | ** ** | **2006**              | ** ** |
| Carrier and  customer relationships   |       | $                     | 25,316     |                  | $          | 25,316 |   |
| Subscribers                           |       | 8,665                 |       | 8,665                 |       |
| Other                                 |       | 2,740                 |       | 2,740                 |       |
| Identified Intangible Assets          |       | 36,721                |       | 36,721                |       |
| Less:  accumulated amortization       |       | (5,829                | )          | (15,690               | )          |
| Subtotal                              |       | 30,892                |       | 21,031                |       |
| Goodwill                              |       | 3,449                 |       | 3,449                 |       |
|                                  |       |                  |       |                  |       |
| Total intangible  assets and goodwill |       | $                     | 34,341     |                  | $          | 24,480 |   |

 

Estimated futureamortization related to the Company’s identified finite-lived intangible assetsat December 31, 2006 is as follows (in thousands):

| 2007                 |   | $      | 9,713  |   |
|----------------------|--------|--------|--------|--------|
| 2008                 |   | 8,365  |   |
| 2009                 |   | 2,783  |   |
| 2010 and  thereafter |   | — |   |
| Total                |   | $      | 20,861 |   |

 

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**8.  Accrued Expenses**

Accrued expensesof $16.4 million and $44.9 million at December 31, 2005 and 2006, respectivelywere largely comprised of accrued operating and fixed asset purchases,inventory obligations, advertising and marketing expenses, payroll and otherpayroll-related liabilities and agent commissions.

**9.  Capitalization**

*Formation of HELIO, Inc.*

HELIO, Inc. wasformed in January 2005 and was later capitalized in March 2005 through theissuance of one (1) share of Class B Common Stock to each of thePartners.   The Company has theauthority to issue 200,000,004 shares of capital stock, which consists of (i)180,000,002 shares of  Class A Common Stock, par value $0.01 per share (“ClassA Common Stock”) and 2 (two) shares of Class B Common Stock, par value $0.01per share (“Class B Common Stock”, and together with Class A Common Stock, “CommonStock”) and (ii) 20,000,000 shares of Preferred Stock, par value $0.01 pershare (“Preferred Stock”), issuable in one or more series as defined in theCompany’s amended and restated certificate of incorporation (the “Certificateof Incorporation”).

In January andJuly 2006, the Company issued 1,000,000 and 3,680,400 shares of Class A CommonStock, respectively for an aggregate purchase price of approximately $1.7million and $6.3 million, respectively (collectively, the “2006 CompanyInvestments”).

In October2006, the Company issued 650,000 shares of Class A Common Stock to SKT inexchange for professional services performed and completed from October 2005through December 2006 (see Note 16).   The 650,000 share issuance wasvalued at $1.1 million and included in operating expenses in the Company’sstatement of operations for the year ended December 31, 2006.

As of December 31,2006, there was no Preferred Stock issued or outstanding.

*Rights of Common Stock Holders*

Except as providedin the Certificate of Incorporation, the holders of Common Stock vote togetheras one class on all matters submitted to a vote of the stockholders of theCompany.   All shares of Common Stock are identical in all respectsand shall entitle the holders thereof to the same rights and privileges, andshall be subject to the same qualifications, limitations and restrictionsthereof.  Each holder of Class A CommonStock and Class B Common Stock is entitled to one vote for each share of stockheld on all matters submitted to the holders thereof, except for mattersreserved exclusively to holders of another class of capital stock.  Withrespect to matters reserved exclusively to holders of Class A Common Stock,holders of Class B Common Stock, who also hold shares of Class A Common Stock,shall be entitled to vote their shares of Class of A Common Stock, but shallnot be entitled to any increased voting multiple as may apply in other cases asmore fully described below.

Each holder ofClass B Common Stock shall be entitled to an aggregate number of votes for allshares of Class B Common Stock held by such holder on all matters submitted toa vote of the stockholders, except as provided above, equal to the differencebetween (i) ten multiplied by the aggregate number of:

·                  Theshares of Class A Common Stock obtained if all shares of Class B Common Stock,HELIO LLC Membership Units (as described below) and shares of Preferred Stockof the holder were then converted (as described below); and

·                  Theshares of Class A Common Stock held by such holders of Class B Common Stock;

and (ii) the shares ofClass A Common Stock held by such holders of Class B Common Stock.

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Pursuant to theCertificate of Incorporation, the initial number of directors serving on theHELIO, Inc. board of directors is six. For so long as there are any shares of Class B Common Stock outstanding,the holders of Class B Common Stock are entitled to elect all six directors witheach holder of Class B Common Stock electing three of such directors, or, ifthere is only one share of Class B Common Stock outstanding, then the holder ofsuch share of Class B Common Stock shall be entitled to elect all six of suchdirectors.  In the event a holder ofClass B Common Stock, together with its subsidiaries, ceases to own, directlyor indirectly, such number of total outstanding shares of the Company (assumingconversion of all Class B Common Stock, Preferred Stock and Membership Units intoClass A Common Stock) (“Total Outstanding Shares”) equal to at least fiftypercent (50%) of the other Class B Common Stock holder’s ownership of TotalOutstanding Shares, and fails, after written notice to acquire additional ClassA Common Stock, Membership Units and or Class B Common Stock to attain thisminimum ownership percentage within a stated period, the party failing toachieve the minimum ownership percentage shall lose its right to elect one ofits three board member(s) and the number of directors to be elected by theholders of Class B Common Stock shall be reduced by one to a total of fivedirectors.  In the event a holder ofClass B Common Stock, together with its subsidiaries, ceases to own, directlyor indirectly, at least ten percent (10%) of the Total Outstanding Shares and,after written notice from the other holder(s) of Class B Common Stock fails toacquire sufficient additional Class A Common Stock, Membership Units or Class BCommon Stock, as the case may be, within 30 days following receipt of suchnotice to restore such holder’s percentage ownership of the Total OutstandingShares to at least ten percent (10%), then the Class B Common Stock of theparty failing to achieve the minimum ownership percentage shall be convertedinto Class A Common Stock and the directors elected by such former holder ofClass B Common Stock shall be appointed by the remaining holder of Class BCommon Stock, if any.  If there are noshares of Class B Common Stock outstanding, then all directors shall be electedby, and the number of directors determined by the holders of Class A CommonStock and Preferred Stock, if any, voting together as a single class.

Each holder ofClass A Common Stock other than SKT, has entered into an irrevocable proxy witheach of the Partners, entitling each of the Partners to vote 50 percent of suchholder’s shares in any vote involving the holders of Class A Common Stock.  In addition, with respect to the issuance of650,000 shares of HELIO, Inc. Class A Common Stock to SKT, SKT entered into anirrevocable proxy with EarthLink to vote 50 percent of SKT’s 650,000 shares ofClass A Common Stock so issued in any vote involving the holders of Class ACommon Stock.  The irrevocable proxiesterminate upon mutual agreement, the Company’s initial public offering or achange of control of the Company.

*Formation of HELIO LLC*

HELIO LLC (the “OperatingCompany”) was formed in January 2005 and was later capitalized in March 2005through the issuance of (i) 100,000,000 Membership Units to the Partners(50,000,000  to each Partner) in exchangefor a commitment to contribute capital, equally in the aggregate amount of $440million ($220 million by each partner) (the “Partners’ Investment”) and (ii)2  Membership Units to HELIO, Inc., asdescribed below.  The Operating Company was established as a partnershipfor federal and state income tax treatment.  The purpose of the OperatingCompany is to operate the Company’s business, to make additional investmentsand engage in such activities as the Company may approve and engage in and anyand all activities and exercise any power permitted to limited liabilitycompanies under the laws of the State of Delaware. The Company is the solemanaging partner of the Operating Company.

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In March 2005 andwith the exchange for the Partners’ Investment, the following Membership Unitswere issued by the Operating Company (in thousands, except for MembershipUnits):
| **Member**  | ** ** | **Cash  Committed** | ** ** | **Non-cash  Contribution** | ** ** | **Membership  Units Issued** | ** ** | **Membership Units**          | ** ** |
|-------------|------------|---------------------|------------|----------------------------|------------|-----------------------------------|------------|------------------------------------|------------|
| SKT         |       | $                   | 220,000    |                       | $          | —                            |       | 50,000,000                         |       | Convertible  Preferred  Units |   |
| EarthLink   |       | 180,000             |       | 40,000                     |       | 50,000,000                        |       | Convertible  Preferred  Units |       |
| HELIO, Inc. |       | —              |       | —                     |       | 2                                 |       | Convertible  Common  Units    |       |
| Total       |       | $                   | 400,000    |                       | $          | 40,000                            |       | 100,000,002                        |       |   |   |

 

There was noadditional change in ownership of the Operating Company during 2005.  During the period ended December 31, 2006,HELIO, Inc. reinvested approximately $9.1 million into the Operating Companyfor an additional 5,337,900 Convertible Common Membership Units.

Through December31, 2006, cumulative funding received under the Partner’s Investment totaled$401 million, comprised of $361 million in cash and $40 million in contributedassets.

Upon any equityinvestment made into the Company, such equity investment is immediatelyreinvested into the Operating Company.  In January and July 2006, the 2006Company investments were immediately reinvested into the Operating Company andas such, an additional 1,000,000 and 3,680,400 of Convertible Common MembershipUnits were issued by the Operating Company, respectively for an aggregate $1.7million and $6.3 million, respectively.  These investments, when combined,increased the Company’s effective ownership of the Operating Company toapproximately 4.5% at December 31, 2006.  At December 31, 2005, theCompany’s ownership of the Operating Company was less than 1%.

*Rights of holders of Membership Units*

All MembershipUnits are identical in all respects and entitle the holders thereof to the samerights and privileges, and shall be subject to the same qualifications,limitations and restrictions thereof, except as provided in the OperatingCompany’s Amended and Restated Limited Liability Company Agreement.  Each Membership Units is entitled to one voteon all matters to be voted on by the holders of Membership Units (“Members”).  Holders of Convertible Preferred MembershipUnits are entitled to certain preferential rights, including but not limitedto, preferences with respect to tax allocations, distributions, and certainother preferences.

*Exchange of Membership Units and Conversion of Class BCommon Stock*

A holder ofMembership Units may, at the option of the holder, exchange, at any time andfrom time-to-time, any or all of its Membership Units for validly issued, fullypaid and non-assessable shares of Class A Common Stock.  The number ofshares of Class A Common Stock obtained from such an exchange of MembershipUnits shall be determined by multiplying the number of Membership Units to beexchanged by the Unit Exchange Rate then in effect.  The Unit ExchangeRate shall initially be set at one (1).  In the event there is a stocksplit, dividend, combination or similar transactions related to Class A CommonStock in which there is not an identical dividend, distribution, combination orstock split or similar transaction related to the Membership Units, the UnitExchange Rate in effect immediately after such an event shall equal the UnitExchange Rate in effect immediately prior to such a transaction multiplied by(i) the number of shares of Class A Common Stock outstanding immediately aftersuch an event, and divided by (ii) the number of shares of Class A Common Stockoutstanding immediately prior to such an event.  At December 31, 2006, theUnit Exchange Rate then in effect was one (1).

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A holder of Class BCommon stock is entitled to convert, at any time and from time-to-time, any orall of shares of Class B Common Stock into validly issued, fully paid andnon-assessable shares of Class A Common Stock.  The number of shares ofClass A Common Stock obtained from the conversion of Class B Common Stock shallbe determined by multiplying the number of Class B Common Stock to be exchangedby the Class B Conversion Rate then in effect.  The Class B ConversionRate shall initially be set at one (1).  In the event there is a stocksplit, dividend, combination or similar transactions related to Class A CommonStock, the holders of Class B Conversion Rate in effect  immediately aftersuch an event shall equal the Class B Conversion Rate in effect immediately priorto such a transaction multiplied by (i) the number of shares of Class A CommonStock outstanding immediately after such an event, and divided by (ii) thenumber of shares of Class A Common Stock outstanding immediately prior to suchan event.  At December 31, 2006, the Class B Conversion Rate then ineffect was one (1).

Certain eventstrigger an automatic conversion of Class B Common Stock into Class A CommonStock, such as if a holder of Class B Common Stock, together with itssubsidiaries, ceases to own, directly or indirectly, at least ten percent (10%)of the total outstanding shares (as defined) and, after written notice from theother holder(s) of Class B Common Stock fails to acquire sufficient additionalClass A Common Stock, Membership Units or Class B Common Stock, as the case maybe, within thirty (30) days following receipt of such notice to restore suchholder’s percentage ownership of the Total Outstanding Shares to at least tenpercent (10%).  Upon such an event, the following automatically occurs:

·                  TheClass B Common Stock of the party failing to achieve the minimum ownershippercentage described above (the “Triggering Party”) shall convert into Class ACommon Stock;

·                  Theterm of the Class B Directors appointed by the Triggering Party shall end;

·                  Allrights of the Triggering Party associated with ownership of the Class B CommonStock shall terminate; and,

·                  Certainstrategic decisions shall be made by the remaining Class B Directors and anyClass A Directors as provided under the Certificate of Incorporation.

In the event aholder of Class B Common Stock, together with its subsidiaries, ceases to own,directly or indirectly, such number of Total Outstanding Shares equal to atleast fifty percent (50%) of the other Class B Common Stock holder’s ownershipof the Total Outstanding Shares, and fails, after written notice to acquireadditional Class A Common Stock, Membership Units and or Class B Common Stockto attain this minimum ownership percentage within a stated period, the partyfailing to achieve the minimum ownership percentage shall lose one of itselected board member(s) and the ability to influence certain of the Company’sstrategic decisions immediately following such an event.

In the event ofany dissolution, liquidation or winding-up of the affairs of the Company, anyassets remaining subsequent to payments or provision of any debts and otherliabilities then outstanding and after making provision for the holders of eachseries of Preferred Stock, if any, and according to the terms of the PreferredStock, shall be divided among and paid ratably to the holders of the shares ofCommon Stock or on an as-converted basis.

Upon completion ofa public offering of shares of the Company’s Common Stock, the Company willreceive a number of Membership Units determined by the Unit Exchange Rate theneffect based upon the number of shares of Class A Common Stock sold in such apublic offering.

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**10.  Stock Compensation**

*HELIO, Inc. Equity Incentive Plan*

In February 2006,the Company adopted the Amended and Restated Helio, Inc. Equity Incentive Plan,which is an amendment and restatement of the November 2005 Helio, Inc. EquityIncentive Plan (the “Plan”).  The termsof the Plan provide for grants of non-qualified stock options (“NSOs”) andother stock-related awards and performance awards that may be settled in cash,stock or other property.  Employees,officers, directors, outside consultants and service providers are eligible forawards under the Plan. NSO’s shall have a term of no more than 10 yearsfrom the date of grant and an exercise price of no less than the estimated fairmarket value per share on the date of grant. Options granted to an individual who, at the time of grant of suchoption, owns stock representing more than 10% of the voting power of allclasses of stock of the Company, shall have an exercise price equal to no lessthan 110% of the fair market per share on the date of grant. The vesting periodfor NSO’s is generally four years from the date of grant, however, certainemployees were issued stock options subject to the Company achieving future,specific member and Company financial performance milestones (the “PerformanceOptions”). The Plan is administered by the Company’s board of directors. As ofDecember 31, 2005, there was an aggregate of 10,205,000 shares of Class ACommon Stock reserved for issuance under the Plan.  In April 2006, the board of directors andstockholders of the Company approved a 4,000,000 share increase in the numberof shares reserved for issuance under the Plan. As of December 31, 2006, an aggregate 14,205,000 shares of Class ACommon Stock were reserved for issuance under the Plan.

*Stock-Based Compensation Before Adoption ofSFAS No. 123(R)*

The Company’sfinancial statements as of and for the twelve months ended December 31,2006 reflect the impact of FAS 123(R). Stock-based compensation expenserecognized during the twelve months ended December 31, 2006 includes:

·                  Compensationexpense for stock-based awards granted to employees subsequent toJanuary 1, 2006 based on the grant date fair value estimated in accordancewith the provisions of FAS No. 123(R) of approximately $0.4million; and,

·                  Compensationexpense for unvested stock-based awards granted to employees prior toJanuary 1, 2006 based on the grant date fair value estimated in accordancewith the provisions of FAS No. 123(R) of approximately $1.0million.

No income taxbenefit has been recognized relating to stock-based compensation expense and notax benefits have been realized from exercised stock options for the periodsended December 31, 2006 and 2005. The implementation of FAS 123(R) did nothave an impact on cash flows from financing activities during the twelve monthsended December 31, 2006.

The Companyestimated the fair value of employee time-based stock options using theBlack-Scholes valuation model. The fair value of these time-based employeestock options is being amortized on a straight-line basis over the requisiteservice period of the awards. The fair value of employee stock options wasestimated using the following weighted-average assumptions:
| ** **                | ** ** | **Year ended  December 31,  2006** | ** ** | **Period  inception to  December 31,  2005** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------|------------|
| Expected  volatility      |       | 70                                           | %          | 70                                                     | %          |
| Risk-free  interest rate  |       | 4% to 5                                      | %          | 4 to 5                                                 | %          |
| Dividend yield            |       | 0.0                                          | %          | 0.0                                                    | %          |
| Expected term (in  years) |       | 6.25                                         |       | 5.0                                                    |       |

 

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In 2006, theCompany’s expected term of stock options was based upon the “shortcut method”as prescribed under SAB 107 (an expected term based on the mid-point betweenthe vesting date and the end of the contractual term) as the Company did nothave sufficient historical information to develop reasonable expectations aboutfuture exercise patterns and post-vesting employment termination behavior ofits employees. The use of the shortcut method is permitted through December 31,2007.  The Company plans to convert tocompany-specific experience on or before January 1, 2008.  The expected stock price volatility for theCompany’s stock options was determined by independent valuation experts byexamining and using an average of the historical volatilities of similarcompanies and industry peers as the Company did not have any trading historyfor the Company’s common stock. The Company will continue to analyze thehistorical stock price volatility and expected term assumptions as morehistorical data for the Company’s common stock becomes available. The risk-freeinterest rate assumption is based on the U.S. Treasury instruments whoseterm was consistent with the expected term of the Company’s stock options. Theexpected dividend assumption is based on the Company’s history and expectationof dividend payouts. In addition, FAS 123(R) requires forfeitures tobe estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates.  Forfeitures were estimated based onhistorical experience and future expectations. Prior to the adoption of FAS 123(R),the Company accounted for forfeitures as they occurred.

During the periodsended December 31, 2005 and 2006, the Company granted certain employeePerformance Options of 2,725,000 and 75,000, respectively.  During 2006, 100,000 of the PerformanceOptions were forfeited.  As prescribedunder FAS 123(R), the Company accounts for its Performance Options based uponthe probability of achieving the specific Performance Options milestones.  For the periods ended December 31, 2006 and2005, the certainty of achieving the Performance Options milestones, which wasperformed by an independent financial valuation expert, was deemed less thanprobable (probable being defined as the likelihood of achieving suchPerformance Options milestones under FAS 123(R)), and accordingly there was norelated compensation expense recorded for these Performance Options duringthese periods.  The Company will continueto evaluate the probability of achieving these Performance Options milestonesand as a result, additional stock compensation expense pertaining to these PerformanceOptions may be recorded in future periods.

The table belowreflects the pro forma net loss (and net loss per share) for the periodinception to December 31, 2005 (in thousands):
| ** **                                                                                          | ** ** | **Inception  (January 27,  2005) to  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                                           | ** ** |
| Net loss, as  reported                                                                              | ** ** | $                                                                  | (42,023    | ) |
| Add: stock-based compensation included in net loss  under the intrinsic method                      |       | 43                                                                 |       |
| Less: stock based compensation expense determined  under the fair value based method for all awards |       | (891                                                               | )          |
| Net loss, pro forma                                                                                 |       | $                                                                  | (42,871    | ) |

 

The weightedaverage deemed fair value of employee stock options outstanding was $1.15 and$1.16 per share for the periods ended December 31, 2005 and December 31, 2006,respectively. The fair value of these options was estimated at the date ofgrant using the Black-Scholes option-pricing model using the same weightedaverage assumptions in the above table accordance with the requirements of FAS123(R) and SAB No. 107, *Share-Based Payment*:

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*Put Option*

The Company provides each employee who was grantedstock options (an “Optionee”) a put option (the “Put”), whereby the Optioneehas the right to sell any vested options and vested shares of stock issuedpursuant to the exercise of stock options (the “Vested Shares”) to the Companyat any time after March 31, 2010 (the “Put Initiation Date”), provided thefollowing conditions are met (collectively, the “Triggering Events”):

(i)                                     theOperating Company shall have or exceed 3.3 million active members; and,

(ii)                                  theOperating Company must have been profitable for at least two (2) consecutivequarters commencing with the quarter ending December 31, 2009; and

(iii)                               thefair value of the Operating Company’s assets must exceed the amount of theOperating Company’s liabilities, as defined in the agreement.

If an Optionee so desired to exercise their Put up tothe Put Initiation Date and all of the Triggering Events were met, the purchaseprice of the Vested Shares shall be based on a valuation of the Company ascalculated by a third party appraisal firm designated by the Company’s board ofdirectors.

As of December 31,2006 and 2005, the likelihood of the Triggering Events occurring within the PutInitiation Date were not certain and accordingly, the Vested Shares under thePut are included in the equity section of the Company’s balance sheets forthese periods.  However, as facts andcircumstances change and it is deemed that the likelihood of the TriggeringEvents occurring within a reasonable period is deemed probable, as definedunder FAS 123(R),  the Company would berequired to reclassify such Vested Shares from equity to a liability at suchtime (on a grant-by-grant basis).

*Stock Option Activity*

The followingtable summarizes information about stock option activity from January 27, 2005(date of inception) through December 31, 2006 (in thousands, except price pershare and remaining contractual life):
| ** **                         | ** ** | **Options Outstanding and Exercisable** | ** ** | **Options Vested**                                | ** **     |
|------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|----------------|
| ** **                         | ** ** | **Number of  Options  Outstanding**               | ** ** | **Range of  Exercise  Price Per Share** | ** **     | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Weighted-  Average  Remaining  Contractual  Life  (in Years)** | ** ** | **Number  Vested** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** |
| January 27, 2005  (inception)      |       | —                                                 |       | $                                                      | —         |   | $ | — |   |   |   |   |   |   |   |
|                               |       |                                                   |       |                                                   |           |   |   |   |   |   |   |   |   |
| Granted                            |       | 7,236                                                  |       | 1.71                                                   |           | 1.71 |   |   |   |   |   |   |   |
| Exercised                          |       | —                                                 |       | —                                                 |           | — |   |   |   |   |   |   |   |
| Forfeited                          |       | (86                                                    | )          | 1.71                                                   |           | 1.71 |   |   |   |   |   |   |   |
|                               | ** ** | ** **                                             | ** ** | ** **                                             | ** **     | ** ** | ** ** | ** ** |   |   | ** ** | ** ** | ** ** |
| Balance at  December 31, 2005 | ** ** | **7,150**                                              | ** ** | **$**                                                  | **1.71**       | ** ** | **$** | **1.71** | ** ** | **9.88** |   | — | ** ** | **$** | **1.71** | ** ** |
|                               | ** ** | ** **                                             | ** ** | ** **                                             | ** **     | ** ** | ** ** | ** ** |   |   | ** ** | ** ** | ** ** |
| Granted                            |       | 2,723                                                  |       | $                                                      | 1.71-$1.82     |   | 1.75 |   |   |   |   |   |   |   |
| Exercised                          |       | (8                                                     | )          | $                                                      | 1.71           |   | 1.71 |   |   |   |   |   |   |   |
| Forfeited                          |       | (1,623                                                 | )          | $                                                      | 1.71-$1.82     |   | 1.71 |   |   |   |   |   |   |   |
|                               | ** ** | ** **                                             | ** ** | ** **                                             | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  December 31, 2006 | ** ** | **8,242**                                              | ** ** | **$**                                                  | **1.71-$1.82** | ** ** | **$** | **1.72** | ** ** | **9.04** | ** ** | **1,391** | ** ** | **$** | **1.72** | ** ** |

 

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**11. Warrants**

InNovember 2005 and in conjunction with certain services to be provided tothe Company over a four year period beginning in November 2005 (the “SKTI ServiceAgreement”), the Company issued ten-year warrants to SK Telecom International,Inc. (“SKTI”), a related party and affiliate of SK Telecom Co., Ltd., topurchase (i) an aggregate 1,995,000 shares of the Company’s Class A CommonStock (the “November 2005 Warrant”) at an exercise price of $1.71 per share and(ii) an aggregate 1,800,000 shares of the Company’s Class A Common Stock (the “PerformanceWarrant”) at an exercise price of $1.71 per share.  The November 2005 Warrant vests over the termof the four year SKTI Service Agreement at the rate of 25% each year.  The Performance Warrant is exercisable underthe following performance conditions:

·                  One-third (1/3)of the Performance Warrant Shares may be purchased upon the attainment of theOperating Company of one million (1,000,000) members;

·                  An additionalone-third (1/3) of the Performance Warrant Shares may be purchased upon theattainment of the Operating Company of two million five hundred thousand(2,500,000) members; and,

·                  The remainingone-third (1/3) of the Performance Warrant Shares may be purchased upon theattainment by the Operating Company of two million five hundred thousand(2,500,000) members and at least two (2) consecutive quarters of positive cashflows.

In October 2006and in conjunction with the SKTI Service Agreement, the Company issued aten-year warrant to SKTI to purchase 65,000 of the Company’s Class A CommonStock at $1.82 per share (the “October 2006 Warrant”).  The October 2006 Warrant vests over fouryears at the rate of 25% each year beginning in October 2006.

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The Companyaccounts for its warrants under EITF 96-18 using the fair value provisionsof FAS 123(R).  Under EITF 96-18, thewarrants were valued using the Black-Scholes valuation model and as applicable,the measurement of expense was subject to periodic mark-to-market adjustmentsin each reporting period.   The deemedfair value of its warrants was calculated with the following assumptions:

| Risk-free interest rate |   | 4%-5      | %      |
|-------------------------|--------|-----------|--------|
| Expected life in  years |   | 5.00-6.25 |   |
| Dividend yield          |   | 0         | %      |
| Expected volatility     |   | 70        | %      |

 

During the periodsended December 31, 2005 and 2006, the Company recognized expense of less than$0.1 million and $0.6 million, respectively related to the November 2005Warrant and October 2006 Warrant.  During the periods ended December 31, 2005 and 2006, no expense wasrecognized for the Performance Warrant during such periods as the performancecriteria had not yet been achieved, and as a result the fair value was zero.The weighted average deemed fair value of warrants granted for the periodsended December 31, 2005 and 2006 was $1.04 and $1.25 per share,respectively.

The weighted averageexercise prices and the weighted average remaining contractual life forwarrants issued as of December 31, 2006 were as follows (in thousands):
| **Warrants Outstanding** | ** ** | **Warrants Exercisable** | ** ** |
|--------------------------|------------|-------------------------------|------------|
| ** **               | ** ** | ** **                    | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                    | ** ** | **Average** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **               | ** ** | ** **                    | ** ** | **Remaining** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**        | ** ** | **Number**                    | ** ** | **Contractual** | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Outstanding**               | ** ** | **Life** | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| $1.71 - $1.82            |       | 3,860                         |       | 8.90 |   | $ | 1.71 |   | 499 |   | $ | 1.71 |   |
|                          |            |                               |            |  |  |  |  |  |  |  |  |  |  |

 

**12. Income Taxes**

HELIO LLC is not ataxable entity for federal income tax purposes. The allocable share of HELIO LLC’s taxable income or loss is included inits members federal and state income tax returns based upon their respectiveownership interests.  The Company’sinformation below is prepared based on HELIO, Inc.’s effective ownershipinterest in HELIO LLC and to the extent that certain states impose income taxesupon non-corporate legal entities these taxes are also reflected below.

The Companyrecords a provision (benefit) for federal and state income taxes and generallyrecognizes deferred tax assets and liabilities based on differences between thefinancial reporting and tax bases of assets and liabilities, applying enactedstatutory rates.  Pursuant to theprovisions of Statement of Financial Accounting Standards No. 109,*Accounting For Income Taxes*  (“SFAS 109”), the Company providesvaluation allowances for deferred tax assets for which it does not considerrealization of such assets to be more likely than not.

Pursuant to the HELIO LLCMembership Agreement (the “Membership Agreement”), losses generated by HELIOLLC are generally allocated in the following order: (i) to holders of HELIO LLCConvertible Common Membership units up to member(s) capital account balance(s),without creating a deficit in the member(s) capital account; and, (ii) toholders of HELIO LLC convertible preferred membership units up to member(s)capital account balance(s) and in proportion to their respective interest,without creating a deficit in the members’ capital account.   Under the Membership Agreement, profitsgenerated by HELIO LLC are generally allocated first to the holders ofPreferred Membership Units to the extent of prior losses, and second to theholders of Convertible Common Membership units to the extent of priorlosses.  As a result of the MembershipAgreement, HELIO, Inc. was allocated losses from HELIO LLC up to its

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investment in HELIOLLC.  As of December 31, 2005 and 2006,the Company was allocated $0 and approximately $9.1 million of the income taxlosses generated by HELIO LLC, respectively.  The Company has not recordedany portion of the deferred taxes attributable to HELIO LLC as it is notpresently expected that any portion of such amounts will be allocated to theCompany pursuant to the terms of the Membership Agreement.

As a result ofcontinued operating losses, the Company has not provided any provision(benefit) for income taxes for the periods ended December 31, 2005 or2006.  Since inception (January 27, 2005)through  December 31, 2005, HELIO, Inc.’seffective interest in HELIO LLC was less than 0.1% and therefore net operatingloss carryforwards for the same period were limited solely to HELIO, Inc.’sactivities.

The significantcomponents of the Company’s deferred tax assets and liabilities are as follows(in thousands):
| ** **                        | ** ** | **December 31,  2005** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Deferred  income tax assets**   | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Tangible and  intangible assets   |       | 20                          |       | 18                          |       |
| Net operating  loss carryforwards |       | 1                           |       | 3,802                       |       |
| Less: valuation  allowance        |       | (21                         | )          | (3,820                      | )          |
| Total deferred  income tax assets |       | $                           | —     |                        | $          | — |   |
|                                   |            |                             |            |                             |            |  |  |

 

A reconciliationof the income tax provision (benefit) computed by applying the U.S. federalstatutory rate of 35% to the loss before income taxes and actual income taxexpense (benefit) for the years ending December 31, 2005 and 2006 was asfollows:
| ** **                           | ** ** | **December 31,  2005** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                 |       |                        |       |                        |       |
| Federal income  tax rate             |       | (35.0                       | )%         | (35.0                       | )%         |
| State taxes, net  of federal benefit |       | (5.7                        | )%         | (5.7                        | )%         |
| Effect of  partner allocations       |       | 40.7                        | %          | 38.7                        | %          |
| Change in  valuation allowance       |       | —                      | %          | 2.0                         | %          |
| Total                                |       | —                      | %          | —                      | %          |

 

The Company hasfederal net operating loss carry forwards of approximately $9.3 million, whichbegin to expire on December 31, 2025.  The Company has provided avaluation allowance for deferred income tax assets for which it does notconsider realization of such assets to be more likely than not.

**13.  Financial Instruments and Concentration ofRisk**

The carryingamounts of cash and cash equivalents, accounts receivable, subscriptionsreceivable, prepaid expenses, other current assets and accounts payable arereasonable estimates of their fair value due to the short-term nature of theseinstruments.

The majority ofthe Company’s wireless airtime services are leased from a third party wirelessnetwork provider   Any disruption of thisservice would have an adverse impact on the Company’s member experience andongoing operating results.

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**14. Commitments and Contingencies**

*Leases*

The Company leasescertain of its facilities and equipment under non-cancelable operating leasesexpiring in various years through 2011. The leases generally contain annualescalation provisions as well as renewal options. The total amount of rentalpayments, net of allowances and incentives, is being charged to expense usingthe straight-line method over the terms of the leases. In addition to therental payments, the Company generally pays a monthly allocation of thebuildings’ operating expenses. Total rental expense in the periods endedDecember 31, 2005 and 2006 for all operating leases amounted to $0.9million and $3.7 million, respectively.

As ofDecember 31, 2006, minimum lease commitments under non-cancelable leases,including office space and company-owned retail store leases, are as follows (in thousands):
| ** **                                  | ** ** | **Operating** | ** ** |
|---------------------------------------------|------------|---------------|------------|
| ** **                                  | ** ** | **Leases**    | ** ** |
| **Year Ending December 31:** | ** ** | ** **    | ** ** |
| 2007                                        |       | $             | 3,924      |   |
| 2008                                        |       | 4,115         |       |
| 2009                                        |       | 4,244         |       |
| 2010                                        |       | 3,657         |       |
| 2011                                        |       | 2,011         |       |
| Thereafter                                  |       | 8,043         |       |
| Total minimum future  lease payments        |       | $             | 25,994     |   |

 

*Litigation*

From time-to-time,the Company is involved in litigation relating to claims arising in the normalcourse of business. The Company does not believe that any currently pending orthreatening litigation will have a material adverse effect on the Company’sresults of operations or financial condition.

**15.  401K Plan**

The Company has adefined contribution profit sharing plan covering all full-time employees.Employees may make pre-tax contributions up to the maximum allowable by theInternal Revenue Code.  Participants vestin their employee contributions at the rate of 25% per year beginning at aparticipant’s hire date (as defined). Employer contributions of less than $0.1 million and $0.4 million weremade to the plan for the periods ended December 31, 2005 and 2006,respectively.

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**16.  Related Party Transactions**

The partnersprovided aggregate funding of $204 million in cash and $40 million incontributed assets during the period ended December 31, 2005, and aggregatefunding of $157 million during the period ended December 31, 2006 to theCompany (Note 9).

In March 2005,EarthLink and the Company entered into a Master Software Development, SoftwareLicense and Services Agreement pursuant to which EarthLink provides the Companyvarious software development, software license and support services in exchangefor management fees.  The management feeswere determined based on EarthLink’s costs to provide such services, andmanagement believes such fees were reasonable. Fees for services provided by EarthLink are reflected in the Company’sstatements of operations for the periods ended December 31, 2005 and 2006and totaled $3.0 million and $2.3 million, respectively.

During the periodsended December 31, 2005 and 2006, EarthLink purchased wireless devices andservices from Company.   Fees receivedfrom such products and services are included in the Company’s statements ofoperations and were $0.9 million and $0.9 million, respectively.

AtDecember 31, 2005 and 2006, the Company had net payable balances ofapproximately $0.3 million and $0.8 million, respectively outstanding and dueto EarthLink.

In March 2005, SKTand the Company entered into a Master Software Development, Software Licenseand Services Agreement (the “Master Agreement”) pursuant to which SKT providesthe Company various software development, software license and support servicesin exchange for management fees.  InAugust 2005, the Operating Company entered into a software license and servicesagreement with SKT for the installation and subsequent licensing of the Company’swireless data platform and terminal systems pursuant to the Master Agreement(the “Wireless Internet Order”). Effective October 2005, the Operating Company entered into an amendmentto the Wireless Internet Order (the “WI Amendment”).  Aggregate fees under the Wireless InternetSolution Agreement and the WI Agreement were $10.7 million, of which $7.5million and $3.2 million were paid to SKT during the periods ended December 31,2005 and 2006, respectively.   Servicesunder the Wireless Internet Agreement and the WI Agreement commenced in August2005 and were principally being capitalized as equipment additions asprescribed under SOP 98-1.  At December31, 2005 and 2006, gross capitalized costs of $7.5 million and $10.7 million,respectively, associated with the Wireless Internet Agreement and the WIAgreement were included in property and equipment on the Company’s balancesheets.

In August 2005,the Operating Company entered into a software license and services agreementwith SKT for the installation and subsequent licensing of the Company’sCustomer Care and Billing System (“CCBS”) pursuant to the Master Agreement (the“CCBS Order”).  Effective October 2005,the Operating Company entered into an amendment to the CCBS Order (the “CCBSAmendment”).    Aggregate fees under theCCBS Order and CCBS Agreement were $14.1 million, of which $4.2 million and$5.7 million were paid to SKT during the periods ended December 31, 2005 and2006, respectively.   Services under theCCBS Order and CCBS Agreement commenced in August 2005 and were principallybeing capitalized as equipment additions as prescribed under SOP 98-1.  At December 31, 2005 and 2006, grosscapitalized costs of $4.2 million and $14.1 million associated with the CCBSOrder and CCBS Agreement were reflected in property and equipment on theCompany’s balance sheets.   At December31, 2006, the Company had accrued related party liabilities associated with theCCBS Order and CCBS Agreement of $4.2 million.

Effective May2006, the Operating Company entered into a technical system support andservices agreement with SKT whereby SKT would provide technical and systemoperational support on CCBS beginning in May 2006 through December 2006 for anaggregate fee of $1.7 million (the “May 2006 Agreement”).   The aggregate $1.7 million in fees forservices under the May 2006 Agreement are included in the Company’s statementsof operations for the period ended December 31, 2006, of which $1.3 million waspaid and $0.4 million was recorded as an accrued related party liability atDecember 31, 2006.

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Effective August2006, the Operating Company entered into a change request agreement with SKTwhereby SKT expanded the scope of technical functionality to the CCBS systemunder the then-existing Order, as amended, for an aggregate fee of $2.5 million(the “CCBS 1.0 Change Request”).  TheCompany accounted for the CCBS 1.0 Change Request under SOP 98-1 andcapitalized costs of $2.5 million were included in property and equipment onthe Company’s balance sheet at December 31, 2006.   As of December 31, 2006, none of the CCBS1.0 Change Request fees had been paid, and the aggregate $2.5 million wasrecorded as accrued related party liabilities.

Effective August2006, the Operating Company entered into a change request agreement with SKTwhereby SKT expanded the scope of technical functionality under thethen-existing Wireless Internet Agreement for an aggregate fee of $5.9 million(the “Wireless Internet 1.0 Agreement”). Services under the Wireless Internet 1.0 Agreement were completed inDecember 2006. The Company accounted for the Wireless Internet 1.0 Agreementunder SOP 98-1 and FAS 86, whereby capitalized costs of $2.8 million werereflected in property and equipment on the Company’s balance sheet at December31, 2006 and the remaining amount was $3.1 million was charged to expenseduring the year ended December 31, 2006.  As of December 31, 2006, none of the Wireless Internet 1.0 Agreement feeshad been paid, and the aggregate $5.9 million was recorded as related partyliabilities.

Effective August2006, the Operating Company entered into a master services and software licenseagreement with an affiliate of SKT for added functionality and enhancement aroundits original CCBS Agreement (the “CCBS 2.0 Agreement”).  Aggregate fees under the CCBS 2.0 Agreementwere $2.1 million and services began in September 2006 and continued into early2007.  The CCBS 2.0 Agreement wasprincipally being capitalized as equipment additions as prescribed under SOP98-1.  At December 31, 2006, capitalizedcosts of $1.7 million associated with the CCBS 2.0 Agreement were included inproperty and equipment on the Company’s balance sheets.   As of December 31, 2006, none of the CCBS2.0 Agreement fees had been paid and $1.7 million was recorded as accruedrelated party liabilities.

In December 2005,the Operating Company entered into a sales agreement with SKT authorizing SKTto serve as an agent of the Operating Company for the purposes of sellingwireless devices in Korea (the “SKT Bounty Agreement”).  Under the SKT Bounty Agreement, SKT earns acommission ranging between $50 to $125 per device sold.  Fees earned by SKT under the SKT BountyAgreement were less than $0.1 million in 2006.

In March 2006, theOperating Company contracted with SKT to provide a four-year agreement forinternational telecommunications services, whereby the Operating Company isrequired to pay to SKT for service usage (the “SKT Telink Agreement”).   In return for entering into the SKT TelinkAgreement, SKT provided the Operating Company an aggregate credit in the amountof $0.3 million, which is being recognized straight-line through December2009.   As of December 31, 2006, nopayments have been made under this agreement.

In April 2006, theOperating Company and SKT entered into a content license agreement whereby SKTagreed to license certain content and provide services related thereto coveringthe period April 2006 through December 2006 (the “SKT Content Agreement”).  In December 2006, the Operating Company andSKT entered into Amendment Number 1 to the SKT Content Agreement pursuant towhich SKT agreed to provide additional content to the Operating Company inexchange for an additional monthly fee. Aggregate fees paid and incurred under the SKT Agreement, as amended,were approximately $0.2 million and $0.4 million in 2006, respectively.

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In August 2006,the Operating Company entered into a services agreement with SKT to providevarious professional services and operational support activities covering theperiod October 2005 through December 2006 (the “SKT Services Agreement”).  In exchange for the SKT Services Agreement,the Company issued SKT 650,000 shares of the Company’s Class A Common Stock inthe fourth quarter of 2006.  Theaggregate value of the 650,000 shares was valued at $1.1 million and wascharged to expense during 2006 as the underlying services were completed in2006.

In August 2006,the Operating Company contracted with Boingo Wireless, Inc. (“Boingo”) toprovide the Company with access to Boingo’s aggregated network of publichigh-speed wireless access points.  TheCompany’s Chief Executive Officer, who also is a board member of EarthLink andBoingo, holds greater than five percent (5%) of Boingo’s outstanding equitysecurities.   Fees incurred under theAugust 2006 Boingo agreement were not material to the Company’s financialresults in 2006.

In December 2006,the Operating Company and SKT entered into a terminal services agreement wherebySKT agreed to provide certain software development, delivery and supportpertaining to device-specific services to be marketed or otherwise sold to theCompany’s end members (the “Terminal Services Agreement”).   Aggregate fees under the Terminal ServicesAgreement were $3.1 million, which include ongoing software and related devicesupport and troubleshooting for two years beginning in March 2007.  Payment terms under the Terminal ServicesAgreement included a $2.5 million due upon execution and the remaining $0.7million due in February 2007.  Servicesunder the Terminal Services Agreement were completed as of December 31, 2006and accounted for under FAS 86.   None ofthe fees under the Terminal Services Agreement were paid as of December 31,2006.

**17. Subsequent Events (unaudited)**

In January 2007the Operating Company amended its wireless network services agreement (the “AmendedWireless Network Services Agreement”). As a result of the Amended Wireless Network Services Agreement, theOperating Company received a one-time pricing benefit of approximately $1.0million in January 2007.  In exchange forthe Amended Wireless Network Services Agreement, the Company issued ten-yearwarrants to its outside wireless services provider to purchase 2,348,883 sharesof the Company’s Class A Common Stock at an exercise price of $10.00 per share.

In January 2007,the Company issued warrants to SKTI to purchase an aggregate 55,000 shares ofthe Company’s Class A Common Stock at an exercise prices of $1.82 pershare.  The warrant is exercisable underthe same performance conditions as the Performance Options (see also Note 11).

In February 2007,the Company received an aggregate $27.0 million of funding from its Partnerspursuant to the January 25, 2005 Contribution Agreement.  Of the total $440 million funding commitmentper the January 25, 2005 Contribution Agreement, $12.0 million remains to bepaid by the Partners which the Company anticipates will be paid in August 2007.

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**18.  Reconciliation of HELIO, Inc. and HELIO LLC(Summarized Financial Data)**

As discussed morefully in Note 1 and Note 2, the combined financial statements include theaccounts of HELIO Inc. and HELIO LLC. The following presents the summarized balance sheets and statements ofoperations for each of the HELIO, Inc. and HELIO LLC on a stand-alone basis,and any adjustments required to combine the entities as presented at and forthe periods ended December 31, 2005 and 2006 (in thousands):
| ** **                                                              | ** ** | **At and for the period inception (January 27, 2005) to December 31, 2005** | ** **  |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|-------------|
| ** **                                                              | ** ** | ** **                                                                                                                              | ** **  | ** ** | ** ** | ** ** | ** ** | **Combined** | ** ** |
| ** **                                                              | ** ** | **HELIO LLC**                                                                                                                      | ** **  | **HELIO, Inc.** | ** ** | **Adjustments** | ** ** | **HELIO, Inc.** | ** ** |
|                                                                    |       |                                                                                                                                    |        |   |   |   |   |   |   |
| Total assets (less due from HELIO, Inc.)                                |       | $                                                                                                                                       | 223,947     |   | $ | — |   | $ | — |   | $ | 223,947 |   |
| Due from HELIO, Inc.                                                    |       | 50                                                                                                                                      |        | — |   | (50 | )(a) | — |   |
| **Total  assets**                                                       |       | $                                                                                                                                       | 223,997     | ** ** | **$** | **—** | ** ** | **$** | **(50** | **)** | **$** | **223,947** | ** ** |
|                                                                    |       |                                                                                                                                    |        |   |   |   |   |   |   |
| Total liabilities (less due to HELIO LLC)                               |       | $                                                                                                                                       | 20,306      |   | $ | — |   | $ | — |   | $ | 20,306 |   |
| Due to HELIO LLC                                                        |       | —                                                                                                                                  |        | 50 |   | (50 | )(a) | — |   |
| Total liabilities                                                       |       | $                                                                                                                                       | 20,306      |   | 50 |   | (50 | ) | 20,306 |   |
|                                                                    |       |                                                                                                                                    |        |   |   |   |   |   |   |
| Stockholders’ and partners’ equity                            |       | 203,691                                                                                                                                 |        | $ | (50 | ) |   |   | 203,641 |   |
|                                                                    |       |                                                                                                                                    |        |   |   |   |   |   |   |
| **Total  liabilities and stockholders’ and partners’ equity** | ** ** | **$**                                                                                                                                   | **223,997** | ** ** | **$** | **—** | ** ** | **$** | **(50** | **)(a)** | **$** | **223,947** | ** ** |
|                                                                    |       |                                                                                                                                    |        |   |   |   |   |   |   |
| **Net Loss**                                                            | ** ** | **$**                                                                                                                                   | **(41,973** | **)** | **$** | **(50** | **)** | **$** | **—** | ** ** | **$** | **(42,023** | **)** |

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(a)          Adjustments represent the elimination of costsincurred by HELIO, Inc., which are largely for Delaware state franchise taxesthat was subsequently paid for by HELIO LLC on behalf of HELIO, Inc.

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| ** **                                                              | ** ** | **At and for the year ended December 31, 2006** | ** **   |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|--------------|
| ** **                                                              | ** ** | ** **                                                                              | ** **   | ** ** | ** ** | ** ** | ** ** | **Combined** | ** ** |
| ** **                                                              | ** ** | **HELIO LLC**                                                                      | ** **   | **HELIO, Inc.** | ** ** | **Adjustments** | ** ** | **HELIO, Inc.** | ** ** |
|                                                                    |       |                                                                                    |         |   |   |   |   |   |   |
| Total assets (less due from HELIO, Inc.)                                |       | $                                                                                       | 264,970      |   | $ | 9,127 |   | $ | (9,127 | )(b) | $ | 264,970 |   |
| Due from HELIO, Inc.                                                    |       | 197                                                                                     |         | — |   | (197 | )(a) | — |   |
| **Total  assets**                                                       | ** ** | **$**                                                                                   | **265,167**  | ** ** | **$** | **9,127** | ** ** | **$** | **(9,324** | **)** | **$** | **264,970** | ** ** |
|                                                                    |       |                                                                                    |         |   |   |   |   |   |   |
| Total liabilities (less due to HELIO LLC)                               |       | $                                                                                       | 83,742       |   | $ | — |   | $ | — |   | $ | 83,742 |   |
| Due to HELIO LLC                                                        |       | —                                                                                  |         | 197 |   | (197 | )(a) | — |   |
| Total liabilities                                                       |       | 83,742                                                                                  |         | 197 |   | (197 | ) | 83,742 |   |
|                                                                    |       |                                                                                    |         |   |   |   |   |   |   |
| Stockholders’ and partners’ equity                            |       | 181,425                                                                                 |         | $ | 8,930 |   | (9,127 | )(b) | 181,228 |   |
|                                                                    |       |                                                                                    |         |   |   |   |   |   |   |
| **Total  liabilities and stockholders’ and partners’ equity** | ** ** | **$**                                                                                   | **265,167**  | ** ** | **$** | **9,127** | ** ** | **$** | **(9,324** | **)(b)** | **$** | **264,970** | ** ** |
|                                                                    |       |                                                                                    |         |   |   |   |   |   |   |
| **Net Loss**                                                            | ** ** | **$**                                                                                   | **(191,558** | **)** | **$** | **(197** | **)** | **$** | **—** | ** ** | **$** | **(191,755** | **)** |

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(a)          Adjustments represent the elimination of costsincurred by HELIO, Inc., which are largely for Delaware state franchise taxesthat was subsequently paid for by HELIO LLC on behalf of HELIO, Inc.

(b)         Adjustment represents the elimination of HELIO Inc.’s investment in HELIOLLC. (less than $0.1 million at December 31, 2005)

 

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