**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-KSB**

 

**(Mark One)**
| **x**                                                 | **ANNUAL  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|-------------------------------------------------------|----------------------------------------------------------------------------------------------|
| ** **                                            | ** **                                                                                   |
| **For the  fiscal year ended December 31, 2006** |
| ** **                                            | ** **                                                                                   |
| **o**                                                 | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from                    to                     **

 

**Commissionfile number     000-50712**

 

**PAYPHONE WIND DOWN CORPORATION**

(Name of small business issuer in its charter)

 

| **Delaware**                                                     | ** ** | **58-2131736**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State or  other jurisdiction of  incorporation or organization) |       | (I.R.S.  Employer  Identification No.) |
|                                                             |       |                                   |
| **PO Box  143209, Fayetteville, GA**                             | ** ** | **30214**                              |
| (Address of  principal executive offices)                        |       | (Zip Code)                             |

 

Issuer’s telephone number **(770) 631-3489**

** **

Securities registered pursuant toSection 12(b) of the Act:

 

| **Title of each class** | ** ** | **Name on each exchange on which registered** |
|----------------------------------------|------------|-----------------------------------------------------------------------------|
| None                                   |       | None                                                                        |

 

Securities registered pursuant toSection 12(g) of the Act:

 

**CommonStock, $.0001 par value**

(Title of class)

 

Checkwhether the issuer is not required to file reports pursuant to Section 13 or15(d) of the Exchange Act  o

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) ofthe Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes o No x

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB. x

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act): Yes o  No x

 

State issuer’s revenues forits most recent fiscal year. $11,485,162

 

State the aggregate marketvalue of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was sold, or theaverage bid and asked price of such common equity, as of a specified datewithin the past 60 days. (See definition of affiliate in Rule 12b-2of the Exchange Act.) There is no trading market for the issuer’s commonequity. There is no market maker and no ascertainable sales within the last 60days. The issuer is not able to determine the aggregate market value of itscommon equity.

 

**(ISSUERS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PAST FIVE YEARS)**

** **

Check whether the issuer hasfiled all documents and reports required to be filed by Section 12, 13 or15(d) of the Exchange Act after the distribution of securities under a planconfirmed by a court. Yes x No o

 

**(APPLICABLE ONLY TO CORPORATEREGISTRANTS)**

** **

State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date As of February 14, 2007, there were outstanding 4,987,624 shares of the Issuer’s commonstock $.0001 par value.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

** **

Report on Form 8-K dated asof November 1, 2005, filed November 7, 2005 (File No. 000-50712)

Report on Form 8-K, dated asof February 9, 2007, filed February 15, 2007 (File Number 000-50712)

Definitive Proxy Statement,filed January 4, 2006 (File Number 000-50712)

 

Transitional Small BusinessDisclosure Format (Check one): Yes x  No o

 

 

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**PART I**

 

**ALTERNATIVE 2**

 

**ALL STATEMENTS, OTHERTHAN STATEMENTS OF HISTORICAL FACT, INCLUDED IN THIS REPORT, INCLUDING, WITHOUTLIMITATION, THE STATEMENTS UNDER “DESCRIPTION OF BUSINESS” ARE, OR MAY BEDEEMED TO BE, FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21EOF THE SECURITIES EXCHANGE ACT OF 1934. IMPORTANT FACTORS THAT COULD CAUSEACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCHFORWARD-LOOKING STATEMENTS (“CAUTIONARY STATEMENTS”) INCLUDE BUT ARE NOTLIMITED TO:  OUR ABILITY TO ACCURATELYESTIMATE THE EXPENSES ASSOCIATED WITH EXECUTING OUR PLAN OF DISSOLUTION. ALL SUBSEQUENTWRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY ORPERSONS ACTING ON BEHALF OF THE COMPANY ARE EXPRESSLY QUALIFIED IN THEIRENTIRETY BY SUCH CAUTIONARY STATEMENTS. WE ARE UNDER NO DUTY TO UPDATE ANY OFTHE FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCHSTATEMENTS TO ACTUAL RESULTS OR TO CHANGES IN OUR EXPECTATIONS.**

 

**Item 6. Description of Business.**

 

**General**

 

Payphone Wind Down Corporation (“we,” “us,” “our,”or the “Company”), formerly ETS Payphones, Inc. (“ETS”), is a Delawarecorporation that operated, serviced, and maintained a system of payphones,concentrated primarily in the Eastern and Southern United States (other thanFlorida), as well as the District of Columbia and Puerto Rico. The Company alsoprovided other telecommunications products to certain of its clients. Pursuantto the Annual Meeting of Stockholders held on February 15, 2006, thestockholders of the Company approved, among other things, the winding down ofour operations following the sale of substantially all of our assets to EmpirePayphones, Inc., (“Empire”) pursuant to an Asset Sale Agreement dated November1, 2005 (the “Asset Sale Agreement”). The Board of Directors of the Company(the “Board of Directors”) approved the dissolution on October 31, 2005 subjectto stockholder approval and consummation of the Asset Sale Agreement. OnFebruary 9, 2007, pursuant to the First Amendment to the Asset Sale Agreement,dated as of February 9, 2007 (the “First Amendment”), the parties finalized theAsset Sale Agreement and agreed that the closing date would be deemed effectiveas of December 31, 2006 (the “Closing Date”). However, for financial reportingpurposes, the Company has deemed the sale date to be concurrent with theclosing, February 9, 2007, and accordingly, has recorded the sale of the assetson that date. On February 12, 2007, the Company amended the certificate ofincorporation of the Company to change the name of the Company to “PayphoneWind Down Corporation” from ETS Payphones, Inc. In order to accomplish theliquidation and dissolution, on February 14, 2007, the Board of Directors fileda certificate of dissolution of the Company (“Certificate of Dissolution”) withthe Delaware Secretary of State to dissolve the Company. Since February 9,2007, the Company’s activities have been limited solely to those incidental toeffecting its dissolution, including the investment of any funds being held inreserve and preparation for the distribution of its remaining assets to itsstockholders.

 

Upon the filing of the Certificate ofDissolution with the State of Delaware, the Company ordered the transfer agentto close the stock transfer books to discontinue recording transfers of theCompany’s common stock at the close of business on the Closing Date (the “FinalRecord Date”). As a result of the approval by the Company’s stockholders of thesale of substantially all of the assets of the Company and approval of theliquidation and dissolution of the Company following the closing of the sale,the Company changed its basis of accounting to the liquidation basis ofaccounting as of January 1, 2006. If the Company elected to continue to use thegoing concern basis of accounting to present its operations for the periodJanuary 1, 2006 through February 14, 2006, the effect would be immaterial.

 

As of December 31, 2006, we had 4 employees.The mailing address of the Company is PO Box 143209, Fayetteville, GA 30214 andour telephone number is (770) 631-3489.

 

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

 

As reported in the Form 8-K filed November 7,2005 (the “November 7 Form 8-K”) and the Definitive Proxy Statement, filed onJanuary 4, 2006 (the “Definitive Proxy Statement”), the Company entered intothe Asset Sale Agreement and related agreements including a security agreementand a promissory note to sell substantially all of its operating assets toEmpire. The assets sold to Empire included, subject to certain exclusions, theCompany’s payphones and related equipment, miscellaneous equipment, furniture,fixtures, general supplies, computers, software, promotional materials,customer lists, tools and spare parts inventory used in the operation of thebusiness (the “Sale Assets”), contracts related to the Sale Assets, all of theCompany’s interest in and to certain pay telephone numbers, trade names,trademarks and other intellectual property. In addition, as reported in theNovember 7 Form 8-K and in the Definitive Proxy Statement, the Company alsoentered into a Management Services Agreement effective November 1, 2005 

 

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(“ManagementServices Agreement”), with Empire pursuant to which Empire provided managementservices and funded the operational losses of the Company pending consummationof the sale transaction.

 

As reported in the Form 8-K filed February15, 2007 (the “February 15, 2007 Form 8-K”), on February 9, 2007, the AssetSale Agreement was amended pursuant to the First Amendment. The First Amendmentamended the Asset Sale Agreement to, among other things, specify that theremaining purchase price to be paid to the Company pursuant to the Asset SaleAgreement was $1,827,966 (the “Remaining Purchase Price”). The First Amendmentprovided that the Remaining Purchase Price was in full and final satisfactionof the remaining unpaid amount of (i) the Purchase Price (as defined in theAsset Sale Agreement) remaining under the Asset Sale Agreement through December31, 2006 and (ii) any Shortfall Advances (as defined in the Management ServicesAgreement) accrued through December 31, 2006 pursuant to the ManagementServices Agreement. Pursuant to the First Amendment, the Company and Empireagreed that, for purposes of the Asset Sale Agreement, the Closing Date wouldbe deemed to be effective as of December 31, 2006.

 

Pursuant to the terms of the Asset SaleAgreement, as amended by the First Amendment, the Company received $802,966 incash on February 9, 2007, and a secured Promissory Note, dated as of December31, 2006, from Empire in the principal amount of $1,025,000.

 

The Promissory Note provided that theprincipal amount will be paid to the Company in monthly installments beginningon the Closing Date with the last payment occurring on August 31, 2007. ThePromissory Note contained a guaranty by Manhattan TelecommunicationsCorporation of certain obligations of Empire under the Promissory Note. ThePromissory Note was paid in full by Empire on August 29, 2007.

 

The aggregate consideration received by theCompany in connection with the transaction is approximately $4.5 million.

 

The description above is qualified in itsentirety by the more detailed description in the November 7 Form 8-K, theFebruary 15, 2007 Form 8-K and the Definitive Proxy Statement filed January 4,2006 and to the exhibits therein, which are incorporated herein by reference.

 

***Stockholder Approval;******Winding Down ofOperations***

 

Pursuant to the Annual Meeting ofStockholders held February 15, 2006, the stockholders of the Company approved,among other things, the sale of substantially all of our assets to Empirepursuant to the Asset Sale Agreement and the winding down of our operationsfollowing the sale of substantially all of our assets to Empire. In order toaccomplish the liquidation and dissolution of the Company, in accordance withDelaware General Corporation Law, the Board of Directors adopted a plan ofdissolution. Pursuant to the plan of dissolution, on February 14, 2007, theCompany filed a Certificate of Dissolution with the Delaware Secretary of Stateto dissolve the Company.

 

Once a corporation is dissolved underDelaware law, its existence is automatically continued for a term of threeyears, or for such longer period as the Delaware Court of Chancery directs,solely for the purpose of winding down its business. The process of windingdown includes: (1) the prosecution and defense of lawsuits, if any; (2) thesettling and closing of any business; (3) the disposition and conveyance of anyproperty; (4) the discharge of any liabilities; and (5) the distribution of anyremaining assets to the stockholders.

 

Pursuant to Delaware law, the Company willcontinue in existence until at least February 14, 2010. The Company’sactivities are limited solely to those incidental to effecting its dissolution,including the investment of any funds being held in reserve and thedistribution of its remaining assets to its stockholders. After theconsummation of the Asset Sale Agreement, the only remaining assets andproperties of the Company are cash and certain receivables. Pursuant to theAsset Sale Agreement, the Company reduced its number of employeessignificantly, with most employees being hired by Empire and other employeesbeing terminated. Currently, only three directors and three employees (two ofwhich are directors) remain. The remaining staff will be principally engaged indealing with the winding down and dissolution of the Company.

 

As part of the dissolution of our Company,the Board of Directors may at any time delegate the wind down and management ofour Company to a third party, including possibly a liquidating trust, to completethe liquidation of any remaining assets, satisfaction of any remainingliabilities and distribute any remaining proceeds to the stockholders. Inaddition to the employment agreements with our existing employees, we may payour officers, directors, employees or agents additional compensation forservices rendered in the dissolution.

 

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The Company cannot predict with certainty theprecise amount of the liquidation distribution to stockholders. The Company hasnot established a firm timetable for distributions to its stockholders.However, the Board of Directors intends, subject to contingencies inherent inwinding down the Company’s business, to make such distributions as promptly aspracticable. The timing of any distribution will depend on and could be delayedby, among other things, obstacles with claim settlements with creditors. Anydelays could substantially diminish amounts available for distribution to ourstockholders.

 

As a result of future expenses that will beincurred, both anticipated and not anticipated, dissolution and liquidation maynot provide value to the Company’s stockholders or result in any remainingcapital for distribution to its stockholders. In addition, claims, liabilitiesand expenses during the winding down of the Company will continue to beincurred which will reduce the amount of assets available for distribution. Anydistributions made by the Company shall be made solely to the stockholders ofrecord at the close of business on the Final Record Date, except as may benecessary to reflect subsequent transfers recorded on our books as a result ofassignments by will, intestate succession or operation of law.

 

As a result of the approval by the Company’sstockholders of the sale of substantially all of the assets of the Company andapproval of the liquidation and dissolution ofthe Company following the closing of the sale, the Company changed its basis ofaccounting to the liquidation basis of accounting as of January 1, 2006. If theCompany elected to continue to use the going concern basis of accounting topresent its operations for the period January 1, 2006 through February 14,2006, the effect would be immaterial.

 

**Close of Stock Transfer Books**

 

Upon the filing of a Certificate ofDissolution with the State of Delaware, the Company ordered the transfer agentto close the stock transfer books to discontinue recording transfers of theCompany’s common stock at the close of business on the Final Record Date. Assuch, no transfers of the Company’s common stock will be recorded excepttransfers as a result of assignments by will, intestate succession or operationof law.

 

**Previous Operations**

 

Our predecessor company, also called ETSPayphones, Inc. but incorporated in Georgia (“Old ETS”), was owned andcontrolled by Charles E. Edwards. Old ETS began operations with approximately75 payphones and initially grew through obtaining new site contracts andinstalling payphones. Old ETS was started during a time in which there was arapid expansion of payphone service providers who were independent from theRegional Bell Operating Companies (“RBOCs”). Old ETS and related affiliatesalso owned and operated automated teller machines (“ATMs”) and coin-operatedair and vacuum machines.

 

In late 1997 Old ETS began to aggressivelypursue a business model pursuant to which they would “sell” payphones toindividual investors (“Payphone Investors”) at prices up to $7,000 per phone.As part of the sales contract Old ETS agreed to immediately lease the payphoneback from the Payphone Investor and manage the location, collection, andmaintenance of the payphones. Old ETS was obligated to find a location for thepayphone, negotiate a contract with the site owner, and install and service thepayphone. Old ETS also obtained the necessary licenses, ensured compliance withregulatory requirements and obtained line service, long-distance service, andoperator service for the payphones. Under these “sale-leaseback” transactionsOld ETS agreed to make monthly payments to the Payphone Investor, whichannually totaled about 14% of the payphone sale price, regardless of therevenue generated from the payphone. For example, Old ETS agreed to payapproximately $80 per month with respect to a phone it sold for $7,000. Theagreements with the Payphone Investors generally had five year terms andobligated Old ETS to buy the payphone back at the end of the term.

 

To promote sales under this sale-leasebackscheme, Old ETS engaged independent sales representatives on a commissionbasis. These sales representatives marketed the payphones through trade showsfor entrepreneurs, direct marketing promotions, and personal solicitations.

 

The sales effort brought in a tremendousnumber of Payphone Investors and most investors purchased several payphones.Old ETS was not able to negotiate site contracts and install payphones at therate at which they were entering into sale-leaseback transactions with PayphoneInvestors. Consequently, Old ETS began to acquire established payphone routesfrom competing payphone companies, and assign the acquired payphones toPayphone Investors. From 1997 through 2000 Old ETS entered into varioustransactions and asset purchase agreements to acquire in excess of 35,000payphones. The total number of phones actually acquired pursuant to these salescontracts was less than the contracted for phone count. By September 2000there were approximately 18,000 Payphone Investors and Old ETS had entered intosale-leaseback transactions involving in excess of 70,000 payphones. However,the records of Old ETS indicate that it was operating approximately 50,000payphones. At that time Old ETS was the second largest payphone operator in theUnited States (excluding the RBOCs), with payphones located in 39 states, the Districtof Columbia, Puerto Rico and the U.S. Virgin Islands. Old ETS had 30 officesand employed more than 450 people.

 

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Old ETS made a substantial immediate cashprofit on each sale-leaseback of a payphone to a Payphone Investor. However,virtually every sale-leaseback transaction was destined to lose money for OldETS in the long run, as the payphones failed to generate sufficient revenue tocover (i) the lease payments to the Payphone Investors, (ii) the costsOld ETS was paying to obtain site contracts, and (iii) the costs Old ETSwas incurring to operate and maintain the payphones.

 

In addition to problems with the financingstructure of Old ETS, the effects of general industry trends were substantiallyreducing the revenue for payphones during the relevant time period. Thewidespread use of cellular telephones and dial-around calls substantiallyreduced the call volume on payphones, negatively impacting the revenues of OldETS. In order to fund operations and to make the required lease payments to thePayphone Investors, Old ETS sold more payphones to new Payphone Investors.

 

As a private company that was owned andcontrolled by Mr. Edwards, Old ETS did not have audited financialstatements. Because of difficulties and complications with integrating therecords of the various payphone companies that were purchased by Old ETS, rapidturnover of the company’s financial officers, poor internal controls on revenueand expenditures, and the loss of records, it is not possible to know the exactfinancial status of Old ETS during the time period of the sale-leasebacktransactions. However, it is known that by September of 2000 Old ETS(a) had over $375,000,000 of debt obligations (including obligations to thePayphone Investors), (b) had lease payment obligations to PayphoneInvestors on its payphones that were not supportable by revenue from thepayphones, and (c) was not able to pay its obligations as they came due.

 

In 2000, theUnited States Securities and Exchange Commission (“SEC”) began to scrutinizeOld ETS’ operations, alleging that the sale-leaseback transactions constitutedthe sale of securities by Old ETS. In addition, securities enforcement agenciesfrom a number of states initiated proceedings against Old ETS and itsaffiliates to enjoin securities violations. A number of class action lawsuitswere brought against Old ETS and certain of its then officers, alleging breachof contract, as well as various fraud allegations.

 

In early September 2000, Old ETS and itsaffiliates filed voluntary petitions under Chapter 11 of Title 11 ofthe United States Code (the “Bankruptcy Code”) with the United StatesBankruptcy Court for the District of Delaware, In Re: PSA, Inc., ETSPayphones, Inc., ETS Vending, Inc., et al., jointly administeredunder Case No. 00-3570. The bankruptcy filings did not interrupt thepayphone servicing operations, but in conjunction with the bankruptcy filingand settlement of an injunction sought by the SEC, Old ETS agreed to stop enteringinto new sale-leaseback payphone agreements. Mr. Edwards resigned andagreed not to be involved in the management and operations of Old ETS goingforward.

 

On September 29, 2000, the SEC filed alawsuit against Old ETS and Charles E. Edwards in the United States DistrictCourt for the Northern District of Georgia, alleging, among other things, that(i) the sale-leaseback transactions constituted an illegal sale ofsecurities, (ii) the overall funding of Old ETS, in which its short termrevenue from new sales was used to fund long-term sale-leaseback obligations,constituted a “Ponzi Scheme” that defrauded the Payphone Investors, and(iii) Mr. Edwards and Old ETS had violated the registrationrequirements and the anti-fraud provisions of the Securities Act of 1933 andthe Securities Exchange Act of 1934, including Rule 10b-5 thereunder. OldETS stopped entering into the sale-leaseback transactions and settled itsinvolvement in the litigation with the SEC by consenting to an injunctionagainst any further such transactions, without admitting or denying any of theSEC’s allegations. Mr. Edwards continued to defend the SEC’s allegation againsthim, individually. The litigation went on appeal to the United States SupremeCourt which in a unanimous decision found in favor of the SEC and against Mr.Edwards. In September of 2005, Mr. Edwards was found guilty of, among otherthings, wire fraud, money laundering and conspiracy to commit money laundering.Mr. Edwards was sentenced to 13 years in prison in February 2006.

 

On June 19, 2001, Old ETS filed adeclaratory judgment action with the Payphone Investors as the class ofdefendants, to have the sale-leaseback agreements deemed to be investments andthe payphones deemed assets of the company. Old ETS’ proposal for resolving thelitigation with the Payphone Investors, as included in the plan ofreorganization filed in the bankruptcy case, was to issue stock in the Companyto the Payphone Investors in place of their sale-leaseback agreements. The planof reorganization and settlement of the litigation received overwhelmingsupport from the Payphone Investors.

 

On November 14, 2001, the bankruptcycourt issued an order confirming the plan of reorganization. With confirmationof the plan, there was a resolution of the declaratory judgment action with thePayphone Investors. The re-characterization of the sale-leaseback transactionschanged approximately $375,000,000 of liabilities of Old ETS into assets worthabout $10,000,000.

 

Pursuant to the reorganization plan, various assetswere auctioned off, including the payphone routes in the U.S. Virgin Islands,California, Florida, Wisconsin, and Minnesota. In addition, Old ETS wasreincorporated on November 8, 2002, under the laws of the State ofDelaware and all of the operating subsidiaries were merged into the newDelaware corporation. With the sale of the payphone routes and removal ofunprofitable payphones, the Company reduced its phones in operation toapproximately 19,000 from the initial 50,000.

 

The Company exited from bankruptcy onDecember 5, 2002. Pursuant to the reorganization plan, the PayphoneInvestors became entitled to receive new, post-bankruptcy common stock in thereorganized Company.

 

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**Litigation Trust**

 

As part of the bankruptcy proceedings a trust(the “Litigation Trust”) was established to pursue certain claims and causes ofaction the Company had against the former management, Charles Edwards, theindependent sales agents who may have violated securities or other laws in thesolicitation of the sale-leaseback transactions, and claims for money that waswrongfully transferred from Old ETS prior to the bankruptcy filing. TheLitigation Trust also includes claims for the recovery of money that was paidby the Company within the ninety days prior to the bankruptcy filing. TheLitigation Trust was established for the benefit of the Payphone Investors andthe other general unsecured creditors of Old ETS. The Litigation Trust isadministered by Darryl Laddin, Esq. (the “Litigation Trustee”), of the lawfirm Arnall Golden Gregory LLP, a trustee selected by the creditors’ committeein the bankruptcy case. The Litigation Trust’s assets do not include proceedsfrom potential claims the Company may have arising after September 11,2000, or claims related to breaches of contract prior to such date, the Debtors’interest in New York Local Telephone Company, claims arising from Old ETS’investments in Mexico, or claims related to end user common line charges thatmay have been wrongfully assessed by various local exchange carriers, orsimilar litigation.

 

Funds in the Litigation Trust will not go tothe Company. Eighty-five percent of the proceeds of the Litigation Trust, afterexpenses, will go to the Payphone Investors. However, rights to receive paymentfrom the Litigation Trust are completely separate from the Common Stock thePayphone Investors receive. If a Payphone Investor sells the Common Stockreceived, the Payphone Investor will still be entitled to receive any proceedsattributable to them from the Litigation Trust. Purchasers of Common Stock willnot receive any rights to proceeds from the Litigation Trust with such CommonStock. The remaining fifteen percent of the Litigation Trust proceeds will bedistributed to the other general unsecured creditors of Old ETS.

 

The Litigation Trust obtained approximately$2,004,000 in late 2004 as a result of legal settlements with Charles Edwards,et al., working with the United States Attorney’s Office for the NorthernDistrict of Georgia. Payments to vendors and shareholders were made as ofDecember 31, 2004 in the amount of $1,612,216, with the remainder of thesettlement in the amount of $392,118 being paid out at the end of February,2005. The Litigation Trust obtained additional amounts totaling $85,000 inconnection with the settlement of certain litigation brought by the LitigationTrust and the Litigation Trustee is in the process of determining the mattersneeded to wind up the Litigation Trust and to make a final distribution offunds remaining in the Litigation Trust, including the net proceeds of theseand prior settlements, to beneficiaries.

 

**Common Stock Allocation**

 

The Company’s plan of reorganization, asconfirmed by the bankruptcy court, provided for 5,000,000 shares of CompanyCommon Stock to be distributed to the Payphone Investors. The number of sharesof Common Stock received by each Payphone Investor was dependent upon theamount of each Payphone Investor’s claim relative to the total amount of allallowed Payphone Investor claims. The claim associated with each sale-leasebackagreement was calculated by adding the amount of all monthly payments remainingto be paid under the agreement as of the filing of the bankruptcy case plus theamount of the initial investment. Adjustments to this formula for calculatingclaim amounts were made for the situations that deviated from the usualsale-leaseback transaction, such as when payphones and agreements were providedas a bonus or commission to certain sales agents.

 

As of December 31, 2006, the totalnumber of shares of our Common Stock outstanding, after giving effect todistributions to Payphone Investors and adjustments resulting fromreconciliation of allowed Payphone Investor Claims, was 4,987,624.

 

***Employees***

 

As of December 31, 2006, the Company had4 full-time employees, none of whom are subject to a collective bargainingagreement. The Company believes that its relationship with its employees isgood.

 

**Factors to Consider**

 

The following characteristics of our statusas a non-operating company may have a material impact upon our future financialcondition.

 

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# ***Dissolution; Winding Down and Liquidation,Closing of Stock Record Book.***

#  

Pursuant to the Annual Meeting of Stockholdersheld February 15, 2006, the stockholders of the Company approved, among otherthings, the sale of substantially all of our assets to Empire pursuant to theAsset Sale Agreement and the winding down of our operations following the saleof substantially all of our assets to Empire. The consummation of the AssetSale Agreement occurred as of December 31, 2006 and as a result, our activitiesare limited to collecting proceeds from assets not included in the sale, payingoff creditors, satisfying requirements under applicable law and distributingany remaining proceeds to stockholders of record. As a result of futureexpenses that will be incurred, both anticipated and not anticipated,dissolution and liquidation may not provide value to our stockholders or resultin any remaining capital for distribution to our stockholders. In addition,claims, liabilities and expenses during the winding down of our company willcontinue to be incurred which will reduce the amount of assets available fordistribution. The stock transfer books of the Company have been closed and aCertificate of Dissolution has been filed with the Delaware Secretary of State.Any distributions made by us shall be made solely to the stockholders of recordat the close of business on the Final Record Date, except as may be necessaryto reflect subsequent transfers recorded on our books as a result ofassignments by will, intestate succession or operation of law. We cannot assurethe stockholders of the amount, if any, or timing of any distribution to ourstockholders as a result of the dissolution.

 

# ***We will continue toincur claims, liabilities and expenses that will reduce the amount availablefor distribution out of the liquidation to stockholders.***

#  

Claims, liabilities and expenses incurredduring the wind down process, such as payroll, legal, accounting and consultingfees and miscellaneous office expenses, will reduce the amount of assetsavailable for future distribution out of the liquidation to stockholders. Ifavailable cash and amounts received on the sale of non-cash assets are notadequate to provide for our obligations, liabilities, expenses and claims, wemay not be able to distribute out of the liquidation any cash at all, to ourstockholders.

 

The Company is involved from time to time inlawsuits that arise in the ordinary course of our business. In March 2006Commercial Payphones, Inc., a Florida corporation, initiated a lawsuit againstthe Company in state court in Dade County, Florida for an alleged violation ofa non-compete agreement alleging damages in excess of $15,000. We do notbelieve the allegations have legal merit and are vigorously defending theaction and have filed a motion to quash service or, in the alternative, todismiss the complaint for lack of jurisdiction. However, we cannot predict withcertainty the outcome or effect of this litigation. In 2005 ClipperTelecommunications, Inc., Comchoice, Inc. and Coinlink, L.L.C. (the “Plaintiffs”)initiated a lawsuit against the Company and APCC Services, Inc. (a collector ofdial around compensation for the payphones industry) in the United StatesDistrict Court for the Western District of Texas. The complaint alleged damagesin excess of $75,000 relating to dial around compensation collected by APCCServices, Inc. and held in the Company’s accounts with APCC. The Company wassuccessful in obtaining a dismissal of the action. In December of 2006, thePlaintiffs filed a substantially similar complaint against the Company and APCCServices, Inc. in the state court of Texas. We do not believe the allegationshave legal merit and are vigorously defending the action. However, we cannotpredict with certainty the outcome or effect of this or other litigation inwhich the Company is or may become involved. On March 13, 2006, three formeremployees from the Puerto Rico branch filed a lawsuit against the Company inthe Commonwealth of Puerto Rico, Court of First Instance, Manati Courthousesubsequent to their termination that had occurred while Empire was managing theCompany pursuant to the Management Services Agreement. The lawsuit allegeddamages in excess of $300,000. The Company reached a settlement with the formeremployees on September 18, 2007. At December 31, 2006, adequate provision wasmade in the financial statements for losses relating to this matter.

 

We filed a Certificate of Dissolution withthe Secretary of State of the State of Delaware effective February 14, 2007.Pursuant to Delaware General Corporation Law, we will continue to exist forthree years after the Certificate of Dissolution is filed or for such longerperiod as the Delaware Court of Chancery shall direct, for the purpose ofprosecuting and defending suits against us and enabling us to gradually closeour business, to dispose of our property, to discharge our liabilities and todistribute to our stockholders any remaining assets. Under Delaware GeneralCorporation Law, in the event we fail to create during this three-year periodan adequate contingency reserve for payment of our expenses and liabilities, eachstockholder could be held liable for payment to our creditors of suchstockholder’s pro rata share of amounts owed to creditors in excess of thecontingency reserve, up to the amount actually distributed to such stockholder.Although the liability of any stockholder is limited to the amounts previouslyreceived by such stockholder from us (and from any liquidating trust or truststhat may be established in connection with the dissolution) in the dissolution,this means that a stockholder could be required to return all distributionspreviously made to such stockholder and receive nothing from us under the planof dissolution. Moreover, in the event a stockholder has paid taxes on amountspreviously received, a repayment of all or a portion of such amount couldresult in a stockholder incurring a net tax cost if the stockholder’s repaymentof an amount previously distributed does not cause a commensurate reduction intaxes payable. While we will endeavor to make adequate reserves for all known,contingent, and unknown liabilities, there is no guarantee that the reservesestablished by us will be adequate to cover all such expenses and liabilities.

 

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# ***We will continue toincur the expenses of complying with public company reporting requirements.***

#  

We have an obligation to continue to complywith the applicable reporting requirements of the Securities Exchange Act of1934, as amended, referred to as the “Exchange Act,” even though compliancewith such reporting requirements is economically burdensome. We have sought andwill continue to attempt to seek relief from the Securities and ExchangeCommission from the reporting requirements under the Exchange Act, but to datewe have not been successful in obtaining relief. We anticipate that, if suchrelief were granted, we would continue to file current reports on Form 8-K todisclose material events relating to our liquidation and dissolution along withany other reports that the Securities and Exchange Commission might require.However, the Securities and Exchange Commission has not granted, and may not inthe future agree to grant, any such relief.

 

# ***Our Board ofDirectors may at any time turn management of the liquidation of the Companyover to a third party, and some or all of our directors may resign from ourboard at that time.***

#  

Our Board of Directors may at any time turnour management over to a third party to complete the liquidation of anyremaining assets, satisfaction of any remaining liabilities and distribute anyavailable proceeds to our stockholders, and some or all of our directors mayresign from our board at that time. Our Board of Directors currently consistsof Guy A. Longobardo, our Chief Executive Officer and Chairman of the Board,Michael H. McClellan, our Executive Vice President, Chief Financial Officer andTreasurer and Michael H. Buck. If management is turned over to a third partyand all of our directors resign from our board, the third party would have solecontrol over the liquidation process, including the sale or distribution of anyremaining assets.

 

# ***If we are deemed tobe an investment company, we may be subject to substantial regulation thatwould cause us to incur additional expenses and reduce the amount of assetsavailable for distribution.***

#  

If we invest our cash and/or cash equivalentsin investment securities, we may be subject to regulation under the InvestmentCompany Act of 1940. If we are deemed to be an investment company under theInvestment Company Act because of our investment securities holdings, we mustregister as an investment company under the Investment Company Act. As aregistered investment company, we would be subject to the further regulatoryoversight of the Division of Investment Management of the Securities and ExchangeCommission, and our activities would be subject to substantial regulation underthe Investment Company Act. Compliance with these regulations would cause us toincur additional expenses, which would reduce the amount of assets availablefor distribution to our stockholders. To avoid these compliance costs, weintend to invest our cash proceeds in money market funds and governmentsecurities, which are exempt from the Investment Company Act but whichcurrently provide a very modest return.

 

**Item 7. Description of Property.**

 

**Pursuant to the First Amendment,the Company assigned all its operating leases to Empire and was released fromits contractual obligations relating to future operating lease payments.**

 

**Item 8.Directors and Executive Officers and Significant Employees.**

 

The following sets forth information concerning our executivemanagement and directors, including each person’s name, age as ofDecember 31, 2006, and principal occupation or employment during the pastfive years.

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                                                               |
|-----------------------|------------|---------|------------|----------------------------------------------------------------------------|
| Guy A.  Longobardo    |       | 46      |       | President, Chief Executive Officer and  Chairman of the Board(1)(2)        |
| Michael H.  McClellan |       | 55      |       | Executive Vice President, Chief Financial  Officer and Treasurer(1)(2)     |
| David C.  Jones       |       | 63      |       | Vice President of Human Resources and  Investor Relations and Secretary(1) |
|                  |       |    |       |                                                                       |
| Michael H.  Buck      |       | 72      |       | Director(2)                                                                |

 

----

(1)                                  ExecutiveOfficer

(2)                                  Director

 

Mr. Longobardohas been the President, Chief Executive Officer and Chairman of the Board ofDirectors since he joined the Company in February 2001. Mr. Longobardo wasre-elected as a Class III director to the Board at the Annual Meeting ofStockholders held February 15, 2006 for a term ending on the date of the annualmeeting following December 31, 2008. Prior to that time he served as GeneralCounsel, Vice President of Corporate Development and Corporate Secretary ofAMNEX, Inc. since March 1998 and assumed the duties of ChiefExecutive Officer of AMNEX, Inc. and its subsidiaries after AMNEX hadfiled for bankruptcy in May of 1997. From February 1995 until joiningAMNEX, Mr. Longobardo was employed by HSBC Securities, Inc., the U.S.securities subsidiary of HSBC Holdings plc, where he most recently served as aManaging Director and Head of Corporate Finance in its Investment BankingDivision. From 1985 through February 1994, he was an attorney in theCorporate Department of the law firm of Milbank, Tweed, Hadley &McCloy. Mr. Longobardo holds a BA degree in Economics from WilliamsCollege and a JD from 

 

7

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ColumbiaUniversity School of Law. Mr. Longobardo served as a director on the boardof the American Public Communications Council.

 

Mr. McClellan is the Executive VicePresident, Chief Financial Officer and Treasurer of the Company.Mr. McClellan has also served on our Board since July 2003. Mr. McClellanwas re-elected a Class III director to the Board at the Annual Meeting ofStockholders held February 15, 2006 for a term ending on ending on the date ofthe annual meeting following December 31, 2008. Mr. McClellan earned hisBachelor of Science Degree from Stanford University in Palo Alto, California.He later earned his MBA degree in Finance and Accounting from Rollins Collegein Winter Park, Florida. Prior to joining us in December 2000, Mr. McClellanserved as Vice President-Finance for UPS Truck Leasing. He joined UPS TruckLeasing in 1987 and held various positions in the Finance Department. At UPS,Mr. McClellan was responsible for creating the financial modeling andforecasting, cost reduction requirements and programs improving returns oninvested capital. Mr. McClellan served as an alternate director on theboard of the American Public Communications Council.

 

Mr. Jones is the Company’s VicePresident of Human Resources and Investor Relations. He also serves asCorporate Secretary. He joined the Company in September 1999. Mr. Jonesearned his Bachelor of Arts Degree in English from the University of Richmond,Richmond, Virginia. From 1997 to 1999, Mr. Jones was Vice President of HumanResources for One Source, a commercial cleaning and landscaping company withannual sales in excess of $826 million and 38,000 employees. Mr. Jones manageda staff of ten Human Resources professionals in developing policies andprocedures, overseeing safety performance, designing benefit programs, anddeveloping compensation structure. Mr. Jones previously held Senior HumanResources positions with Scientific Games, Inc. in Atlanta, Georgia, andAvondale Mills in Sylacauga, Alabama.

 

Mr. Michael H. Buck was appointed a BoardMember in November 2002 as a Class I Director. Mr. Buck wasre-elected as a Class I director to the Board at the Annual Meeting ofStockholders held February 15, 2006 for a term ending on the date of the annualmeeting following December 31, 2006. Mr. Buck was President of BucklandGroup Inc, a Sears Authorized Dealer from November 2001 untilDecember 2003. Mr. Buck was also owner of CommunicationsOpportunities from 1998 until 2000. Mr. Buck also served as a member ofthe creditors committee during the Old ETS bankruptcy. Mr. Buck earned hisBA Degree from Dartmouth College. Mr. Buck also was a RegisteredRepresentative for a New York Stock Exchange member firm from 1968 until 1997.Mr. Buck acted as an agent selling payphone leases for Old ETS.

 

**Item 9. Remuneration of Directors andOfficers.**

 

The following table sets forth the aggregateannual remuneration of each of the three highest paid persons who are officersor directors and the aggregate annual remuneration of the officers anddirectors as a group during the issuer’s last fiscal year.

 

 
| **Name of Individual or Identity of   Group** | ** ** | **Capacities in Which  Remuneration Was Received** | ** ** | **Aggregate   Remuneration(1)** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|--------------------------------------|------------|
| Guy A. Longobardo                                                           |       | President  and Chief Executive Officer                                 |       | $                                    | 363,565    |   |
| Michael H. McClellan                                                        |       | Executive  Vice President and Chief Financial Officer                  |       | $                                    | 304,940    |   |
| Jeffery E. Fennell                                                          |       | Senior Vice  President and Chief Operating Officer                     |       | $                                    | 198,617    |   |
| Officers and Directors as a Group(2)                                        |       |                                                                   |       | $                                    | 1,069,956  |   |

 

----

(1)                                  Amounts paid to Mr.Longobardo and Mr. McClellan include payments in respect of incentive andretention compensation pursuant to their Employment Agreements, as describedbelow. The amount paid to Mr. Fennell includes a payment pursuant to change incontrol provisions contained in his Employment Agreement with the Company.

(2)                                  The Officers andDirectors Group consists of 4 officers and 3 directors. One of the officers,Jeffrey E. Fennell, and two of the directors, S. Gregory Hays and Michael M.Scott, resigned in March 2006.

 

**Directors Compensation**

 

Non-executive officer members of the Board ofDirectors receive $20,000 annually for service on the Board of Directors or anycommittee thereof. In addition, Directors may be reimbursed for certainexpenses in connection with attendance at Board and committee meetings.

 

8

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**Employment Agreements**

 

The Company has employment agreements withGuy A. Longobardo and Michael H. McClellan and a Change-in-Control Agreementwith David C. Jones.

 

On December 5, 2002, we entered into atwo-year employment agreement with Guy A. Longobardo, our President and ChiefExecutive Officer. The employment agreement was subsequently renewed foradditional one-year terms in January 28, 2005 and November 11, 2005 (at whichtime the agreement was renewed for an additional one-year term ending onDecember 31, 2006). In February 2004, Mr. Longobardo requested that the Boardof Directors approve the reduction of his annual salary to $240,000 and alsoreduce other benefits provided under his employment agreement. The Board ofDirectors subsequently approved this salary and benefit reduction. Pursuant tothe March 29, 2006 amendment, in order to help effectuate the closing of theAsset Sale Agreement and the dissolution and winding down of the Company, inlieu of a severance and termination payment and in consideration of hiscontinued employment, Mr. Longobardo received an incentive payment of $180,000on May 16, 2006, and effective on the date of payment of the incentive payment,his annual base salary was reduced from $240,000 to $120,000. The employmentagreement with Mr. Longobardo, as amended, also contains the followingprovisions: an annual bonus to be determined by our Board; a term of one yearcommencing March 29, 2006 renewable by mutual agreement of both parties;housing and car allowances; such benefits as currently exist for executives ofour Company; and provision of medical insurance for Mr. Longobardo and hisdependents for a period of nine months following the termination of hisemployment for any reason other than for cause (as defined in the employmentagreement).

 

On December 5, 2002, we entered into afour-year employment agreement with Michael H. McClellan, our Executive VicePresident and Chief Financial Officer. Pursuant to the March 29, 2006amendment, in order to help effectuate the closing of the Asset Sale Agreementand the dissolution and winding down of the Company, in lieu of a severance andtermination payment and in consideration of his continued employment, Mr. McClellanreceived an incentive payment of $165,000 on May 16, 2006, and, effective onthe date of the payment of the incentive payment, his annual base salary wasreduced from $165,000 to $82,500. The employment agreement with Mr. McClellan,as amended contains the following provisions: an annual bonus to be determinedby our Chief Executive Officer; a term of one year commencing March 29, 2006renewable by mutual agreement of both parties; such benefits as currently existfor executives of our Company; and provision of medical insurance for Mr.McClellan and his dependents for a period of twelve months following thetermination of his employment for any reason other than for cause (as definedin the employment agreement).

 

The Company entered into a Change in ControlAgreement with David C. Jones, Vice President of Human Resources and Secretaryon January 28, 2005 and entered into an amendment thereto as of March 29, 2006(the “Change in Control Agreement”). The Change in Control Agreement wasamended effective as of March 29, 2006, in order to help effectuate theclosing of the Asset Sale Agreement and the dissolution and winding down of theCompany, in lieu of a severance and termination payment and in consideration ofMr. Jones’ continued employment, Mr. Jones received an incentive payment of$60,000 on May 16, 2006, and effective on the date of the payment of theincentive payment, his annual base salary was reduced from $120,000 to $60,000.The Change in Control Agreementprovides that following the termination of Mr. Jones, the Company shallcontinue medical insurance for Mr. Jones and any dependents on the same termsas exist on the date of termination for six (6) months following the date oftermination and after that six (6) month period Mr. Jones shall be entitled toelect eighteen months of continuation coverage under COBRA.

 

This brief description of the amendments setforth above is not intended to be complete and is qualified in its entirety byreference to the full text of the amendments which are annexed hereto asExhibits 10.4.3, 10.5.2 and 10.7.1 and incorporated herein by reference.

 

**Item 10. Security Ownership ofManagement and Certain Security Holders.**

 

The following table sets forth certaininformation with respect to the beneficial ownership of the Company’s CommonStock as of September 30, 2007 for (a) each of the three highest paidpersons who are officers or directors and (b) all directors and currentexecutive officers of the Company as a group. The Company does not have any tenpercent (10%) shareholders. Except as otherwise noted, the Company believesthat the persons or entities in this table have sole voting and investing powerwith respect to all the shares of Common Stock owned by them. Any informationappearing below concerning persons other than officers and directors of theCompany is to the Company’s best knowledge based on information obtained fromthe Company’s transfer agent.

 
| **Title of Class** | ** ** | **Name and Address of Owner**                 | ** ** | **Amount owned** | ** ** | **Percent of Class** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------|------------|--------------------------------|------------|
| Common                       |       | Guy A.  Longobardo(1)(2)   PO Box 143209   Fayetteville, GA 30214 |       | 0                     |       | *                              |       |
|                         |       |                                                              |       |                  |       |                           |       |
| Common                       |       | Michael H.  McClellan(1)(2)   PO Box 143209                       |       |                  |       |                           |       |
|                         |       | Fayetteville,  GA 30214                                           |       | 0                     |       | *                              |       |
|                         |       |                                                              |       |                  |       |                           |       |
| Common                       |       | David C.  Jones(1)   PO Box 143209   Fayetteville, GA 30214       |       | 0                     |       | *                              |       |
|                         |       |                                                              |       |                  |       |                           |       |
| Common                       |       | Officers and Directors as a Group(3)     |       | 4,479                 |       | *                              |       |

 

 

9

----

 

----

| *   |   | Less than 1%                                                                                                                                   |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) |   | Executive Officer                                                                                                                              |
| (2) |   | Director                                                                                                                                       |
| (3) |   | The Officers and Directors Group consists of 3 officers and 1  director. Michael H. Buck is a director and owns 4,479 shares of Common  Stock. |

 

**Item 11. Interest of Management inCertain Transactions.**

 

The Companyhas employment agreements with Guy A. Longobardo and Michael McClellan and aChange-in-Control Agreement with David C. Jones. See “Item 9. Remuneration ofDirectors and Officers.”

 

10

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**PART II**

 

**Item 1. Market Price of and Dividends onthe Registrant’s Common Equity and Other Stockholder Matters.**

 

There is no public trading market for theCommon Stock of the Company. As of December 31, 2006, there wereapproximately 12,500 holders of record of our Common Stock.

 

To date, the Company has not paid anydividends on the Common Stock, and the Board of Directors does not currentlyintend to declare cash dividends on the Common Stock. Any future distributionswill be liquidating distributions. The Company cannot predict with certaintythe precise amount of the liquidation distribution to stockholders. The Companyhas not established a firm timetable for distributions to its stockholders.However, the Board of Directors intends, subject to contingencies inherent inwinding down the Company’s business, to make such distributions as promptly aspracticable. The timing of any distribution will depend on and could be delayedby, among other things, obstacles with claim settlements with creditors. Anydelays could substantially diminish amounts available for distribution to ourstockholders.

 

**Item 2. Description of Exhibits.**

 

Theinformation required under this item is included under Part III, Item 1, below.

 

**Item 3. Changes in and Disagreementswith Accountants.**

 

None.

 

**Item 4. Submission of Matters to a Voteof Security Holders**

 

No matterswere submitted to the security holders of the Company for a vote during thefourth quarter of the fiscal year covered by this report.

 

**Item 5. Compliance withSection 16(a) of the Exchange Act**

 

Section 16of the Securities Exchange Act requires that officers and directors of theCompany, as well as those persons who beneficially own more than 10% of theoutstanding common stock of the Company, file reports of security ownership andchanges in such ownership on Forms 3, 4 and 5 (and amendments thereto)with the Securities and Exchange Commission within specified time periods.Based solely on a review of copies of such reports furnished to the Company,the Company believes that during the year ended December 31, 2006, suchfiling requirements were complied with by its officers, directors andapplicable shareholders.

 

11

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**PARTF/S**

**TABLE OF CONTENTS**

 
| ** **                                              | **Page(s)** |
|---------------------------------------------------------|-------------|
| Report of Independent Registered Public Accounting Firm | 13          |
| Statement of  Net Assets in Liquidation                 | 14          |
| Statement of Changes  in Net Assets in Liquidation      | 15          |
| Statement of Operations                                 | 16          |
| Statements of  Shareholders’ Equity (Deficiency)   | 17          |
| Statement of Cash Flows                                 | 18          |
| Notes to Financial  Statements                          | 19          |

 

12

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Report of IndependentRegistered Public Accounting Firm

 

Tothe Board of Directors and Shareholders

 

PayphoneWind Down Corporation

 

Wehave audited the statement of operations, shareholders’ equity (deficiency),and cash flows of Payphone Wind Down Corporation (the “Company”) for the yearended December 31, 2005. We also have audited the statement of net assets inliquidation of Payphone Wind Down Corporation as of December 31, 2006, and therelated statement of changes in net assets in liquidation for the year thenended. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of internal controlover financial reporting.   Our audits included consideration ofinternal control over financial reporting as a basis for designing audit proceduresthat are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal controlover financial reporting.  Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Asdescribed in Note A to the financial statements, the stockholders of PayphoneWind Down Corporation approved a plan of liquidation on February 15, 2006, andthe Company began liquidation shortly thereafter, with operations continuingthrough December 31, 2006. As a result, the Company changed its basis ofaccounting effective January 1, 2006, from the going concern basis to theliquidation basis.

 

Inour opinion, the financial statements referred to in the first paragraphpresent fairly, in all material respects, the results of operations and cashflows of Payphone Wind Down Corporation for the year ended December 31, 2005,the net assets in liquidation as of December 31, 2006, and the changes in netassets in liquidation for the year ended December 31, 2006, in conformity withaccounting principles generally accepted in the United States of Americaapplied on the bases of accounting described in the preceding paragraph.

 

 

/s/Tauber& Balser, P.C.

 

Atlanta,Georgia

 

October9, 2007

 

13

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**PAYPHONE WIND DOWN CORPORATION**

(FORMERLY ETS PAYPHONES, INC.)

 

**STATEMENTOF NET ASSETS IN LIQUIDATION**

 

**DECEMBER 31, 2006**

 
| **ASSETS**                                         | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|------------|------------|
| Cash                                               |       | $          | 2,018,893  |   |
| Cash, restricted                                   |       | 83,285     |       |
| Accounts receivable                                |       | 1,298,063  |       |
| Inventories                                        |       | 402,440    |       |
| Payphones, property and equipment                  |       | 3,773,155  |       |
| Deposits                                           |       | 157,626    |       |
| Total assets                                       |       | 7,733,462  |       |
|                                               |       |       |       |
| **LIABILITIES**                                    | ** ** | ** ** | ** ** |
| Advance on sale of business                        |       | 514,286    |       |
| Estimated costs to be incurred during  liquidation |       | 2,479,574  |       |
| Accounts payable                                   |       | 2,261,180  |       |
| Accrued expenses                                   |       | 4,679,853  |       |
| Accrued property, excise and sales taxes           |       | 114,221    |       |
| Total liabilities                                  |       | 10,049,114 |       |
|                                               |       |       |       |
| **Deficiency  in net assets in liquidation**       |       | $          | (2,315,652 | ) |

 

The accompanying notes are an integralpart of these financial statements.

 

14

----

 

**PAYPHONE WIND DOWN CORPORATION**

(FORMERLY ETS PAYPHONES, INC.)

 

**STATEMENTOF CHANGES IN NET ASSETS IN LIQUIDATION**

 

**FORTHE YEAR ENDED DECEMBER 31, 2006**

 
| **PRE-LIQUIDATION OPERATIONS**                                 | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|
| **Revenues**                                                   | ** ** | ** ** | ** ** |
| Coin calls                                                     |       | $          | 7,395,136  |   |
| Non-coin calls                                                 |       | 3,491,141  |       |
| Other payphone revenue                                         |       | 598,885    |       |
| Total revenues                                                 |       | 11,485,162 |       |
|                                                           |       |       |       |
| **Operating expenses**                                         | ** ** | ** ** | ** ** |
| Direct cost of payphone operations                             |       | 10,783,112 |       |
| Selling, general and administrative                            |       | 2,745,819  |       |
| Depreciation                                                   |       | 120,104    |       |
| Total operating expenses                                       |       | 13,649,035 |       |
|                                                           |       |       |       |
| **Loss from operations**                                       |       | (2,163,873 | )          |
|                                                           |       |       |       |
| **Other income, net**                                          |       | 866,133    |       |
|                                                           |       |       |       |
| **Loss from pre-liquidation operations**                       |       | (1,297,740 | )          |
|                                                           |       |       |       |
| **LIQUIDATION ACTIVITIES**                                     | ** ** | ** ** | ** ** |
| Administrative expenses incurred after entering  liquidation   |       | (4,512,630 | )          |
| Net unrealized gain on revaluations of  assets and liabilities |       | 931,529    |       |
| **Net loss in liquidation**                                    |       | (3,581,101 | )          |
|                                                           |       |       |       |
| **Net decrease in net assets**                                 |       | (4,878,841 | )          |
|                                                           |       |       |       |
| Shareholders’ equity at beginning of year                 |       | 2,563,189  |       |
|                                                           |       |       |       |
| Deficiency in net assets in liquidation at  December 31, 2006  |       | $          | (2,315,652 | ) |

 

The accompanying notes are an integralpart of these financial statements.

 

15

----

 

**PAYPHONE WIND DOWN CORPORATION**

**(FORMERLY ETS PAYPHONES, INC.)**

 

**STATEMENT OF OPERATIONS**

 

**FOR THE YEAR ENDED DECEMBER 31, 2005**

 
| REVENUES                                              |   |       |       |
|-------------------------------------------------------|--------|------------|------------|
| Coin Calls                                            |   | $          | 10,749,793 |   |
| Non-coin calls                                        |   | 4,990,470  |       |
| Other payphone revenue                                |   | 768,958    |       |
| Total Revenues                                        |   | 16,509,221 |       |
| OPERATING EXPENSES                                    |   |       |       |
| Telephone charges                                     |   | 5,421,121  |       |
| Commissions                                           |   | 4,463,135  |       |
| Service, maintenance and network costs                |   | 5,143,571  |       |
| Depreciation and amortization                    |   | 1,035,827  |       |
| Selling, general and administrative                   |   | 5,081,151  |       |
| Total operating expenses                              |   | 21,144,805 |       |
| Loss from Operations                                  |   | (4,635,584 | )          |
| OTHER INCOME                                          |   |       |       |
| Interest income                                       |   | 13,882     |       |
| Reorganization income, net                            |   | 411,336    |       |
| Other income                                          |   | 2,547,957  |       |
| Gain on asset sales                                   |   | 654,179    |       |
| Total other income, net                               |   | 3,627,354  |       |
| NET LOSS                                              |   | $          | (1,008,230 | ) |
| Basic and diluted net loss per common share           |   | $          | (0.20      | ) |
| Weighted average number of common shares  outstanding |   | 4,987,624  |       |

 

This statement has been prepared on the goingconcern basis of accounting.

The accompanying notes are an integral partof these financial statements.

 

16

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**PAYPHONE WIND DOWN CORPORATION**

**(FORMERLY ETS PAYPHONES, INC.)**

 

**STATEMENTS OF SHAREHOLDERS’ EQUITY(DEFICIENCY)**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005**

 
| ** **                            | ** ** | **Common  Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total**  | ** **  |
|---------------------------------------|------------|--------------------|------------|-------------------|------------|---------------------------------|------------|--------------------------|------------|------------|-------------|
| **Balance at December 31, 2004** |       | 4,987,624          |       | $                 | 499        |                            | $          | 11, 432,656              |       | $          | (7,861,736  | ) | $ | 3,571,419 |   |
| Net loss                              |       | —             |       | —            |       | —                          |       | (1,008,230               | )          | (1,008,230 | )           |
| **Balance at December 31, 2005** |       | 4,987,624          |       | 499               |       | 11,432,656                      |       | (8,869,966               | )          | 2,563,189  |        |
| Net decrease in net assets            |       | —             |       | —            |       | —                          |       | (4,878,841               | )          | (4,878,841 | )           |
| **Balance at December 31, 2006** |       | 4,987,624          |       | $                 | 499        |                            | $          | 11,432,656               |       | $          | (13,748,807 | ) | $ | (2,315,652 | ) |

 

Common Stock, par value $.0001 per share; authorized 6,000,000 shares;4,987,624 shares issued and outstanding

 

The accompanying notes are an integralpart of these financial statements.

 

17

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**PAYPHONE WIND DOWN CORPORATION**

**(FORMERLY ETS PAYPHONES, INC.)**

 

**STATEMENT OF CASH FLOWS**

 

**FOR THE YEAR ENDED DECEMBER 31, 2005**

 
| Operating Activities                                                         |   |      |       |
|------------------------------------------------------------------------------|--------|-----------|------------|
| Net loss                                                                     |   | $         | (1,008,230 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |      |       |
| Depreciation expense                                                         |   | 1,035,827 |       |
| Gain on asset sales                                                          |   | (654,179  | )          |
| Decrease in restricted cash balance, net                                     |   | 479,629   |       |
| Decrease in accounts receivable                                              |   | 282,544   |       |
| Decrease in inventories                                                      |   | 77,842    |       |
| Decrease in prepaid expenses                                                 |   | 20,011    |       |
| Decrease in accounts payable                                                 |   | (181,653  | )          |
| Decrease in tax liabilities                                                  |   | (818,151  | )          |
| Increase in accrued expenses                                                 |   | 214,592   |       |
| Increase in deposits                                                         |   | (19,666   | )          |
| Total Adjustments                                                            |   | 436,796   |       |
| Net cash used in operating activities                                        |   | (571,434  | )          |
| Investing Activities                                                         |   |      |       |
| Purchase of fixed assets                                                     |   | (23,221   | )          |
| Proceeds from sale of fixed assets                                           |   | 503,129   |       |
| Advance on sale of business                                                  |   | 382,143   |       |
| Net cash (used by) provided by investing  activities                         |   | 862,051   |       |
| Net increase in cash                                                         |   | 290,617   |       |
| Cash—Beginning of Year                                                  |   | 1,544,999 |       |
| Cash—End of Year                                                        |   | $         | 1,835,616  |   |
| Supplemental Disclosure of Cash Flow  Information                            |   |      |       |
| Cash paid for interest                                                       |   | $         | 2,128      |   |

 

This statement has been prepared on the goingconcern basis of accounting.

The accompanying notes are an integral partof these financial statements.

 

18

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**PAYPHONE WIND DOWN CORPORATION**

(FORMERLY ETS PAYPHONES, INC.)

 

**NOTES TO FINANCIAL STATEMENTS**

** **

**NOTE A—NATURE OF BUSINESS AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

***Organization and Nature of Business***

 

Payphone Wind Down Corporation (“we,” “us,” “our,”or the “Company”), formerly ETS Payphones, Inc. (“ETS”), is a Delawarecorporation that operated, serviced, and maintained a system of payphones,concentrated primarily in the Eastern and Southern United States (other thanFlorida), as well as the District of Columbia and Puerto Rico. The Company alsoprovided other telecommunications products to certain of its clients. Pursuantto the Annual Meeting of Stockholders held on February 15, 2006, thestockholders of the Company approved, among other things, the winding down ofour operations following the sale of substantially all of our assets to EmpirePayphones, Inc. (“Empire”), pursuant to an Asset Sale Agreement dated November1, 2005 (the “Asset Sale Agreement”). The Board of Directors of the Company(the “Board of Directors”) approved the dissolution on October 31, 2005 subjectto stockholder approval and consummation of the Asset Sale Agreement. OnFebruary 9, 2007, pursuant to the First Amendment to the Asset Sale Agreement,dated as of February 9, 2007 (the “First Amendment”), the parties finalized theAsset Sale Agreement and agreed that the closing date would be deemed effectiveas of December 31, 2006 (the “Closing Date”). However, for financial reportingpurposes, the Company has deemed the sale date to be concurrent with theclosing, February 9, 2007, and accordingly, has recorded the sale of the assetson that date. On February 12, 2007, the Company amended the Certificate ofIncorporation of the Company to change the name of the Company to “PayphoneWind Down Corporation” from ETS Payphones, Inc. In order to accomplish theliquidation and dissolution, on February 14, 2007, the Board of Directors fileda Certificate of Dissolution of the Company (“Certificate of Dissolution”) withthe Delaware Secretary of State to dissolve the Company. Since February 9,2007, the Company’s activities have been limited solely to those incidental toeffecting its dissolution, including the investment of any funds being held inreserve and the distribution of its remaining assets to its stockholders.

 

Upon the filing of the Certificate ofDissolution with the State of Delaware, the Company ordered the transfer agentto close the stock transfer books to discontinue recording transfers of theCompany’s common stock at the close of business on the Closing Date (the “FinalRecord Date”). As a result of the approval by the Company’s stockholders of thesale of substantially all of the assets of the Company and approval of theliquidation and dissolution of the Company following the closing of the sale,the Company changed its basis of accounting to the liquidation basis ofaccounting as of January 1, 2006. If the Company elected to continue to use thegoing concern basis of accounting to present its operations for the periodJanuary 1, 2006 through February 14, 2006, the effect would be immaterial.

 

As of December 31, 2006, the Company employed4 people.

 

On September 11, 2000, ETS filedvoluntary petitions for relief under Chapter 11 of the Bankruptcy Code. ETScontinued to operate as debtor-in-possession subject to the jurisdiction of theBankruptcy Court for the District of Delaware. On November 14, 2001, theJoint Reorganization Plan was approved by the Court. On December 5, 2002,the “Reorganization Date” or “Effective Date”, all conditions necessary for theapproval of the Joint Reorganization Plan had occurred and the JointReorganization Plan became effective.

 

The Company reflected the terms of the JointReorganization Plan in its 2002 financial statements by adopting thefresh-start accounting provisions of SOP 90-7 (American Institute ofCertified Public Accountants Statement of Position 90-7, “FinancialReporting by Entities in Reorganization Under the Bankruptcy Code”).

 

***Bankruptcy Case***

 

On March 29, 2006 a final decree was entered closing the bankruptcy cases.

 

***Basis of Accounting***

 

The financial statements for the fiscal year ended December 31,2005, were prepared on the going concern basis of accounting, whichcontemplates realization of assets and satisfaction of liabilities in thenormal course of business. As a result of our shareholders’ approval of thesale of substantially all of the Company’s assets and the imminent nature ofthe liquidation of our Company, the Company adopted the liquidation basis ofaccounting effective January 1, 2006. The liquidation basis of accounting isconsidered appropriate when, among other things, liquidation of a company isprobable and the net realizable values of assets are reasonably determinable.Under this basis of accounting, assets are valued at their estimated net realizablevalues and liabilities are stated at their estimated settlement amounts. Forfinancial statement presentation purposes, liquidating activities are limitedto those relating to the revaluation and disposition of assets and liabilitiesas well as costs incurred or expected to be incurred specifically as a

 

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result of liquidation. Thefinancial statements do not include estimated future operating losses expectedto be incurred prior to the final liquidation.

 

***Use of Estimates***

 

The preparation of financial statements requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses and the disclosure of contingent assets andliabilities. Actual results could differ from those estimates. In the opinionof management, all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included. With regard tothe liquidating activities, the amounts ultimately realizable from thedisposition of the remaining assets, including costs to be incurred inconnection with the liquidation, or the amounts that creditors will agree toaccept in settlement of the obligations due them, may differ materiallyfrom the estimated or other amounts shown in the accompanying financialstatements, and the estimates are subject to material change in the near term.

 

The conversion from the going concern basis to the liquidation basis ofaccounting required management to make significant estimates and judgments. Inorder to record assets at estimated net realizable value and liabilities atestimated settlement amounts under the liquidation basis of accounting, theCompany recorded the following adjustments to record its assets and liabilitiesto fair value as of January 1, 2006, the date of adoption of the liquidationbasis of accounting.

 
| Adjust assets and liabilities to fair  value:    |   |   |       |
|--------------------------------------------------|--------|--------|------------|
| Adjustment to write up fixed assets              |   | $      | 851,999    |   |
|                                             |   |   |       |
| Accrued estimated net costs during  liquidation: |   |   |       |
| Costs to be incurred during liquidation  period  |   | $      | (1,929,391 | ) |
|                                             |   |   |       |
| Total adjustments                                |   | $      | (1,077,392 | ) |

 

***Estimated Costs to be Incurred DuringLiquidation***

 

Under the liquidation basis of accounting, we accrue for the remaining coststo be incurred during liquidation, including compensation and severance for theremaining employees, board fees, fees of professional service providers, andmiscellaneous other costs. Such costs were estimated at $2,479,574 as ofDecember 31, 2006. Our estimates are based on assumptions regarding our abilityto settle outstanding obligations to creditors, resolve outstanding litigation,settle remaining facility leases, and the timing of distributions toshareholders. If there are delays, or we are not successful, in achieving theseobjectives, actual costs incurred may increase, reducing net assetsavailable in liquidation.

 

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

 

As reported in the Form 8-K filed November 7,2005 (the “November 7 Form 8-K”) and the Definitive Proxy Statement, filed onJanuary 4, 2006 (the “Definitive Proxy Statement”), the Company entered intothe Asset Sale Agreement and related agreements including a security agreementand a promissory note to sell substantially all of its operating assets toEmpire. The assets sold to Empire included, subject to certain exclusions, theCompany’s payphones and related equipment, miscellaneous equipment, furniture,fixtures, general supplies, computers, software, promotional materials, customerlists, tools and spare parts inventory used in the operation of the business(the “Sale Assets”), contracts related to the Sale Assets, all of the Company’sinterest in and to certain pay telephone numbers, trade names, trademarks andother intellectual property. In addition, as reported in the November 7 Form8-K and in the Definitive Proxy Statement, the Company also entered into aManagement Services Agreement effective November 1, 2005 (“Management ServicesAgreement”), with Empire pursuant to which Empire provided management servicesand funded the operational losses of the Company pending consummation of thesale transaction. As of December 31, 2006, the Company had not accrued anyreceivables for any unfunded operational losses.

 

As reported in the Form 8-K filed February15, 2007 (the “February 15, 2007 Form 8-K”), on February 9, 2007, the AssetSale Agreement was amended pursuant to the First Amendment. The First Amendmentamended the Asset Sale Agreement to, among other things, specify that the remainingpurchase price to be paid to the Company pursuant to the Asset Sale Agreementwas $1,827,966 (the “Remaining Purchase Price”). The First Amendment providedthat the Remaining Purchase Price was in full and final satisfaction of theremaining unpaid amount of (i) the Purchase Price (as defined in the Asset SaleAgreement) remaining under the Asset Sale Agreement through December 31, 2006and (ii) any Shortfall Advances (as defined in the Management ServicesAgreement) accrued through December 31, 2006 pursuant to the ManagementServices Agreement. Pursuant to the First

 

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Amendment, the Company and Empire agreed thatfor purposes of the Asset Sale Agreement, the Closing Date would be deemed tobe effective as of December 31, 2006.

 

Pursuant to the terms of the Asset SaleAgreement, as amended by the First Amendment, the Company received $802,966 incash on February 9, 2007, and a secured Promissory Note, dated as of December31, 2006, from Empire in the principal amount of $1,025,000.

 

The Promissory Note provided that theprincipal amount will be paid to the Company in monthly installments beginningon the Closing Date with the last payment occurring on August 31, 2007. ThePromissory Note contained a guaranty by Manhattan TelecommunicationsCorporation of certain obligations of Empire under the Promissory Note. OnAugust 29, 2007, Empire paid the Promissory Note in full.

 

The aggregate consideration received by theCompany in connection with the transaction is approximately $4.5 million.

 

The description above is more fully explainedin the November 7 Form 8-K, the February 15, 2007 Form 8-K and the DefinitiveProxy Statement filed January 4, 2006 and to the exhibits therein, which areincorporated herein by reference.

 

***Stockholder Approval***

 

Pursuant to the Annual Meeting ofStockholders held February 15, 2006, the stockholders of the Company approved,among other things, the sale of substantially all of our assets to Empirepursuant to the Asset Sale Agreement and the winding down of our operationsfollowing the sale of substantially all of our assets to Empire.  In order to accomplish the liquidation anddissolution of the Company, in accordance with Delaware General CorporationLaw, the Board of Directors adopted a plan of dissolution. Pursuant to the planof dissolution, on February 14, 2007, the Company filed a Certificate ofDissolution with the Delaware Secretary of State to dissolve the Company.

 

Once a corporation is dissolved underDelaware law, its existence is automatically continued for a term of threeyears, or for such longer period as the Delaware Court of Chancery directs,solely for the purpose of winding down its business. The process of windingdown includes: (1) the prosecution and defense of lawsuits, if any; (2) thesettling and closing of any business; (3) the disposition and conveyance of anyproperty; (4) the discharge of any liabilities; and (5) the distribution of anyremaining assets to the stockholders.

 

Pursuant to Delaware law, the Company willcontinue in existence until at least February 14, 2010. Since February 9, 2007,the Company’s activities have been limited solely to those incidental toeffecting its dissolution, including the investment of any funds being held inreserve and the distribution of its remaining assets to its stockholders. Afterthe consummation of the Asset Sale Agreement, the only remaining assets andproperties of the Company are expected to be cash and certain receivables.Pursuant to the Asset Sale Agreement, the Company reduced its number ofemployees significantly, with most employees being hired by Empire and otheremployees being terminated. As of December 31, 2006, only three directors andfour employees (two of which are directors) remained; as of March 31, 2007, theemployee count was further reduced to three. The remaining staff will beprincipally engaged in dealing with the winding down and dissolution of theCompany.

 

As part of the dissolution of our Company,the Board of Directors may at any time delegate the wind down and management ofour Company to a third party, including possibly a liquidating trust, tocomplete the liquidation of our remaining assets and distribute the proceeds tothe stockholders. In addition to the employment agreements with our existingemployees, we may pay our officers, directors, employees or agents additionalcompensation for services rendered in the dissolution.

 

The Company cannot predict with certainty theprecise amount of the liquidation distribution to stockholders. The Company hasnot established a firm timetable for distributions to its stockholders.However, the Board of Directors intends, subject to contingencies inherent inwinding down the Company’s business, to make such distributions as promptly aspracticable. The timing of any distribution will depend on and could be delayedby, among other things, obstacles with claim settlements with creditors. Anydelays could substantially diminish amounts available for distribution to ourstockholders.

 

As a result of future expenses that will beincurred, both anticipated and not anticipated, dissolution and liquidation maynot provide value to the Company’s stockholders or result in any remainingcapital for distribution to its stockholders. In addition, claims, liabilitiesand expenses during the winding down of the Company will continue to beincurred which will reduce the amount of assets available for distribution. Anydistributions made by the Company shall be made solely to the stockholders ofrecord at the close of business on the Final Record Date except as may benecessary to reflect subsequent transfers recorded on our books as a result ofassignments by will, intestate succession or operation of law.

 

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***Close of Stock Transfer Books***

 

Upon the filing of a Certificate ofDissolution with the State of Delaware, the Company ordered the transfer agentto close the stock transfer books to discontinue recording transfers of theCompany’s common stock at the close of business on the Final Record Date. Assuch no transfers of the Company’s common stock will be recorded excepttransfers as a result of assignments by will, intestate succession or operationof law.

 

***Cash and Cash Concentration***

 

The cash balance of $2,018,893 is notrestricted and is available for normal Company operations.

 

The restricted cash balance of $83,285consists of funds restricted per the Joint Reorganization Plan for payment tocreditors. Payments to unsecured creditors were made during 2004 through 2006.The Company also acted as Disbursing Agent for the Litigation Trust, which madepayments to both unsecured creditors and ETS stockholders in 2004. TheLitigation Trust disbursement was still in process as of the end of 2004, andcontinued into early 2005. The establishment and activities of the LitigationTrust are more fully described in the Company’s 2003 Form 10-KSB filingand 2004 Form 10-KSB filing.

 

The Company maintains its cash balances inseveral financial institutions. These balances, at times, may exceed federallyinsured limits. The Company believes no significant concentration of creditrisk exists with respect to these cash holdings.

 

***Accounts Receivable***

 

Accounts receivable are reported at theamount management expects to collect on balances outstanding at year-end. Theamount of the accounting loss that the Company is at risk for these unsecuredaccounts receivable is limited to their carrying value, which was $1,298,063 atDecember 31, 2006. Uncollectible receivables are written off based on theCompany’s experience with collections. The Company no longer carries anallowance for doubtful accounts.

 

***Fair Value of Financial Instruments***

 

The carryingamount of the Company’s financial instruments included in assets andliabilities approximates fair value due to their short-term nature. The fairvalue of the Empire receivable (see Note B) is estimated by discountingexpected future cash flows using current interest rates at which similar loanswould be made to borrowers with similar credit ratings and remainingmaturities.

 

***Revenue Recognition***

 

The Company derives its revenues from twoprincipal sources: coin calls and non-coin calls. Coin calls represent callspaid for by callers with coins deposited into payphones. Coin call revenues arerecorded in the amount of coins deposited in the payphones and in the perioddeposited. Revenue from non-coin calls, which includes dial-aroundcompensation, is discussed in Note B, as are other non-coin revenue items.

 

***Inventories and Fixed Assets***

 

***Due to the Company changing to theliquidation basis of accounting, the valuation of assets and liabilities hasbeen adjusted to reflect the amounts expected to be realized in liquidation asa result of their sale to Empire Payphones, Inc. The valuation of assets attheir net realizable value and liabilities at their anticipated settlementamounts requires many estimates and assumptions. In addition, there aresubstantial risks and uncertainties associated with carrying out theliquidation of the Company’s existing operations. The valuations presented inthe accompanying Statement of Net Assets in Liquidation represent estimates,based on present facts and circumstances, of the net realizable values ofassets and costs associated with carrying out the dissolution and liquidationplan. The actual values and costs may differ from the amounts shown herein andcould be greater or lesser than the amounts recorded. Accordingly, it is notpossible to predict the aggregate amount, if any, that will ultimately be distributableto shareholders.***

 

***Income Taxes***

 

The Company recognizes deferred tax assetsand liabilities for the expected future tax consequences of events that havebeen included in the financial statements or tax returns. Under this method,deferred tax assets resulting from net operating loss carryforwards arecalculated using enacted tax rates. Net deferred tax assets are reduced by avaluation allowance when appropriate. Deferred tax assets and liabilities areadjusted for the effects of changes in tax laws and rates on the date ofenactment.

 

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***Net Loss Per Common Share***

 

Basic loss per share is computed based on netloss divided by the weighted average number of common shares outstanding duringthe year. There were no potential common share equivalents outstanding during2005; therefore the diluted loss per common share is the same as the basic lossper common share.

 

**NOTE B—ACCOUNTS RECEIVABLE AND DIAL-AROUNDCOMPENSATION**

 

Accountsreceivable are composed of four types: Dial-around compensation (“DAC”),Operator Service Provider (“OSP”), Semi-public (“Semi-pub”), and Empire. DAC ispayment from long distance carriers for calls made from the Company’spayphones. Dial-around services, such as pre-paid calling cards, 1-800-Collect,and 1-800-CALLATT, are more frequently used at payphones than in the past. Theproliferation in dial-around services is perhaps most plainly evidenced by thefact that entirely new “toll-free” prefixes were needed along with the 101XXXXaccess numbers that are used by the interexchange carriers (“IXCs”). DAC, whichtypically comprises about 20% of the Company’s revenue, is estimated based onhistorical values. The majority of DAC payments are issued quarterly throughseveral main clearinghouses that specialize in processing DAC data.

 

OSP revenue is commission-based payment fromproviders of operator-assisted calls. These providers assume responsibility fortracking, rating, billing, and collecting the revenue related to these calls andremit a percentage of the gross proceeds to the Company in the form of acommission payment. OSP payments are typically made semi-monthly. Receivablesfor the current month are based on projected results after the first severalweeks’ actual information has been obtained.

 

Semi-pub revenue is obtained from customerswhose call volume would not support a normal payphone installation. Thecustomer is willing to pay a monthly fee to the Company for the convenience ofhaving a payphone on their premises (accommodation of clientele, employees,etc.).

 

Empire receivable is the amount outstandingfor the June 30, 2005 sale of the Northeast business (New York, New Jersey,Massachusetts and Connecticut) to Empire Payphones, Inc. The remaining balancewas paid in full on August 29, 2007.

 

A detail of the accounts receivable balanceat December 31, 2006 is as follows:

 
| Dial around calls |   | 929,720 |      |
|-------------------|--------|---------|-----------|
| Empire            |   | 270,096 |      |
| OSP               |   | 55,663  |      |
| Other receivables |   | 42,584  |      |
| Total receivables |   | $       | 1,298,063 |   |
|                   |        |         |           |  |

 

**NOTE C—FIXED ASSETS**

 

Fixed assets were revalued as of January 1,2006, in accordance with the Company’s change to the liquidation basis ofaccounting and no further depreciation was recorded after that date. Therevaluation was based on the fair market value as determined by the Asset SaleAgreement and the subsequent First Amendment.

 

**NOTE D—FRESH-START ACCOUNTING ANDREORGANIZATION**

 

As previously discussed, the Company adoptedthe provisions of fresh-start accounting as of December 5, 2002. Inadopting fresh-start accounting, the Company engaged an independent financialvaluation analyst to assist in the determination of the reorganization value orfair value of the entity.

 

***Plan of Reorganization***

 

OnSeptember 11, 2000, the Company filed voluntary petitions for relief underChapter 11 of the Bankruptcy Code. The Company continued to operate asdebtor-in-possession subject to the jurisdiction of the U.S Bankruptcy Courtfor the District of Delaware. On November 14, 2001, the JointReorganization Plan was approved by the Court. On December 5, 2002, allconditions necessary for the approval of the Joint Reorganization Plan hadoccurred and the Joint Plan became effective. The Joint Reorganization Planrepresents a consensual arrangement between the Committee of Unsecured Creditors,Debtors and the Company.

 

Pursuant tothe Joint Reorganization Plan, the various debtor corporations were merged intoa single corporation, ETS Payphones, Inc., incorporated in Delaware onNovember 8, 2002. The Joint Reorganization Plan provides that each holderof an allowed Payphone Investor Claim shall receive shares of common stock inthe Company in full satisfaction, settlement, release and discharge of and inexchange for such claim. The number of shares issued has been calculatedaccording to the Payphone Investor Claims Formula provided in the JointReorganization Plan.

 

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In settlement of a Declaratory Judgmentaction brought by the Company, holders of payphone investor claims in theamount of $375,000,000 agreed to exchange their investment for equity asshareholders in the Company. Equity was issued in the amount of 4,985,826shares, based upon a formula approved by the Bankruptcy Court.

 

A Litigation Trust was created on theEffective Date for the benefit of General Unsecured Claims and PayphoneInvestor Claims. The Litigation Trust is administered by a trustee selected bythe Creditors’ Committee. The Litigation Trust will be funded with property andproceeds of all claims and causes of action of the Company or the Creditors’Committee existing as of the Petition Date against Charles Edwards, the formerCEO of the Company, various insiders, and others as described more fully in theJoint Reorganization Plan. The trustee will make distributions as and whenfunds become available and at the trustee’s sole discretion. In 2004 the firstdistribution to Trust beneficiaries was initiated.

 

Income and expenses resulting from thereorganization totaling $411,336, are reported as reorganization income (expense)in the Statement of Operations for the year ended December 31, 2005. Incomeand (expenses) directly associated with the Chapter 11 bankruptcy proceedingstotaling $(43,985), are included in other income, net, in the 2006 Statement ofChanges in Net Assets in Liquidation. These reorganization expenses consistedmainly of professional fees for legal, advisory, and administrative services;2005 reflects a credit due to settlement of litigation with Puerto RicoTelephone Company.

 

Payments of restricted cash made by theCompany resulting from the plan for the year ended December 31, 2006 areas follows:

 
| Restricted Cash—December 31, 2005 |   | $       | 351,770 |   |
|---------------------------------------------|--------|---------|---------|--------|
| Interest earned                             |   | 2,314   |    |
| Total restricted cash                       |   | 354,084 |    |
|                                        |   |    |    |
| Cash Disbursements:                         |   |    |    |
| Pre-Petition taxes paid                     |   | 169,616 |    |
| Claims paid (secured)                       |   | 50,000  |    |
| Claims paid (unsecured)                     |   | 51,183  |    |
| Total cash disbursements                    |   | 270,799 |    |
| Restricted Cash—December 31, 2006 |   | $       | 83,285  |   |

 

**NOTE E—RETIREMENT PLAN**

 

The Company had a 401k plan through December31, 2005, that covered all employees who had attained certain servicerequirements as specified in the plan. The total Company contribution to theplan for the year ended December 31, 2005 was $96,158. In contemplation ofthe consummation of the Asset Sale Agreement between the Company and EmpirePayphones, Inc., the 401k plan was terminated effective as of December 31,2005.

 

**NOTE F—INCOME TAXES**

 

The effective tax rate varies from themaximum federal statutory rate as a result of the following items for the yearsended December 31, 2006 and 2005:

 
| ** **                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|
| Tax benefit computed at the maximum federal  statutory rate |       | (34.0    | )%         | (34.0    | )%         |
| Decrease (increase) in tax benefit  resulting from:         |       |     |       |     |       |
| Depreciation                                                |       | 1.0      |       | 32.8     |       |
| Non-deductible reorganization costs                         |       | —   |       | 1.4      |       |
| Revaluation of payphone assets and  liquidation accrual     |       | 29.0     |       | 14.7     |       |
| Bankruptcy related settlements                              |       | —   |       | (21.3    | )          |
| Increase in valuation allowance                             |       | 4.0      |       | 6.4      |       |
| Effective income tax rate                                   |       | 0.0      | %          | 0.0      | %          |

 

Net deferred taxes consist of the followingcomponents as of December 31, 2006:

 

Deferred Tax assets:

 
| Net operating loss carryforwards |   | $          | 1,702,769 |   |
|----------------------------------|--------|------------|-----------|--------|
| Less valuation allowance         |   | (1,702,769 | )         |
|                             |   | $          | —    |   |

 

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A valuation allowance has been recognized tooffset the entire net deferred tax asset due to the uncertainty of realizingthe benefit of the net deferred tax asset. The Company has available netoperating loss carryforwards totaling approximately $5 million that expirein various periods through 2026.

 

The Company realized substantial cancellationof debt, or “COD,” income as a result of the implementation of the JointReorganization Plan. Because the Company was a debtor in a bankruptcy case atthe time it realized the COD income, it is not required to include such CODincome in its taxable income for federal income tax purposes. Instead, theCompany will be required to reduce certain of its tax attributes by the amountof COD income so excluded. All of the Company’s net operating losscarryforwards related to activities before it emerged from bankruptcy wereeliminated in 2003. Certain of its other tax attributes will be reduced oreliminated as a result of COD income being excluded pursuant to the JointReorganization Plan.

 

**NOTE G—COMMITMENTS AND CONTINGENCIES**

 

***Operating leases***

 

**Pursuant to the First Amendment,the Company assigned all its operating leases to Empire and was released fromits contractual obligations relating to future operating lease payments.**

 

***Litigation***

 

The Company is involved from time to time inlawsuits that arise in the ordinary course of our business. In March 2006Commercial Payphones, Inc., a Florida corporation, initiated a lawsuit againstthe Company in state court in Dade County, Florida for an alleged violation ofa non-compete agreement alleging damages in excess of $15,000. We do notbelieve the allegations have legal merit and are vigorously defending theaction and have filed a motion to quash service or, in the alternative, todismiss the complaint for lack of jurisdiction. However, we cannot predict withcertainty the outcome or effect of this litigation. In 2005 ClipperTelecommunications, Inc., Comchoice, Inc. and Coinlink, L.L.C. (the “Plaintiffs”)initiated a lawsuit against the Company and APCC Services, Inc. (a collector ofdial around compensation for the payphones industry) in the United StatesDistrict Court for the Western District of Texas. The complaint alleged damagesin excess of $75,000 relating to dial around compensation collected by APCCServices, Inc. and held in the Company’s accounts with APCC. The Company wassuccessful in obtaining a dismissal of the action. In December of 2006, thePlaintiffs filed a substantially similar complaint against the Company and APCCServices, Inc. in the state court of Texas. We do not believe the allegationshave legal merit and are vigorously defending the action. However, we cannotpredict with certainty the outcome or effect of this or other litigation inwhich the Company is or may become involved. On March 13, 2006, three formeremployees from the Puerto Rico branch filed a lawsuit against the Company inthe Commonwealth of Puerto Rico, Court of First Instance, Manati Courthousesubsequent to their termination that had occurred while Empire was managing theCompany pursuant to the Management Services Agreement. The lawsuit allegeddamages in excess of $300,000. The Company reached a settlement with the formeremployees on September 18, 2007. At December 31, 2006, adequate provision wasmade in the financial statements for losses relating to this matter.

 

**NOTE H—OTHER INCOME**

 

Other Income for the years endedDecember 31 is as follows:

 
| ** **                                      | ** ** | **2006** | ** ** | **2005**  | ** ** |
|-------------------------------------------------|------------|----------|------------|-----------|------------|
| Dial around true-up settlements                 |       | $        | 93,788     |      | $          | 554,889 |   |
| Legal settlements                               |       | 656,627  |       | 1,531,440 |       |
| MCI/Worldcom bankruptcy dial around  settlement |       | —   |       | 276,626   |       |
| Other income, net                               |       | 115,718  |       | 185,002   |       |
| Total                                           |       | $        | 866,133    |      | $          | 2,547,957 |   |

 

These Other Income items not explainedpreviously or otherwise self-explanatory are as follows:

 

*Dial Around True-Up Settlements*Certain DAC true-up payments have been received and recorded as Other Income in2006 and 2005. These payments are generally not accrued for since the amountsand timing of payment are usually unknown. These payments are the results ofpast activity on Company payphones that was not reimbursed within the normalpayment processing time. These payments usually cover a period of time over ayear or more after the time the actual calls were made.

 

*Legal Settlements* Thisrelates to funds received in respect of DAC for phones acquired prior tobankruptcy; funds received in respect of carrier over charges paid in prioryears; discharge of liability with regard to a New York regulatory authoritystipulation agreement; funds received in connection with employee related fraudrecovery; funds received in connection with POA Joint Venture settlement.

 

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*MCI/Worldcom Bankruptcy Dial AroundSettlement* These are payments received for dial aroundrevenue paid as a result of the MCI bankruptcy settlement for years prior to2003. These payments are cents on the dollar payments on the total amountsearned during the time period prior to MCI filing bankruptcy.

 

**NOTE I—SALE OF PAYPHONE ASSETS**

 

***2006***

 

***In accordance with the Company’s change tothe liquidation basis of accounting and the terms set forth in the Asset SaleAgreement and First Amendment, the Company has recorded the anticipated gainfrom revaluation of assets and liabilities. The anticipated gain is calculatedas follows and is included in net unrealized gain on revaluations of assets andliabilities on the Statement of Pre-liquidation Operations and Changes in NetAssets in Liquidation:***

 
| Total sale price, $250,000 cash; $2,092,252  receivable; $2,254,745 liabilities assumed |                                                               | $      | 4,596,997  |   |
|-----------------------------------------------------------------------------------------|--------------------------------------------------------------------|--------|------------|--------|
| Less:                                                                                   | $6,223,871 book value less accumulated  depreciation of $3,123,565 |   | (3,100,306 | )      |
|                                                                                    | Parts inventory transferred to buyer                               |   | (402,440   | )      |
|                                                                                    | Deposits transferred to buyer                                      |   | (95,121    | )      |
|                                                                                    | Adjustment to carrying value of assets                             |   | 258,680    |   |
|                                                                                    | Last payment remaining from June 30, 2005  asset sale to Empire    |   | (37,354    | )      |
|                                                                                    | Contra items not paid to the Company                               |   | (183,008   | )      |
|                                                                                    | Coin in phones collections not paid to the  Company                |   | (105,919   | )      |
| Gain on revaluation of assets and  liabilities                                          |                                                               | $      | 931,529    |   |

 

***2005***

 

On June 30, 2005 the Company sold to anindependent third party substantially all of its payphones located in thestates of New York, New Jersey, Massachusetts, and Connecticut. This sale wasmade to Empire Payphones, Inc. The sale terms were such that the Companyreceived $200,000 in cash upon contract signing by both parties and willreceive future payments of $750,000 in total. The gain from this sale iscalculated as follows:

 
| Total sale price, $200,000 cash; $750,000  receivable; $145,849 liabilities assumed |                                                           | $      | 1,095,849 |   |
|-------------------------------------------------------------------------------------|----------------------------------------------------------------|--------|-----------|--------|
| Less:                                                                               | Imputed interest on $750,000 receivable                        |   | (29,567   | )      |
|                                                                                | $783,252 book value less accumulated  depreciation of $351,681 |   | (431,571  | )      |
|                                                                                | Parts inventory transferred to buyer                           |   | (12,798   | )      |
|                                                                                | Coin in phones collections not paid to ETS                     |   | (4,184    | )      |
| Gain on sale                                                                        |                                                           | $      | 617,729   |   |

 

**NOTE J – SUBSEQUENT EVENTS**

 

***Stockholder Approval; Winding Down ofOperations***

 

Pursuant to the Annual Meeting ofStockholders held February 15, 2006, the stockholders of the Company approved,among other things, the sale of substantially all of our assets to Empirepursuant to the Asset Sale Agreement and the winding down of our operationsfollowing the sale of substantially all of our assets to Empire. In order toaccomplish the liquidation and dissolution of the Company, in accordance withthe Delaware General Corporation Law, the Board of Directors adopted a plan ofdissolution. Pursuant to the plan of dissolution, on February 14, 2007, theCompany filed a Certificate of Dissolution with the Delaware Secretary of Stateto dissolve the Company.

 

Once a corporation is dissolved underDelaware law, its existence is automatically continued for a term of threeyears, or for such longer period as the Delaware Court of Chancery directs,solely for the purpose of winding down its business. The process of windingdown includes: (1) the prosecution and defense of lawsuits, if any; (2) thesettling and closing of any business; (3) the disposition and conveyance of anyproperty; (4) the discharge of any liabilities; and (5) the distribution of anyremaining assets to the stockholders.

 

Pursuant to Delaware law, the Company willcontinue in existence until at least February 14, 2010. Since February 9, 2007,the Company’s activities have been limited solely to those incidental toeffecting its dissolution, including the investment of any funds being held inreserve and the distribution of its remaining assets to its stockholders. Afterthe consummation of the Asset Sale Agreement, the only remaining assets andproperties of the Company are cash and certain receivables. Pursuant to theAsset Sale Agreement, the Company reduced its number of employeessignificantly, with most employees being hired by Empire and other employeesbeing terminated. As of December 31, 2006, only three directors, and fouremployees (two of which are directors)

 

26

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remained; as of March 31, 2007, the employeecount was further reduced to three. The remaining staff will be principallyengaged in dealing with the winding down and dissolution of the Company.

 

As part of the dissolution of our Company,the Board of Directors may, at any time delegate the wind down and managementof our Company to a third party, including possibly a liquidating trust, tocomplete the liquidation of any remaining assets, satisfaction of any remainingliabilities and distribute any remaining proceeds to the stockholders. Inaddition to the employment agreements with our existing employees, we may payour officers, directors, employees or agents additional compensation forservices rendered in the dissolution.

 

The Company cannot predict with certainty theprecise amount of the liquidation distribution to stockholders. The Company hasnot established a firm timetable for distributions to its stockholders.However, the Board of Directors intends, subject to contingencies inherent inwinding down the Company’s business, to make such distributions as promptly aspracticable. The timing of any distribution will depend on and could be delayedby, among other things, obstacles with claim settlements with creditors. Anydelays could substantially diminish amounts available for distribution to ourstockholders.

 

As a result of contingent or unmatureliabilities that may materialize or mature, dissolution and liquidation may notcreate value to the Company’s stockholders or result in any remaining capitalfor distribution to its stockholders. In addition, claims, liabilities andexpenses during the winding down of the Company will continue to be incurredwhich will reduce the amount of assets available for distribution. Anydistributions made by the Company shall be made solely to the stockholders ofrecord at the close of business on the Final Record Date except as may benecessary to reflect subsequent transfers recorded on our books as a result ofassignments by will, intestate succession or operation of law.

 

***Close of Stock Transfer Books***

 

Upon the filing of a Certificate ofDissolution with the State of Delaware, the Company ordered the transfer agentto close the stock transfer books to discontinue recording transfers of theCompany’s common stock at the close of business on the Final Record Date. Assuch no transfers of the Company’s common stock will be recorded excepttransfers as a result of assignments by will, intestate succession or operationof law.

 

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**PART III**

 

**Item 1. Index to Exhibits.**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                          |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                     |
| 3.1                 |       | Certificate of  Incorporation of ETS Payphones, Inc. dated November 8, 2002(1)                                                                 |
| 3.2                 |       | Certificate of  Amendment to the Certificate of Incorporation of ETS Payphones, Inc. dated  February 12, 2007(5)                                         |
| 3.3                 |       | Bylaws of ETS  Payphones, Inc.(1)                                                                                                                   |
| 4.1                 |       | Settlement  Agreement For Third Omnibus Claims Objection ETS Payphones, Inc. and UPO  dated February 28, 2003(1)                               |
| 10.1                |       | Cocot Agreement  dated September 4, 2002 between Metropolitan Telecommunications, d/b/a  MetTel and ETS Payphones, Inc(1)                      |
| 10.2                |       | Cocot Agreement  dated August 16, 2002 between Metropolitan Telecommunications, d/b/a  MetTel and ETS Payphones, Inc.(1)                       |
| 10.3                |       | ETS Creditors’  Litigation Trust Agreement dated December 4, 2002(1)                                                                           |
| 10.4                |       | Employment  Agreement dated December 5, 2002 between ETS Payphones, Inc. and  Guy A. Longobardo(1)                                        |
| 10.4.1              |       | Amendment, dated  as of January 28, 2005, to Employment Agreement between ETS  Payphones, Inc. and Guy A. Longobardo(2)                   |
| 10.4.2              |       | Amendment, dated  as of November 11, 2005, to Employment Agreement between ETS Payphones, Inc.  and Guy A. Longobardo(3)                                 |
| 10.4.3              |       | Amendment, dated  as of March 29, 2006, to Employment Agreement between ETS Payphones, Inc. and  Guy A. Longobardo(5)                               |
| 10.5                |       | Employment  Agreement, dated as of January 28, 2005, dated December 5, 2002  between ETS Payphones, Inc. and Michael H. McClellan(1) |
| 10.5.1              |       | Amendment, dated  as of January 28, 2005, to Employment Agreement between ETS  Payphones, Inc. and Michael H. McClellan(2)                |
| 10.5.2              |       | Amendment, dated  as of March 29, 2006, to Employment Agreement between ETS Payphones, Inc. and  Michael H. McClellan(5)                                 |
| 10.6                |       | Employment  Agreement, dated as of January 28, 2005 between ETS Payphones, Inc. and  Jeffrey E. Fennell(2)                                     |
| 10.6.1              |       | Amendment,  effective as of April 1, 2006, to Employment Agreement between ETS Payphones,  Inc. and Jeffrey E. Fennell(5)                                |
| 10.7                |       | Form Change in  Control Agreement(2)                                                                                                                     |
| 10.7.1              |       | Amendment, dated  as of March 29, 2006, to the January 28, 2005 Change of Control  Agreement between ETS Payphones, Inc. and David C. Jones(5)      |
| 10.8                |       | Asset Sale  Agreement, dated as of November 1, 2005, between ETS Payphones, Inc. and  Empire Payphones, Inc.(4)                                     |
| 10.9                |       | Management  Services Agreement, dated as of November 1, 2005, between ETS Payphones,  Inc. and Empire Payphones, Inc.(4)                            |
| 10.10               |       | Security  Agreement, dated as of November 1, 2005, between ETS Payphones, Inc. and  Empire Payphones, Inc.(4)                                       |
| 10.11               |       | Note, dated as  of November 1, 2005, between ETS Payphones, Inc. and Empire Payphones,  Inc.(4)                                                     |
| 10.12               |       | First Amendment  to the Asset Sale Agreement, dated as of December 31, 2006, between ETS  Payphones, Inc. and Empire Payphones, Inc.(6)                  |
| 10.13               |       | Promissory Note,  by Empire Payphones Inc. to ETS Payphones, Inc., dated as of December 31,  2006(5)                                                     |
| 31.1                |       | Certification of  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act*                                                       |
| 31.2                |       | Certification of  Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act*                                                       |
| 32.1                |       | Certification of  Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley  Act*                                                       |
| 32.2                |       | Certification of  Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley  Act*                                                       |

 

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(1)           Incorporated by reference from the Company’sRegistration Statement on Form 10-SB (File No. 000-50712)

(2)           Incorporatedby reference from the Company’s Report on Form 8-K dated February 2,2005 (File No. 000-50712)

(3)           Incorporated by reference from the Company’s Report on Form 10-QSBfor the quarterly period ended September 30, 2005, filed onNovember 14, 2005 (File No. 000-50712)

(4)           Incorporatedby reference from the Company’s Report on Form 8-K dated November 1, 2005(File No. 000-50712)

(5)           Incorporatedby reference from the Company’s Report on Form 10-KSB for the fiscal year endedDecember 31, 2005 (File No. 000-50712)

(6)           Incorporated by reference from the Company’sReport on Form 8-K dated February 9, 2007 (File No. 000-50712)

 

*Filed herewith

 

28

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**Item 2. Description of Exhibits.**

 

**The information required under this item iscontained in Part III, Item 1, Index to Exhbiits.**

 

29

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**SIGNATURES**

** **

In accordance with Section 13 or 15(d) of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|        | PAYPHONE WIND DOWN CORPORATION |
|--------|--------------------------------|
|   |                           |   |
|   | By:                            |   /s/ Guy A. Longobardo |   |
|   |                           |   |   |
|   |                           |   | Guy A.  Longobardo, |   |
|   |                           |   | President,  Chief Executive Officer, |   |
|   |                           |   | Chairman of  the Board and Director |   |
|   |                           |   |   |
|   | Date:                          | October 9, 2007 |   |
|        |                                |  |  |  |  |

 

 

In accordance with the Exchange Act, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the date indicated.

 

 
|        | By:    |   /s/ Guy A. Longobardo    |                                 |
|--------|--------|--------------------------------------|--------------------------------------|
|   |   |                                 |                                 |
|   |   |                                 | Guy A.  Longobardo,                  |   |
|   |   |                                 | President,  Chief Executive Officer, |   |
|   |   |                                 | Chairman of  the Board and Director  |   |
|   |   |                                 |                                 |
|   | Date:  |                                 | October 9,  2007                     |   |   |
|   |   |                                 |                                 |
|   |   |                                 |                                 |
|   | By:    |   /s/ Michael H. McClellan |                                 |
|   |   |                                 |                                 |
|   |   |                                 | Michael H. McClellan,                |   |
|   |   |                                 | Executive Vice President,            |   |
|   |   |                                 | Chief Financial Officer and Director |   |
|   |   |                                 |                                 |
|   | Date:  |                                 | October 9, 2007                      |   |   |
|   |   |                                 |                                 |
|   |   |                                 |                                 |
|   | By:    |   /s/ Michael H. Buck      |                                 |
|   |   |                                 |                                 |
|   |   |                                 | Michael H. Buck,                     |   |
|   |   |                                 | Director                             |   |
|   |   |                                 |                                 |
|   | Date:  |                                 | October 9, 2007                      |   |   |
|        |        |                                      |                                      |  |  |  |

 

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