| |  |                                                                                   |  | OMB APPROVAL                                                                                    
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| |  | UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-KSB |  | OMB Number: 3235-0420Expires: December 31, 2006Estimated average burden
hours per response: 1646

(Mark One)

|ý | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------

For the fiscal year ended December 31, 2004

|o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------

For the transition period
from                                    to

Commission file number

ETS PAYPHONES, INC.(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.)
|1490 Westfork Drive, Suite G, Lithia Springs, Georgia          |  | 30122                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Issuer's
telephone number(770) 819-1600

Securities registered under Section 12(b) of the Exchange Act:

Title of each class

Name on each exchange on which registeredNone

None


Securities
registered under Section 12(g) of the Exchange Act:

Common Stock, $.0001 par value(Title of class)

(Title of class)

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

|SEC 2337 (8-04) |  | Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.
|--------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Check
if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. ý

State issuer's revenues for its most recent fiscal year.    $20,142,919

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

Note:
If determining whether a person is an affiliate will involve an unreasonable effort and expense, the issuer may calculate the aggregate market value of the common equity held by
non-affiliates on the basis of reasonable assumptions, if the assumptions are stated.

(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

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

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.    4,987,624

DOCUMENTS INCORPORATED BY REFERENCE

None.

Transitional
Small Business Disclosure Format (Check
one): Yes ý    No o



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PART 1  ALTERNATIVE 2

ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT, INCLUDED IN THIS REGISTRATION STATEMENT, INCLUDING, WITHOUT LIMITATION, THE
STATEMENTS UNDER "DESCRIPTION OF BUSINESS" ARE, OR MAY BE DEEMED TO BE, FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. IMPORTANT FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS ("CAUTIONARY STATEMENTS") INCLUDE BUT ARE NOT LIMITED TO: THE UNCERTAINTY OF REGULATION,
INCLUDING REGULATION RELATED TO DIAL-AROUND COMPENSATION, OUR DEPENDENCE ON THIRD PARTY SUPPLIERS, OUR FAILURE TO ATTRACT CUSTOMERS, COMPETITIVE LOCAL EXCHANGE CARRIERS' ACCESS TO LOCAL
EXCHANGE CARRIERS' NETWORKS, AND THE IMPACT OF TECHNOLOGICAL CHANGE ON THE PAYPHONE MARKETPLACE. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS
ACTING ON BEHALF OF THE COMPANY ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH CAUTIONARY STATEMENTS.

Item 1. Description of Business.

General

ETS Payphones, Inc. ("we," "us," "our," or the "Company") owns and operates approximately 16,000 public pay telephones in 29 states concentrated primarily
in the Eastern and Southern United States, as well as the District of Columbia and Puerto Rico. We are an independent owner of payphone equipment placed at locations with client site owners that
include retail establishments, convenience stores, hotels, hospitals and other publicly and privately owned businesses. These locations are owned or managed by over 5000 clients that include Fortune
100 companies as well as single store accounts and municipalities. We also provide other telecommunications products to certain clients.

We
contract with site owners to place payphones in their locations and once a contract is signed we install, maintain, manage and collect money from the payphones. Our revenue is
generated from coins gathered from the payphones and from funds we receive from other communications service providers, who receive revenue from calls made at our payphones using phone cards, credit
cards and other forms of non-coin payment. Substantially all of our payphones accept coins as well as other forms of payment. Our payphones generate coin revenues primarily from local
calls.

We
outsource our long-distance and operator service operations to a long-distance carrier and a limited number of operator service providers. When callers do not
designate a long-distance company, we route the calls to one with which we have a contract. We also receive revenue from calls made when the caller uses a "1-800" or other
toll-free number to access a provider with which we have not contracted directly. This "dial-around" revenue is provided to us as a result of Federal Communications Commission
("FCC") order.

Our
expenses consist primarily of site commissions, line service fees, payphone maintenance and equipment, and general labor costs. In most instances the site contracts entitle the site
owner to a commission for each payphone installed on their properties, typically in accordance with a formula based primarily upon a percentage of the payphones' revenue. We pay monthly line and/or
usage charges to local exchange carriers and competitive local exchange carriers to provide service to our payphones.

We
utilize "smart phone" technology. The majority of our payphones are equipped with microprocessors that allow us to monitor the payphones remotely by tracking the payphone's call
traffic, operational status, and coin box amount. In addition to allowing us to track when a coin box

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needs
collecting and when a payphone needs maintenance, the smart phone technology also allows us to change rates for certain types of calls.

We
have approximately 130 employees. Our principal executive office is located at 1490 Westfork Drive, Suite G, Lithia Springs, Georgia 30122 and our telephone number is
(770) 819-1600.

Previous Operations

Our predecessor company, also called ETS Payphones, Inc. but incorporated in Georgia ("Old ETS"), was owned and controlled by Charles E. Edwards. Old ETS
began operations with approximately 75
payphones and initially grew through obtaining new site contracts and installing payphones. Old ETS was started during a time in which there was a rapid expansion of payphone service providers who
were independent from the Regional Bell Operating Companies ("RBOCs"). Old ETS also owned and operated automated teller machines ("ATMs") and coin-operated air and vacuum machines.

In
late 1997 Old ETS began to aggressively pursue a business model pursuant to which they would "sell" payphones to individual investors ("Payphone Investors") at prices up to $7,000 per
phone. As part of the sales contract Old ETS agreed to immediately lease the payphone back from the Payphone Investor and manage the location, collection, and maintenance of the payphones. Old ETS was
obligated to find a location for the payphone, negotiate a contract with the site owner, and install and service the payphone. Old ETS also obtained the necessary licenses, ensured compliance with
regulatory requirements and obtained line service, long-distance service, and operator service for the payphones. Under these "sale-leaseback" transactions Old ETS agreed to
make monthly payments to the Payphone Investor, which annually totaled about 14% of the payphone sale price, regardless of the revenue generated from the payphone. For example, Old ETS agreed to pay
approximately $80 per month with respect to a phone it sold for $7,000. The agreements with the Payphone Investors generally had five year terms and obligated Old ETS to buy the payphone back at the
end of the term.

To
promote sales under this sale-leaseback scheme, Old ETS engaged independent sales representatives on a commission basis. These sales representatives marketed the payphones
through trade shows for entrepreneurs, direct marketing promotions, and personal solicitations.

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

Old
ETS made a substantial immediate cash profit on each sale-leaseback of a payphone to a Payphone Investor. However, virtually every sale-leaseback transaction
was destined to lose money for Old ETS in the long run, as the payphones failed to generate sufficient revenue to cover (i) the lease payments to the Payphone Investors, (ii) the costs
Old ETS was paying to obtain site contracts, and (iii) operating and maintaining the payphones.

In
addition to problems with the financing structure of Old ETS, the effects of general industry trends were substantially reducing the revenue for payphones during the relevant time
period. The

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widespread
use of cellular telephones and dial-around calls substantially reduced the call volume on payphones, negatively impacting the revenues of Old ETS. In order to fund operations
and to make the required lease payments to the Payphone Investors, Old ETS sold more payphones to new Payphone Investors.

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

In
2000, the United States Securities and Exchange Commission ("SEC") began to scrutinize Old ETS' operations, alleging that the sale-leaseback transactions constituted the
sale of securities by Old ETS. In addition, securities enforcement agencies from a number of states initiated proceedings against Old ETS and its affiliates to enjoin securities violations. A number
of class action lawsuits were brought against Old ETS and certain of its then officers, alleging breach of contract, as well as various fraud allegations.

In
early September 2000, Old ETS and its affiliates filed voluntary petitions under chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") with the
United States Bankruptcy Court for the District of Delaware,In Re: PSA, Inc., ETS Payphones, Inc., ETS Vending, Inc., et al.,
jointly administered under Case No. 00-3570. The bankruptcy filings did not interrupt the payphone servicing operations, but in conjunction with the bankruptcy filing and settlement
of an injunction sought by the SEC, Old ETS agreed to stop entering into new sale-leaseback payphone agreements. Mr. Edwards resigned and agreed not to be involved in the management
and operations of Old ETS going forward.

On
September 29, 2000, the SEC filed a lawsuit against Old ETS and Charles E. Edwards in the United States District Court for the Northern District of Georgia, alleging, among
other things, that (i) the sale-leaseback transactions constituted an illegal sale of securities, (ii) the overall funding of Old ETS, in which its short term revenue 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 registration requirements and the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, including Rule 10b-5
thereunder. Old ETS stopped entering into the
sale-leaseback transactions and it consented to an injunction against any further such transactions, without admitting or denying any of the SEC's allegations. The District Court in the
SEC lawsuit concluded that the sale-leaseback arrangement was an "investment contract" within the meaning of and subject to the federal securities laws. The United States Court of Appeals
for the Eleventh Circuit reversed the District Court's decision. However, on appeal the United States Supreme Court, in a unanimous decision, reversed the Court of Appeals ruling, finding in favor of
the SEC.

In
connection with the bankruptcy filings, the Company retained legal counsel and financial advisors to assist in the assessment and restructuring of the Company's operations and
bankruptcy case. A new Chief Executive Officer, Guy A. Longobardo, was hired in February of 2001. The Company's management and advisors sorted out the financial situation and projections for the
Company's operations post-bankruptcy. Extensive negotiations with the committee of creditors appointed in the bankruptcy case took place over a number of months regarding the best
alternatives for liquidating or reorganizing the Company. These discussions led to the development of a business plan that contemplated streamlined payphone operations concentrated primarily on the
East and Gulf coasts.

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The
business plan called for the sale of numerous payphone routes, including those in the U.S. Virgin Islands, California, Wisconsin, Minnesota, and elsewhere.

Based
upon the business plan, the Company and its affiliates proposed a plan for reorganization through the bankruptcy court on July 25, 2001. The plan called for:



On
June 19, 2001, the Company filed a declaratory judgment action with the Payphone Investors as the class of defendants, to have the sale-leaseback agreements deemed
to be investments and the payphones deemed assets of the Company. The Company's proposal for resolving the litigation with the Payphone Investors, as included in the plan of reorganization filed in
the bankruptcy case, was to issue stock in the Company to the Payphone Investors in place of their sale-leaseback agreements. The plan of reorganization and settlement of the litigation
received overwhelming support from the Payphone Investors.

On
November 14, 2001, the bankruptcy court issued an order confirming the plan of reorganization. With confirmation of the plan, there was a resolution of the declaratory judgment
action with the Payphone Investors. The recharacterization of the sale-leaseback transactions changed approximately $375,000,000 of liabilities of the Company into assets worth about
$10,000,000.

Pursuant
to the reorganization plan, the Company began to auction off various assets, including the payphone routes in the U.S. Virgin Islands, California, Florida, Wisconsin, and
Minnesota. In addition, Old ETS was reincorporated on November 8, 2002, under the laws of the State of Delaware and all of the operating subsidiaries were merged into the new Delaware
corporation. With the sale of the payphone routes and removal of unprofitable payphones, the Company reduced its phones in operation to approximately 19,000 from the initial 50,000.

With
its streamlined operations and the money raised from the sales of assets, the Company was able to exit the chapter 11 bankruptcy proceedings and fund current operations. The
Company exited from bankruptcy on December 5, 2002. Pursuant to the reorganization plan, the Payphone Investors became entitled to receive new, post-bankruptcy common stock in the
reorganized Company.

Litigation Trust

As part of the bankruptcy proceedings a trust was established to pursue certain claims and causes of action the Company had against the former management, Charles
Edwards, the independent sales agents who may have violated securities or other laws in the solicitation of the sale-leaseback transactions, and claims for money that was wrongfully
transferred from Old ETS prior to the bankruptcy filing. The trust also includes claims for the recovery of money that was paid by the Company within the ninety days prior to the bankruptcy filing.
This "Litigation Trust" was established for the benefit of the Payphone Investors and the other general unsecured creditors of Old ETS. The Litigation Trust is administered by Darryl
Laddin, Esq., of the law firm Arnall Golden Gregory LLP, a trustee selected by the creditors' committee in the bankruptcy case. The Litigation Trust's assets do not include proceeds from
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 that may have been wrongfully assessed by various local exchange carriers, or similar litigation.

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Funds
in the Litigation Trust will not go to the Company. Eighty-five percent of the proceeds of the Litigation Trust, after expenses, will go to the Payphone Investors.
However, rights to receive payment from the Litigation Trust are completely separate from the Common Stock the Payphone Investors receive. If a Payphone Investor sells the Common Stock received, the
Payphone Investor will still be entitled to receive any proceeds attributable to them from the Litigation Trust. Purchasers of Common Stock will not receive any rights to proceeds from the Litigation
Trust with such Common Stock. The remaining fifteen percent of the Litigation Trust proceeds will be distributed to the other general unsecured creditors of Old ETS.

The
Company provided an initial $100,000 funding for the Litigation Trust. Pursuant to the Litigation Trust Agreement between the Company and the Litigation Trustee, in the event that
the trust has insufficient funds with which to satisfy professional fees and other expenses of the Litigation Trust, the Company is required to advance funds to the Litigation Trust. The amount
required to be advanced by ETS is subject to limitation as provided in the Litigation Trust Agreement. The Litigation Trust Agreement also provides that upon the receipt of funds by the Litigation
Trust, the Litigation Trust is required to reimburse the Company for all amounts advanced except for the initial $100,000 payment. All funds advanced by ETS to date have been reimbursed by the
Litigation Trust.

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 Northern District of Georgia. Payments to vendors and shareholders were made as of December 31, 2004 in the amount of $1,612,216, with the remainder of the settlement in the amount of
$392,118 being paid out by the end of February, 2005.

Common Stock Allocation

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

As
of December 31, 2004, the total number of shares of our Common Stock outstanding, after giving effect to distributions to Payphone Investors and adjustments resulting from
reconciliation of allowed Payphone Investor Claims, was 4,987,624. Approximately 385,347 of these shares have restrictions limiting their transferability as a result of a settlement of litigation by
the Company against the holders of the shares. Pursuant to the settlement, these shareowners are, among other things, restricted from selling more than 25% of their individual aggregate ownership
during any fiscal quarter until the second anniversary of the distribution of the stock (May 12, 2005) without providing the Company notice and the right of first refusal to purchase any of the
restricted shares that are proposed to be sold. The right of first refusal does not apply in certain circumstances, including in the event a market exists for the shares and certain levels of trading
activity are met. The Certificate of Incorporation, confirmed as part of the Plan of Reorganization, authorizes the issuance of up to 6,000,000 shares of Common Stock, including those issued to the
Payphone Investors.

Payphone Industry Development and Current Regulatory Environment

The initial growth of Old ETS in the 1990s coincided with a period of rapid expansion of payphone providers who were independent from the RBOCs. Before the 1984
break-up of AT&T into the RBOCs, there was no obligation to provide line service to payphones. AT&T operated essentially

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all
the payphones, and had no incentive to provide telephone lines to competitors. AT&T paid relatively small commissions to site owners for the right to place a payphone on their premises, which AT&T
presented as more of a utility service to the business owner and their customers than as a profit source for the business.

In
older payphone systems all of the technology required to provide coin service was located at AT&T's local exchanges and was supplied to each payphone via a "coin line." The
development of microprocessor-based payphones allowed these functions to be performed within the telephone rather than at the exchanges. This technology provided the capability for independent
payphone providers to route calls and determine the proper rate charges. The new systems also included maintenance diagnostics, coin administration, credit card, and reporting features. Independent
payphone providers could now route calls to alternate long-distance and operator services, and store and retrieve call data and billing information. The technological improvements allowed
the owner to share in the non-coin long-distance revenues generated by the payphone, reduce the cost of maintenance and collection, and to monitor coin losses, among other
things.

With
the break-up of AT&T the RBOCs took over the payphone businesses in their respective areas of the country. However, the court-ordered and regulatory efforts associated
with the break-up of AT&T included requirements to provide coin line service to independent payphone operators at competitive rates. Following a series of FCC and state regulatory rulings
in the 1980s and 1990s, the independent payphone sector developed as an alternative to the payphone service offered by the regional telephone companies. These independent operators found that they
could make a substantial profit even after paying the site owners higher commissions than their RBOC competition.

Prior
to 1987, coin calls were the sole source of revenues for independent payphone operators because there was no mechanism for them to receive revenue from collect and
dial-around calls. For most long-distance calls placed on an independent payphone the caller would have to insert a lot of coins or call collect. AT&T would collect and keep
all the money for the call from the other party (except the change that the caller put in the phone). Beginning in 1987, technological and regulatory developments allowed competitive
long-distance services using calling cards and other code numbers (offered by companies such as Sprint and MCI) to develop. These services, which competed with AT&T's
long-distance and operator services, offered independent payphone operators commissions for directing operator assisted or calling card calls to them. However, the payphone operators still
did not receive any revenue from calls where the caller "dialed around" the default service or placed a collect call.

In
1990, Congress responded to concerns about rates that some of these alternate long-distance providers charged for interstate calls from payphones and other locations (such
as hotels and hospitals) by adopting the Telephone Operator Consumer Services Improvement Act ("TOCSIA"). TOCSIA created new requirements for long-distance companies and the call
aggregators (including the payphone service providers) who utilized the long-distance operator services. In addition, the act directed the FCC to consider the need to compensate
independent payphone operators for all dial-around calls. In May 1992, the FCC ruled that independent payphone operators were entitled to dial-around compensation.
Because of the lack of a system to track compensable calls, reimbursement was originally set at $6.00 per payphone per month.

In
1996, Congress enacted the Telecommunications Act, eliminating long-standing legal barriers separating regional telephone companies, long-distance carriers,
and cable television companies. The Telecommunications Act also preempted numerous state laws and regulations, in an effort to foster greater competition in all telecommunications market sectors. As a
result, the Telecommunications Act

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helped
to accelerate the widespread deployment of independent payphones. Section 276 of the Telecommunications Act focused on several payphone-industry related issues:



The
dial-around call compensation issue has developed primary importance because of the potential revenue impact for the PSPs. Many years of FCC, court, carrier, and PSP
actions have culminated in the Fifth Order on Reconsideration and Order on Remand (the "Interim Order"), issued by the FCC on October 23, 2002. This order resolved the remaining issues
surrounding the prior periods of compensation rates and the methodology of payment. Specifically, there were four time periods involved: (1) the "Early" period from June 1992 through
November 1996; (2) the "Interim" period from November 7, 1996 to October 6, 1997; (3) the "Intermediate" period from October 7, 1997 to April 20, 1999;
and (4) the "Post-intermediate" period after April 20, 1999. The FCC mandated a true-up process to reconcile over-payment and under-payment situations
created by years of different reimbursement structures that were now changed as a result of this order. The true-up process included a calculation for interest due from the initial payment
point to the reconciling payment, whether the carrier owed the PSP or vice versa.

The
FCC decided that no compensation was due from the carriers to the PSPs for the Early period because of the lack of tracking and accounting systems to determine a fair payment scheme.

The
rate for the Interim period was revised to $35.224 per payphone per month ($0.238 multiplied by a 148 monthly call industry average). The calculation had originally been 131
calls multiplied by $0.35, and had undergone several revisions from 1997 to the date of the Interim Order. Revisions for cost methodology, allowance for flexible automatic number identification cost,
and interest assessments due to the delayed nature of carrier payments (carrier call information is routed through several major clearinghouses on a quarterly basis before payment reaches the PSPs)
were all factored into the payment rationale. The FCC directed each carrier with over $100 million in annual revenues to pay a proportionate amount of the $35.224, depending on their call
volume share in the marketplace. The true-up process occurring in 2003 and ongoing currently has usually resulted in amounts owed by the carriers to PSPs, depending on their original
payments to the PSPs. In a few instances, the PSPs owed payment to the carriers.

The
rate for the Intermediate period also went through several modifications over time. The FCC finally established $0.238 per call (or $35.224 per phone, if call tracking was not
available) as the

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payment
for the period. This typically resulted in a net amount due the carrier since those that had previously paid did so at rates as much as $0.284 per call.

In
the first quarter of 1999, the FCC released the Third Report and Order and Order on Reconsideration of the Second Report and Order. This Order set the per-call
compensation rate at $0.24. This rate had undergone some adjustments that were effective for the Intermediate period. For the Post-intermediate period, the FCC established a $35.52 default
rate per phone per month ($0.24 multiplied by a 148 monthly call industry average), if no
per-call compensation had been paid by the carrier. Again, this rate varied by carrier, depending on their assessed share of the market.

On
August 29, 2002 and September 4, 2002 respectively, the American Public Communications Council ("APCC") and the RBOCs filed petitions with the FCC to revisit and
increase the dial-around compensation rate level. Using the FCC's existing formula and adjusted only to reflect current costs and call volumes, the APCC and RBOCs petitions supported an
approximate doubling of the then current $0.24 rate. In response to the petitions, on September 30, 2002 the FCC placed the petitions out for comment and reply comment by interested parties,
seeking input on how the FCC should proceed to address issues raised by the filings. On October 28, 2003 the FCC adopted an Order and Notice of Proposed Rulemaking (the "October 2003
Rulemaking") to determine whether a change to the dial-around rate is warranted, and if so, to determine the amount of the revised rate. In the October 2003 Rulemaking, the FCC
tentatively concluded that the methodology adopted in the Third Report and Order is the appropriate methodology to use in reevaluating the default dial-around compensation rate and
requested comments on, among other things, the cost studies presented in the petitions. In August 2004, the FCC issued an order revising the default compensation rate to $0.494 per call. The
rate became effective on September 27, 2004.

Another
critical industry issue involves the ability of the competitive local exchange carriers to retain access to unbundled network elements ("UNE") originally mandated by the FCC.
This open access to the local exchange carriers network elements created a competitive pricing environment that benefited the PSPs. Network elements were defined as "a facility or equipment used in
the provision of a telecommunications service" that includes "...features, functions, and capabilities that are provided by means of such facility or equipment, including subscriber numbers,
databases, signaling systems, and information sufficient for billing and collection or used in the transmission, routing, or other provisions of a telecommunications service."

In
the 2003 Triennial Review Order, the FCC revisited the UNE issue and determined that the local exchange carriers must continue to allow competitive local exchange carriers to purchase
those elements necessary to offer local service to PSPs as an alternative to the local exchange carriers' local service. On March 2, 2004, the United States Court of Appeals overturned parts of
the Triennial Review Order, among them, the unbundling rules that affect the PSPs' access to local line service.

The
FCC ultimately responded to the court's decision with a December 2004 order that became effective March 11, 2005. The order significantly reduced the incumbent local
exchange carrier's obligation to make network elements available to other carriers and providers such that after a twelve month transition period, incumbent local exchange carriers will have no
obligation to provide competitive local exchange carriers with unbundled access to mass market switching. The order provides for increase pricing for such access during the transition period. While
the eventual outcome is uncertain, the effect of the order may increase costs to PSPs.

Regulatory
actions and market factors, often outside the Company's control, could significantly affect the Company's dial-around compensation revenues and line access
charges. These factors include (i) the possibility of administrative proceedings or litigation seeking to modify the dial-around compensation rate, (ii) ongoing technical or
other difficulties in the responsible carriers' ability and willingness to properly track or pay for dial-around calls actually delivered to them, and (iii) the

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possibility
of administrative proceedings or litigation that may change UNE access by competitive local exchange carriers and therefore affect the cost of local line service to the PSPs.

As
a result of the changes created by the Telecommunications Act, regulations adopted by the FCC to implement its provisions, and competition from cellular and other wireless forms of
communication, we believe that the public payphone industry continues to undergo fundamental changes. The rapid growth in wireless telephone usage has resulted in declining payphone usage and
revenues. The RBOCs, which control a major share of the payphone market, are no longer permitted to subsidize their public communications businesses with profits from their regulated businesses. It is
estimated that the embedded base of payphones in the United States has contracted from approximately 2.4 million terminals in operation in 1998 to approximately 1.2 million terminals
today, and the market is expected to contract further. BellSouth Corporation exited the public communications business altogether in December 2003. While opportunities exist for the PSP,
competitive and regulatory pressures continue to create a challenging environment as the telecommunications business evolves.

Current Operations

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

Site Contracts

The term of a location agreement with a site owner generally ranges from three to ten years and usually provides for an automatic renewal of the term of the
contract unless it is canceled by the location owner pursuant to the terms of the agreement. We can generally terminate a location agreement on 30 days' prior notice to the location owner if
the payphone does not generate sufficient total revenues for two consecutive months. The duration of the contract and the commission arrangement depends on the location, number of payphones and
revenue potential of the account.
Depending upon the revenues generated by the payphones, we may pay the location owner a commission (typically in accordance with a formula based upon a percentage of the payphone's revenue), or we may
receive a payment from the location owner for providing a payphone to the location.

As
of December 31, 2004, we owned and operated approximately 16,000 payphones.

Coin Calls

Our public payphones generate coin revenues primarily from local calls. Historically, the maximum rate that we could charge for local calls was set by state
regulatory authorities at $0.25 in most cases. Since local payphone coin rates were deregulated in October 1997, we have charged $0.25 to $0.50, depending upon the location, to place a local
coin call from our payphones.

Long-distance
coin calls are typically carried by a long-distance carrier that has contracted to provide transmission services to our payphones. The Company pays
a charge to the long-distance carrier each time the carrier transports a long-distance call for which we receive coin revenue from an end user.

Non-Coin Calls

We also receive revenues from non-coin calls made from our payphones. These non-coin calls include credit card, calling card, prepaid
calling card, collect and third-party billed calls where the caller

10

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dials
"0" plus the number or simply dials "0" for an operator. Non-coin calls often require a number of services, including automated or live operators to answer the call, verifying
billing information, validating calling cards and credit cards, routing and transmitting the call to its destination, monitoring the call's duration and determining the charge for the call, and
billing and collecting the applicable charge. We have contracted with a limited number of operator service providers to handle these calls and perform all associated functions, while paying us a
commission on the revenues generated thereby.

In
accordance with the Telecommunications Act, we also receive additional non-coin revenue from carriers for "dial-around" calls made from our payphones. A
dial-around call is made by dialing an access code for the purpose of reaching a long-distance carrier other than the one designated by the payphone operator or using a
traditional "toll free" number, generally by dialing a 1-800, 888, 877, 866, or 855 number, or a seven-digit "1010XXXX" code.

Payphone Base

As of December 31, 2004, the Company had approximately 16,000 payphones in operation in 29 states, Puerto Rico, and the District of Columbia, compared with
approximately 17,000 in operation as of December 31, 2003, and 19,000 in operation at December 31, 2002. As of December 31, 2004, the states in which we have the greatest numbers
of telephones installed were Texas, North Carolina, Georgia, and New York.

We
select locations for our payphones where there is typically high demand for payphone service, such as shopping centers, convenience stores, service stations, grocery stores, hotels,
restaurants, airports, truck stops, and bus terminals. We rely on a site survey that examines factors including traffic patterns as well as any available historical revenue information in determining
whether to install a payphone.

Technology

Our payphones utilize technology that provides voice synthesized calling instructions, counts coins deposited during each call, informs the caller at certain
intervals of the time remaining on each call, and identifies the amount of any additional deposit needed in order to continue the call. The payphones can be programmed from our central computer
facilities to update rate information or to direct different types of calls to particular carriers. Our payphones can also distinguish coins by size and weight, report to its central host computer the
total amount of coin in the coin box, perform self-diagnosis and automatically report problems to a pre-programmed service number and immediately report attempts at vandalism
or theft. Many of our payphones operate on power available from the telephone lines, thereby avoiding the need for and reliance upon an additional power source at the installation location.

We
utilize proprietary and non-proprietary software to continuously track coin and non-coin revenues from each payphone, as well as expenses relating to each
payphone, including commissions payable to location owners. Technology utilized by the Company also allows us to:



We
provide all technical support required to operate the payphones, such as computers and software and hardware specialists, from our headquarters near Atlanta, Georgia. Each of our
local offices maintains inventories, equipment, spare parts, and accessories for immediate deployment in the field. The Company has not conducted any Company sponsored or customer sponsored research
and development activities during the last two fiscal years.

11

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Telephone Equipment

We assemble payphones from components manufactured by outside suppliers. In addition, we rely on outside suppliers for local line access, billing and collection
services, long-distance, and operator services. We believe that multiple suppliers are available to meet all of the Company's product and service needs at competitive prices and rates, and
expect the availability of such products and services to continue in the future.

Our
payphones comply with all material regulatory requirements regarding the performance and quality of payphone equipment and have all of the operating characteristics required by the
applicable regulatory authorities, including free access to local emergency ("911") telephone numbers, dial-around access to all available carriers, and automatic coin return capability
for incomplete calls. We employ approximately 100 field service technicians, who collect coin boxes and clean and maintain a route of payphones. The technicians also respond to trouble calls made by
location owners, by users of payphones or by the telephone itself as part of its internal diagnostic procedures. Some technicians are also responsible for the installation of new payphones. Due to our
polling and electronic tracking and trouble reporting systems and the ability of our field service technicians to perform on-site service and maintenance functions, we are able to limit
the frequency of trips to the payphones as well as the number of employees needed to service the payphones.

We
re-utilize parts from payphones removed from field service for repair and installation of payphones and when necessary purchase new or refurbished equipment from various
suppliers. We often assemble, refurbish, and replace payphones or component parts obtained from our inventory or purchased from component manufacturers. These components generally include a metal
case, an integrated circuit board incorporating a microprocessor, a handset and cord, and a coin box and lock.

Local Lines

We obtain local line access from a number of local exchange carriers and competitive local exchange carriers, including MetTel, ECI, BellSouth, Verizon, SBC
Communications, AllTel, Sprint, and a number of other suppliers of local line access. We pay monthly line and/or usage charges to these local exchange carriers to provide service to our payphones.

Long-distance and Operator Services

We outsource our long-distance calls to a long-distance carrier and our operator service operations to a limited number of operator
services providers. The revenue we receive from operator service providers is based on the volume of calls carried and the amount of revenues generated by the calls. We also receive revenues from
long-distance carriers for calls made from our public payphones, including dial-around calls when the caller dials a code to obtain access to an operator service provider or a
long-distance company other than one designated by us.

We
expect the basic availability of such products and services to continue in the future; however, the continuing availability of alternative sources cannot be assured. Although we are
not aware of any current circumstances that would require us to seek alternative suppliers for any material portion of the products or services used in the operation of our business, transition from
our existing suppliers, if necessary, could have a disruptive effect on our operations and could give rise to unforeseen delays and/or expenses.

Customers, Sales, and Marketing

We contract directly with businesses and also with intermediaries for location agreements. As of December 31, 2004, corporate payphone accounts of 100 or
more payphones represented approximately thirty-one percent of our installed payphone base. One customer accounted for more than ten percent of the Company's payphone operations revenues
in 2004.

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Employees

As of December 31, 2004, the Company had 133 full-time employees, none of whom are subject to a collective bargaining agreement. The Company
believes that its relationship with its employees is good.

Environmental Compliance

The Company has not experienced any and does not anticipate any material effects, during the current fiscal year, on the Company's capital expenditures, earnings,
and competitive position from compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment.

Competition

We compete with other telecommunication providers including providers of wireless services, other payphone providers, and long-distance carriers.

We
compete with providers of wireless communications services for both local and long-distance traffic. Certain providers of wireless communication services have introduced
rate plans that are competitively priced which have negatively impacted the usage of payphones throughout the nation.

We
believe that the competitive factors among payphone providers are:



We
believe we are currently competitive in each of these areas; however most local exchange carriers and some independent payphone providers that we compete against may have
substantially greater financial, marketing, and other resources than we do.

We
also compete with long-distance carriers that provide dial-around services which can be accessed through our payphones. Certain national
long-distance operator service providers and prepaid calling card providers have implemented extensive advertising, promotions, and distribution schemes which have increased
dial-around activity on payphones, thereby reducing coin revenues and non-coin traffic to our primary providers of operator-assisted services.

In
December 2003, BellSouth, which operated the largest payphone network in the nine state region comprising the southeastern United States (via its wholly-owned subsidiary
BellSouth Public Communications, Inc.), exited the payphone business. While the Company benefited from this development by obtaining contracts to replace over 2500 BellSouth payphones, the
BellSouth exit is an indication of the difficulties faced by payphone owners as a result of various competitive and regulatory factors impacting the payphone industry. It is estimated that the
embedded base of payphones in the United States has contracted from approximately 2.4 million terminals in operation in 1998 to approximately 1.2 million terminals today.

Business Strategy

Our objectives are to continue to rationalize our overall cost structure, increase route density, improve service quality, monitor and remove underperforming
payphones, and add profitable payphones to our base.

13

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Cost structure

The Company has continued the cost-reduction efforts made during the reorganization process. Components of these efforts include:



Service Quality



Route Density



14

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Risk Factors

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



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



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



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



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



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



Our revenue from payphone operations is affected by seasonal variations. Because many of our payphones are located outdoors, weather patterns have differing
effects on our revenue depending on the region of the country where the payphones are located and the enclosure housing of the phone. For example, our payphones throughout the midwestern and eastern
United States produce their highest call volumes during the second and third quarters, when the climate tends to be more

15

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favorable.
Seasonal variations in revenues could have a material adverse effect on our business. Changes in the geographic distribution of our payphones may in the future result in different seasonal
variations in our results.



Our Common Stock is not listed on any stock exchange. Our Common Stock was issued to approximately 12,500 individuals and entities who entered into agreements
with Old ETS to purchase payphones. Ownership interests are tracked by the transfer agent, American Stock Transfer and Trust Company ("AST&T"), and transfers of ownership may be documented through
AST&T. The Common Stock is not traded on any recognized stock exchange, stock market or bulletin board system and there are no market makers for the Common Stock. There can be no assurance that an
active or liquid trading market for our shares of Common Stock will develop or be maintained. The number of shares of Common Stock distributed to each Payphone Investor was determined by formula
confirmed by the bankruptcy court and that formula may not be indicative of the market price for the Common Stock following registration.

Item 2. Description of Property.

We lease space in the following locations:

LOCATION

GENERAL CHARACTERISTICS1490 Westfork Drive, Suite G
Lithia Springs, GA 30122

Corporate Office and Branch Office309 Technical Ct.
Garner NC 27529

Branch Office715A S. Main Street
Dobson, NC 27017

Branch Office927 Crosstimbers
Houston, TX 77022

Branch Office555 63rd Street
Brooklyn, NY 11220

Branch Office25 Simon Madera,
Parcelas Falu, San Juan, PR 00924

Branch Office650A Leson Ct.
Harvey, LA 70058

Branch Office


We
believe that suitable additional or alternative space will be available on commercially reasonable terms as needed, but that existing facilities will be sufficient for operational
purposes through the end of the leases.

16

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Item 3. Directors and Executive Officers and Significant Employees.

The following sets forth information concerning our executive management and directors, including each person's name, age as of December 31, 2004 and
principal occupation or employment during the past five years.

|Name                 |  | Age |  | Position                                                                 
|-------------------- |  | --- |  | -------------------------------------------------------------------------
|Guy A. Longobardo    |  | 43  |  | President, Chief Executive Officer and Chairman of the Board(1)(2)       
|Michael H. McClellan |  | 53  |  | Executive Vice President, Chief Financial Officer and Treasurer(1)(2)    
|David C. Jones       |  | 61  |  | Vice President of Human Resources and Investor Relations and Secretary(1)
|Jeffrey E. Fennell   |  | 42  |  | Senior Vice President and Chief Operating Officer(1)                     
|James B. Leimbach    |  | 50  |  | Vice President of Accounting(1)                                          
|Michael H. Buck      |  | 70  |  | Director(2)                                                              
|S. Gregory Hays      |  | 47  |  | Director(2)                                                              
|Michael M. Scott     |  | 67  |  | Director(2)                                                              

---

Mr. Longobardo
is the President, Chief Executive Officer and Chairman of the Board of Directors. Mr. Longobardo joined ETS in February 2001. Prior to that time he
served as General Counsel, Vice President of Corporate Development and Corporate Secretary of AMNEX, Inc. since March 1998 and assumed the duties of Chief Executive Officer of
AMNEX, Inc. and its subsidiaries after AMNEX had filed for bankruptcy in May of 1997. From February 1995 until joining AMNEX, Mr. Longobardo was employed by HSBC
Securities, Inc., the U.S. securities subsidiary of HSBC Holdings plc, where he most recently served as a Managing Director and Head of Corporate Finance in its Investment Banking Division.
From 1985 through February 1994, he was an attorney in the Corporate Department of the law firm of Milbank, Tweed, Hadley & McCloy. Mr. Longobardo holds a BA degree in Economics
from Williams College and a JD from Columbia University School of Law. Mr. Longobardo serves as a director on the board of the American Public Communications Council.

Mr. McClellan
is the Executive Vice President and Chief Financial Officer of the Company. He also serves as Corporate Treasurer. Mr. McClellan earned his Bachelor of
Science Degree from Stanford University in Palo Alto, California. He later earned his MBA degree in Finance and Accounting from Rollins College in Winter Park, Florida. Prior to joining us in
December 2000, Mr. McClellan served as Vice President-Finance for UPS Truck Leasing. He joined UPS Truck Leasing in 1987 and held various positions in the Finance Department. At UPS,
Mr. McClellan was responsible for creating the financial modeling and forecasting, cost reduction requirements and programs improving returns on invested capital. Mr. McClellan serves as
an alternate director on the board of the American Public Communications Council.

Mr. Jones
is the Company's Vice President of Human Resources and Investor Relations. He also serves as Corporate Secretary. He joined ETS in September 1999.
Mr. Jones earned his Bachelor of Arts Degree in English from the University of Richmond, Richmond, Virginia. From 1997 to 1999, Mr. Jones was Vice President of Human Resources for One
Source, a commercial cleaning and landscaping company with annual sales in excess of $826 million and 38,000 employees. Mr. Jones managed a staff of ten Human Resources professionals in
developing policies and procedures,

17

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overseeing
safety performance, designing benefit programs, and developing compensation structure. Mr. Jones previously held Senior Human Resources positions with Scientific Games, Inc.
in Atlanta, Georgia, and Avondale Mills in Sylacauga, Alabama.

Mr. Fennell
is the Company's Senior Vice President and Chief Operating Officer. Mr. Fennell joined the Company in April 2003. Mr. Fennell earned a degree from
the Community College of the Air Force, majoring in Electronics Engineering Technology. Prior to joining us, from 2000 to 2002, Mr. Fennell was Vice President of North American Operations at
Vital Network Services, a provider of voice and data networks to corporations. At Vital Network Services, he managed over one hundred employees including Area Operations Managers, Project Managers,
and Telecommunication Technicians. Mr. Fennell previously held various positions with Milgo/Timeplex Solutions in Clearwater, Florida (1988-2000) and US West Information Systems in
Atlanta, Georgia.

Mr. Leimbach
is the Company's Vice President of Accounting. Mr. Leimbach joined the Company in May 2003. He earned his BA degree from Furman University and his
Master of Accountancy from the University of Georgia. He has also been an Accounting Instructor at Perimeter College in Atlanta. Prior to joining ETS in May 2003, Mr. Leimbach was
employed as a Certified Public Accountant (CPA) with Stresser & Associates, CPA's, in Atlanta, from February 2002 to May 2003. Mr. Leimbach previously held the position of
Controller with Lenze Corporation (March 1999 to February 2002), responsible for all accounting, cash management, and annual audits. He also held several positions, including Controller,
in the six years he was with International Telemedia Associates, Inc. responsible for monthly financial statements, bank relations, annual audits, and local exchange carrier payments. Earlier
in his career, Mr. Leimbach worked for BellSouth as a Manager, and Arthur Andersen & Company as an Auditor. Mr. Leimbach has held an active license as a Certified Public
Accountant in the State of Georgia since 1984.

Mr. Michael
H. Buck was appointed a Board Member in November 2002 as a Class I Director until the annual meeting after the 12/31/2003 fiscal year end.
Mr. Buck continues to serve as a Director in 2004 and the extension of his term will be voted on at the 2005 annual meeting. Mr. Buck was President of Buckland Group Inc, a Sears
Authorized Dealer from November 2001 until December 2003. Mr. Buck was also owner of Communications Opportunities from 1998 until 2000. Mr. Buck also served as a member of
the creditors committee during the Old ETS bankruptcy. Mr. Buck earned his BA Degree from Dartmouth College. Mr. Buck also was a Registered Representative for a New York Stock Exchange
member firm from 1968 until 1997. Mr. Buck acted as an agent selling payphone leases for Old ETS.

Mr. S.
Gregory Hays was appointed a Board Member in July 2003 as a Class II Director until the annual meeting after the 12/31/2004 fiscal year end. Mr. Hays
has been Managing Director of Hays Financial Consulting in Atlanta, Georgia since July 1, 2001. Previously Mr. Hays was Executive Vice President for William G. Hays &
Associates, Inc. from January 1, 1990 until June 30, 2001. Mr. Hays earned his BBA degree from Stetson University, and his Masters Degree in Finance from Georgia State
University. In 2003 Mr. Hays received his professional designation as a Certified Insolvency & Restructuring Advisor.

Mr. Michael
M. Scott was appointed a Board Member in November 2002 as a Class II Director until the annual meeting after the 12/31/2004 fiscal year end.
Mr. Scott has been self-employed as the owner of Sentinel Investment and Insurance Services since October 1, 1992, selling insurance, tax services, and until
December 2001, securities. Mr. Scott earned his B.S and Masters of Science degrees from Cambridge University in England. He also received his Chartered Financial Consultancy designation
from American College in Pennsylvania. Mr. Scott acted as an agent selling payphone leases for Old ETS.

Each
director serves for a term ending on the date of the annual meeting following the date indicated in the chart or until the director's successor is duly elected, appointed or seated.
The term of

18

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Class I
Directors expires on the date of the annual meeting following December 31, 2003. The term of Class II Directors expires on the date of the annual meeting following
December 31, 2004. The term of Class III Directors expires on the date of the annual meeting following December 31, 2005.

Name

Class

Governing DateMichael H. Buck

I

December 31, 2003S. Gregory Hays

II

December 31, 2004Michael M. Scott

II

December 31, 2004Guy A. Longobardo

III

December 31, 2005Michael H. McClellan

III

December 31, 2005


The
Audit Committee consists of Messrs. Scott, Buck and Hays. The Audit Committee makes recommendations to the Board regarding the selection of independent auditors, reviews the
results and scope of the audit and other services provided by the Company's independent auditors and reviews and evaluates the Company's audit and control functions.

The
Company has issued a Code of Ethics, which is attached hereto as Exhibit 14.

The
Compensation Committee consists of Messrs. Scott, Buck and Hays. Mr. Hays serves as the independent audit committee financial expert within the meaning of
Section 407(b) of the Sarbanes-Oxley Act. The Compensation Committee reviews and recommends for Board approval compensation for executive officers and makes policy decisions concerning salaries
and incentive compensation for employees and consultants of the Company.

Item 4. Remuneration of Directors and Officers.

The following table sets forth the aggregate annual remuneration of each of the three highest paid persons who are officers or directors and the aggregate annual
remuneration of the officers and directors 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
|--------------------------------------- |  | ---------------------------------------------------- |  | ----------------------
|Guy A. Longobardo                       |  | President and Chief Executive Officer                |  | $                     
|Michael H. McClellan                    |  | Executive Vice President and Chief Financial Officer |  | $                     
|David C. Jones                          |  | Vice-President, Human Resources                      |  | $                     
|Officers and Directors as a Group(1)    |  |                                                      |  | $                     

---

Directors Compensation

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

Employment Agreements

The Company has entered into employment agreements with Guy A. Longobardo, Michael H. McClellan and Jeffrey E. Fennell. The Employment Agreement of
Mr. Longobardo (the "Longobardo Agreement"), which by its terms would otherwise have expired on December 5, 2004, was amended in January 2005 to, among other things, extend its
term to December 5, 2005, and reduce, at the request

19

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of
Mr. Longobardo, his base salary to $240,000 (though for the purposes of calculations relating to certain termination events the $360,000 provided for in the Longobardo Agreement will be
retained). The employment agreement of Mr. McClellan (as amended, the "McClellan Employment Agreement"), pursuant to which he is paid a base salary of $165,000, expires on December 5,
2006. The employment agreement of Mr. Fennell (the "Fennell Employment Agreement") expires on January 28, 2005 and provides for a base salary of $134,500 per year. The Longobardo
Employment Agreement, as amended, the McClellan Employment Agreement and the Fennell Employment Agreement provide for severance payments equal to six months base salary, twelve months base salary and
twelve months base salary, respectively, as well as the continuation of certain medical insurance benefits, if the employment of the individual is terminated without cause or upon certain other events
including changes in control (in each case as defined in the respective agreements).

The
Company has also entered into Change in Control Agreements with James B. Leimbach, David C. Jones and Randall L. Garrett, Assistant Vice President of Payphone Sales, Marketing, and
Operations, pursuant to which they will be paid six months base salary and retain certain medical insurance benefits upon certain events relating to a change in control, as defined in the Change in
Control Agreement.

Item 5. Security Ownership of Management and Certain Security Holders.

The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of December 31, 2004 for
(a) each of the three highest paid persons who are officers or directors, (b) all directors and current executive officers of the Company as a group. The Company does not have any ten
percent (10%) shareholders. Except as otherwise noted, the Company believes that the persons or entities in this table have sole voting and investing power with respect to all the shares of Common
Stock owned by them. Any information appearing below concerning persons other than officers and directors of the Company is to the Company's best knowledge based on information obtained from the
Company's transfer agent.

(1)

(2)

(3)

(4)Title of Class

Name and Address of Owner

Amount owned

Percent of ClassCommon

Guy A. Longobardo(1)
1490 Westfork Drive Suite G
Lithia Springs, GA 30122

0

*Common

Michael H. McClellan(1)
1490 Westfork Drive Suite G
Lithia Springs, GA 30122

0

*Common

David C. Jones(1)
1490 Westfork Drive Suite G
Lithia Springs, GA 30122

0

*Common

Officers and Directors as a Group(2)

5760

*


---

Item 6. Interest of Management in Certain Transactions.

None.

20

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PART II

Item 1. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters.

There is no public trading market for the Common Stock of the Company. As of December 31, 2004 there were approximately 12,500 holders of record of our
Common Stock.

To
date, the Company has not paid any dividends on the Common Stock, and the Board of Directors of the Company does not currently intend to declare cash dividends on the Common Stock.
Any future cash dividends would depend on future earnings, capital requirements and the Company's financial condition, Delaware law and other factors deemed relevant by the Board of Directors.

Item 2. Legal Proceedings.

On September 11 and September 21, 2000, Old ETS and certain of its affiliates filed for protection from creditors under chapter 11 of
Title 11 of the U.S. Code. See "Part I. Item 1. Description of BusinessPrevious Operations." While the Company successfully emerged from bankruptcy on
December 5, 2002, the bankruptcy case is still pending in Delaware and the bankruptcy court still retains jurisdiction over various pending matters including resolution of certain disputed
creditor claims, avoidance actions and certain causes of action brought by the trustee of the Litigation Trust.

Pursuant
to the bankruptcy court's order confirming the plan of reorganization and other bankruptcy court orders, any and all claims and causes of action against the Company arising
prior to the effective date of the plan of reorganization, December 5, 2002, were discharged and forever barred from being asserted against the Company, regardless of whether a proof of claim
therefore was filed. In accordance with sections 524 and 1141 of the Bankruptcy Code, the discharge provided for in the plan and confirmation order act as an injunction against the commencement
or continuation of any action to collect, offset or recover any claims discharged in the bankruptcy. While occasionally the Company receives claims or demands by creditors attempting to assert
discharged claims, as a result of the bankruptcy case and confirmation and other orders, the claims are barred from being prosecuted against the Company.

Item 3. Changes in and Disagreements with Accountants.

None.

Item 4. Submission of Matters to a Vote of Security Holders

During the fourth quarter of the 2004 fiscal year, the Company solicited proxies from shareholders for purposes of voting on the election of Michael H.
Buck as a Director and the ratification of the selection of Tauber & Balser, P.C. as independent public accountants of the Company at the Company's annual meeting on December 1, 2004.
The Company was unable to achieve a quorum as of the date of the annual meeting and no matters were voted upon at the annual meeting. The Company will solicit proxies from shareholders related to the
matters that were not voted upon during the 2004 annual meeting and will, upon reaching a quorum, submit them to the vote of shareholders at the Company's 2005 annual meeting.

Item 5. Compliance with Section 16(a) of the Exchange Act

Section 16 of the Securities Exchange Act requires that officers and directors of the Company, as well as those persons who beneficially own more than 10%
of the outstanding common stock of the Company, file reports of security ownership and changes in such ownership on Forms 3, 4 and 5 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, 2004, such filing requirements were
complied with by its officers, directors and applicable shareholders.

21

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PART F/S

TABLE OF CONTENTS

|                                  |  | Page(s)
|--------------------------------- |  | -------
|Independent Auditors' Report      |  | 23     
|Balance Sheet                     |  | 24     
|Statement of Operations           |  | 25     
|Statement of Shareholders' Equity |  | 26     
|Statement of Cash Flows           |  | 27     
|Notes to Financial Statements     |  | 28-34  

22

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Report of Independent Registered Public Accounting Firm

To
the Board of Directors and Shareholders
ETS Payphones, Inc.

We
have audited the accompanying balance sheet of ETS Payphones, Inc. (the "Company") as of December 31, 2004, and the related statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 2004 and 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on these financial statements.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ETS Payphones, Inc. as of December 31, 2004,
and the results of its operations and its cash flows for the years ended December 31, 2004 and 2003 in conformity with accounting principles generally accepted in the United States of America.

/s/TAUBER & BALSER, P. C.Atlanta, Georgia
February 17, 2005

23

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ETS PAYPHONES, INC.        BALANCE SHEET        DECEMBER 31, 2004

|ASSETS                                     |                                                                                                               
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------
|CURRENT ASSETS                             |                                                                                                               
|                                           | Cash                                                                                                          
|                                           | Cash, restricted                                                                                              
|                                           | Accounts receivable, less allowance for doubtful accounts of $1,237,867                                       
|                                           | Inventories                                                                                                   
|                                           | Prepaid expenses                                                                                              
|                                           |                                                                                                               
|                                           |                                                                                                               
|                                           |                                                                                                               
|FIXED ASSETS                               |                                                                                                               
|                                           | Payphones                                                                                                     
|                                           | Property and Equipment                                                                                        
|                                           |                                                                                                               
|                                           |                                                                                                               
|                                           | Accumulated Depreciation                                                                                      
|                                           |                                                                                                               
|                                           |                                                                                                               
|                                           |                                                                                                               
|OTHER ASSETS                               |                                                                                                               
|                                           | Deposits                                                                                                      
|                                           |                                                                                                               
|                                           |                                                                                                               
|                                           |                                                                                                               
|TOTAL ASSETS                               |                                                                                                               
|                                           |                                                                                                               
|LIABILITIES AND SHAREHOLDERS' EQUITY       |                                                                                                               
|CURRENT LIABILITIES                        |                                                                                                               
|                                           | Accounts payable                                                                                              
|                                           | Accrued expenses                                                                                              
|                                           | Accrued property, excise and sales taxes                                                                      
|                                           | 401K payable                                                                                                  
|                                           |                                                                                                               
|                                           |                                                                                                               
|                                           |                                                                                                               
|NON-CURRENT LIABILITIES                    |                                                                                                               
|                                           | Accrued property, excise and sales taxes                                                                      
|                                           |                                                                                                               
|SHAREHOLDERS' EQUITY                       |                                                                                                               
|                                           | Common Stock, par value $.0001 per share; authorized 6,000,000 shares; 4,987,624 shares issued and outstanding
|                                           | Additional paid in capital                                                                                    
|                                           | Accumulated deficit                                                                                           
|                                           |                                                                                                               
|                                           |                                                                                                               
|                                           |                                                                                                               
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |                                                                                                               
|                                           |                                                                                                               

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

24

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ETS PAYPHONES, INC.        STATEMENTS OF OPERATIONS        FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

|                                                     |                                                            | 2004          |            | 2003       |           
|---------------------------------------------------- | ---------------------------------------------------------- | ------------- | ---------- | ---------- | ----------
|REVENUE                                              |                                                            |               |            |            |           
|                                                     | Coin Calls                                                 |               | $          | 14,209,407 |           
|                                                     | Non-coin calls                                             |               |            | 5,165,194  |           
|                                                     | Other payphone revenue                                     |               |            | 768,318    |           
|                                                     |                                                            |               |            |            |           
|                                                     |                                                            | Total Revenue |            |            | 20,142,919
|                                                     |                                                            |               |            |            |           
|OPERATING EXPENSES                                   |                                                            |               |            |            |           
|                                                     | Telephone charges                                          |               |            | 6,304,830  |           
|                                                     | Commissions                                                |               |            | 5,677,718  |           
|                                                     | Service, maintenance and network Costs                     |               |            | 6,342,634  |           
|                                                     | Depreciation and amortization                              |               |            | 1,374,197  |           
|                                                     | Selling, general and administrative                        |               |            | 5,152,873  |           
|                                                     | Impairment of goodwill, intangible assets and fixed assets |               |            | 1,294,795  |           
|                                                     |                                                            |               |            |            |           
|                                                     | Total operating expenses                                   |               |            | 26,147,047 |           
|                                                     |                                                            |               |            |            |           
|Loss from Operations                                 |                                                            |               | (6,004,128 | )          |           
|                                                     |                                                            |               |            |            |           
|OTHER INCOME (EXPENSE)                               |                                                            |               |            |            |           
|                                                     | Interest income (expense)                                  |               |            | (2,136     | )         
|                                                     | Reorganization expense                                     |               |            | (169,391   | )         
|                                                     | Other income                                               |               |            | 1,915,616  |           
|                                                     | Loss on asset disposition                                  |               |            | (2,755     | )         
|                                                     |                                                            |               |            |            |           
|Total other income, net                              |                                                            |               | 1,741,334  |            |           
|                                                     |                                                            |               |            |            |           
|NET LOSS                                             |                                                            | $             | (4,262,794 | )          | $         
|                                                     |                                                            |               |            |            |           
|Basic and diluted net loss per common share          |                                                            | $             | (0.85      | )          | $         
|                                                     |                                                            |               |            |            |           
|Weighted average number of common shares outstanding |                                                            |               | 4,986,533  |            |           
|                                                     |                                                            |               |            |            |           

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

25

---





ETS PAYPHONES, INC.        STATEMENTS OF SHAREHOLDERS' EQUITY        FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

|                             |                      | Common
Shares |           | Common
Stock |     | Additional
Paid-in-Capital |   | Accumulated
Deficit |          | Total |           
|---------------------------- | -------------------- | ------------- | --------- | ------------ | --- | -------------------------- | - | ------------------- | -------- | ----- | ----------
|Balance at December 31, 2002 |                      |              |           | $            |    |                            | $ | 11,694,519          |          | $     | 476,076   
|                             | Net loss             |               |          |              |     |                           |   |                     |         |       |           
|                             | Organizational costs |               |          |              |     |                           |   |                     | (121,013 | )     |           
|                             | Stock Issuance       |               | 4,985,826 |              |     | 499                        |   |                     | (499     | )     |           
|                             |                      |               |           |              |     |                            |   |                     |          |       |           
|Balance at December 31, 2003 |                      | 4,985,826     |           |              | 499 |                            |   | 11,573,007          |          |       | (3,598,942
|                             | Net loss             |               |           |              |     |                            |   |                     |          |       |           
|                             | Organizational costs |               |           |              |     |                            |   |                     | (140,351 | )     |           
|                             | Stock issuance       |               | 1,798     |              |     |                           |   |                     |         |       |           
|                             |                      |               |           |              |     |                            |   |                     |          |       |           
|Balance at December 31, 2004 |                      | 4,987,624     |           | $            | 499 |                            | $ | 11,432,656          |          | $     | (7,861,736
|                             |                      |               |           |              |     |                            |   |                     |          |       |           

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

26

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ETS PAYPHONES, INC.        STATEMENTS OF CASH FLOWS        FOR YEARS ENDED DECEMBER 31, 2004 AND 2003

|                                                 |                                                                             | 2004                                                       |                   | 2003       |          
|------------------------------------------------ | --------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------- | ---------- | ---------
|Operating Activities                             |                                                                             |                                                            |                   |            |          
|                                                 | Net loss                                                                    |                                                            | $                 | (4,262,794 | )        
|                                                 | Adjustments to reconcile net loss to net cash used by operating activities: |                                                            |                   |            |          
|                                                 |                                                                             | Depreciation expense                                       |                   |            | 1,136,634
|                                                 |                                                                             | Amortization expense                                       |                   |            | 237,562  
|                                                 |                                                                             | Loss on asset disposition                                  |                   |            | 2,755    
|                                                 |                                                                             | Impairment of goodwill, intangible assets and fixed assets |                   |            | 1,294,796
|                                                 |                                                                             | Decrease in restricted cash balance                        |                   |            | 503,794  
|                                                 |                                                                             | Decrease in accounts receivable                            |                   |            | 653,181  
|                                                 |                                                                             | Decrease in inventories                                    |                   |            | 51,611   
|                                                 |                                                                             | (Increase) Decrease in prepaid expenses                    |                   |            | 45,042   
|                                                 |                                                                             | (Decrease) in accounts payable                             |                   |            | (473,973 
|                                                 |                                                                             | Decrease in tax liabilities                                |                   |            | (131,900 
|                                                 |                                                                             | (Decrease) Increase in accrued expenses                    |                   |            | 861,935  
|                                                 |                                                                             | (Increase) Decrease in deposits                            |                   |            | 18,268   
|                                                 |                                                                             |                                                            |                   |            |          
|                                                 |                                                                             |                                                            | Total Adjustments |            |          
|                                                 |                                                                             |                                                            |                   |            |          
|Net cash used by operating activities            |                                                                             |                                                            | (63,089           | )          |          
|                                                 |                                                                             |                                                            |                   |            |          
|Investing Activities                             |                                                                             |                                                            |                   |            |          
|                                                 |                                                                             | Purchase of fixed assets                                   |                   |            | (63,621  
|                                                 |                                                                             | Sale of fixed assets                                       |                   |            | 17,315   
|                                                 |                                                                             |                                                            |                   |            |          
|Net cash used by investing activities            |                                                                             |                                                            | (46,306           | )          |          
|                                                 |                                                                             |                                                            |                   |            |          
|Financing Activities                             |                                                                             |                                                            |                   |            |          
|                                                 |                                                                             | Organizational costs                                       |                   |            | (140,351 
|                                                 |                                                                             |                                                            |                   |            |          
|Net decrease in cash                             |                                                                             |                                                            | (249,746          | )          |          
|CashBeginning of Year                           |                                                                             |                                                            | 1,794,745         |            |          
|                                                 |                                                                             |                                                            |                   |            |          
|CashEnd of Year                                 |                                                                             | $                                                          | 1,544,999         |            | $        
|                                                 |                                                                             |                                                            |                   |            |          
|Supplemental Disclosure of Cash Flow Information |                                                                             |                                                            |                   |            |          
|                                                 |                                                                             | Cash paid for interest                                     |                   | $          | 2,473    
|                                                 |                                                                             |                                                            |                   |            |          

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

27

---





ETS PAYPHONES, INC.        NOTES TO FINANCIAL STATEMENTS

NOTE ANATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Business

ETS Payphones, Inc. ("ETS" or the "Company") is a Delaware corporation that operates, services, and maintains a system of payphones. ETS is one of the
largest independent payphone operators in the United States, currently managing approximately 16,000 payphones from eight branch offices handling 29 states, Washington D.C., and Puerto Rico. ETS
employed 133 people at December 31, 2004.

On
September 11, 2000, ETS filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. ETS continued to operate as debtor-in-possession
subject to the jurisdiction of the Bankruptcy Court for the District of Delaware. On November 14, 2001, the Joint Reorganization Plan was approved by the Court. On December 5, 2002, the
"Reorganization Date" or "Effective Date", all conditions necessary for the approval of the Plan had occurred and the Debtors and the Committee of Unsecured Creditors declared the Joint Reorganization
Plan effective.

The
Company reflected the terms of the Joint Reorganization Plan in its 2002 financial statements by adopting the fresh-start accounting provisions of SOP 90-7
(American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code").

Cash and Cash Concentration

The cash balance of $1,544,999 is not restricted and is available for normal Company operations.

The
restricted cash balance of $831,399 consists of funds restricted per the Joint Reorganization Plan for payment to creditors. Payments to unsecured creditors were made during 2004.
The Company also acted as Disbursing Agent for the Litigation Trust, which made payments to both unsecured creditors and ETS shareholders in 2004. The Litigation Trust disbursement was still in
process as of the end of 2004, and continued into early 2005. The establishment and activities of the Litigation Trust are more fully described in the Company's 2003 Form 10-SB
filing and 2004 Form 10-KSB filing.

The
Company maintains its cash balances in several financial institutions. These balances, at times, may exceed federally insured limits. At December 31, 2004, the Company
exceeded the insured FDIC limit by approximately $2,198,000 at one of these financial institutions. The Company believes no significant concentration of credit risk exists with respect to these cash
holdings.

Accounts Receivable

Accounts receivable are reported at the amount management expects to collect on balances outstanding at year-end. The amount of the accounting loss
that the Company is at risk for these unsecured accounts receivable is limited to their carrying value, which was $2,011,180 at December 31, 2004. The Company provides an allowance for doubtful
accounts and records bad debts based on a periodic review of accounts receivable and the collectibility of each account.

Revenue Recognition

The Company derives its revenues from two principal sources: coin calls and non-coin calls. Coin calls represent calls paid for by callers with coins
deposited into the payphone. Coin call revenues are recorded in the amount of coins deposited in the payphones and in the period deposited. Revenue from non-coin calls, which includes
dial-around compensation, is discussed in Note B, as are other non-coin revenue items.

28

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Inventories

Inventories are valued at the lower of cost or market, determined on a first-in, first-out basis. Inventories consist of payphones held
for future installations and repair parts held to repair phones on an as needed basis. Inventories are not held for resale purposes. Inventories consist of the following at December 31, 2004.

Repair parts

$
311,223Payphones


177,860$
489,083


Fixed Assets

Fixed assets are carried at cost, which at December 31, 2004 represents the fair value of the assets as determined by appraisal on the reorganization date,
plus the cost of subsequent purchases, less an
impairment adjustment in 2004. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three to twelve years. Expenditures for
additions and improvements are capitalized, while repairs and maintenance costs are expensed as incurred.

Site Licenses

Site licenses were recorded at the appraised value as of the Effective Date. These assets were amortized on a straight-line basis over their estimated
useful lives of ten years. As of the Effective Date there were approximately six years remaining on the lives of these site licenses. The remaining balance was impaired in 2004 and was written off.

Impairment of Long-Lived Assets

The Company reviewed goodwill at least annually, and also reviewed goodwill, site licenses, and reviews fixed assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Goodwill
represented the portion of reorganization value of the Company at December 31, 2002, that could not be attributable to specific tangible or identified intangible assets
recorded in connection with fresh-start accounting. In accordance with Statement of Financial Accounting Standards No. 142,"Goodwill and Other Intangible
Assets"("SFAS 142"), goodwill was not amortized, but was reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when
circumstances indicate that its carrying amount is greater than its fair value. The goodwill balance was deemed to be impaired and written off in 2004.

The
Company also reviews long-lived assets for possible impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Long-Lived
Assets" ("SFAS 144") the Company reviewed and tested fixed assets for possible impairment as of December 31, 2004 and 2003. In accordance with the provisions of
SFAS 142 and SFAS 144 it was determined that goodwill, site licenses, and fixed assets were impaired as of December 31, 2004, based on impairment tests performed by the Company.
See Notes C and D.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax assets resulting from net operating loss carryforwards are calculated using enacted tax rates. Net deferred tax assets are reduced by a valuation
allowance when appropriate. Deferred tax

29

---



assets
and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Use of Estimates

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

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

Net Loss Per Common Share

Basic loss per share is computed based on net loss divided by the weighted average number of common shares outstanding during the year. The weighted average
number of shares calculation for 2003 was made as if the shares were issued as of the beginning of the year. There were no potential common share equivalents outstanding during 2004 and 2003,
therefore the diluted loss per common share is the same as the basic loss per common share.

NOTE BACCOUNTS RECEIVABLE AND DIAL-AROUND COMPENSATION

Accounts receivable are composed of three distinct types: Dial-around compensation ("DAC"), Operator Service Provider ("OSP"), and
Semi-public ("Semi-pub"). DAC is payment from long distance carriers for calls made from ETS' payphones. 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. The proliferation in dial-around services
is perhaps most plainly evidenced by the fact that entirely new "toll-free" prefixes were needed along with the 1010XXX access numbers that are used by the interexchange carriers ("IXCs").
DAC, which typically comprises about 20% of ETS' revenue, is estimated based on historical values. The majority of DAC payments are issued quarterly through several main clearinghouses that specialize
in processing DAC data.

Certain
DAC true-up payments have been received and recorded as Other Income in 2003 and 2004. These payments are generally not accrued for since the amounts and time of
payment are usually unknown. These payments are the results of past activity on Company payphones that was not reimbursed within the normal payment processing time. These payments usually cover a
period of time over a year or more after the time the actual calls were made.

OSP
revenue is commission-based payment from providers of operator-assisted calls. These providers assume responsibility for tracking, rating, billing, and collecting the revenue related
to these calls and remit a percentage of the gross proceeds to the Company in the form of a commission payment. OSP payments are typically made semi-monthly. Receivables for the current
month are based on projected results after the first several weeks' actual information has been obtained.

Semi-pub
revenue is obtained from customers whose call volume would not support a normal ETS installation. The customer is willing to pay a monthly fee to the Company for the
convenience of having a payphone on their premises (accommodation of clientele, employees, etc.). Due to the relatively small receivable amount and historical experience, no provision for bad debt is
made for this class of receivables.

30

---



A
detail of the accounts receivable balance at December 31 is as follows:

2004Dial around calls, recurring business

$
1,904,492Dial around calls, special true-up


1,237,867Subtotal, Dial around calls


3,142,359OSP


78,509Other receivables.


28,179Total receivables, before allowance


3,249,047Allowance for doubtful accounts


(1,237,867
)Accounts receivable, net of allowance

$
2,011,180


NOTE CFIXED ASSETS

Fixed assets are summarized as follows at December 31, 2004.

Range of
useful livesPayphones in service

6-10 years

$
5,626,756Furniture, fixtures and equipment

5 years


146,591Leasehold improvements

12 years


540,000Computer equipment and software

3 years


667,6806,981,027Less: Accumulated depreciation




2,465,027Fixed assets, net



$
4,516,000


Depreciation
expense for the years ended December 31, 2004 and 2003 was $1,136, 635 and $1,241,953, respectively. An impairment adjustment of $153,246 reduced payphones in service
in 2004.

NOTE DGOODWILL AND SITE LICENSES

December 31, 2004Gross
value

Impairment
losses

Accumulated
amortization

Net
carrying
valueGoodwill

$
176,483

$
(176,483
)
$


$
Site Licenses


1,516,453


(965,067
)

(551,386
)

Total

$
1,692,936

$
(1,141,550
)
$
(551,386
)
$



During
2003, amounts estimated as prepetition liabilities (accrued commissions) were reconciled and the overaccrued liability of $339,768 was adjusted by reducing goodwill. As noted
previously in Note A, the goodwill balance was written off in 2004 as a result of the Company's annual impairment testing as required by SFAS 142.

During
2004, phones were removed from approximately 2,100 licensed sites. The related carrying value of site licenses for these phones was written off. Amortization expense associated
with site licenses for the years ended December 31, 2004 and 2003 was $237,562 and $290,980, respectively. As a result of the impairment testing of fixed assets as described in Note A,
the site licenses were written off in 2004.

31

---



NOTE EFRESH-START ACCOUNTING AND REORGANIZATION

As previously discussed, the Company adopted the provisions of fresh-start accounting as of December 5, 2002. In adopting fresh-start accounting, the
Company engaged an independent financial valuation analyst to assist in the determination of the reorganization value or fair value of the entity.

Plan of Reorganization

On September 11, 2000, ETS filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. ETS continued to operate as
debtor-in-possession subject to the jurisdiction of the U.S Bankruptcy Court for the District of Delaware. On November 14, 2001, the Joint Reorganization Plan was
approved by the Court. On December 5, 2002, all conditions necessary for the approval of the Joint Reorganization Plan had occurred and the Debtors and the Committee of Unsecured Creditors
declared the Joint Plan effective. The Joint Reorganization Plan represents a consensual arrangement between the Committee of Unsecured Creditors, Debtors and ETS.

Pursuant
to the Joint Reorganization Plan, the various debtor corporations were merged into a single corporation, ETS Payphones, Inc., incorporated in Delaware on
November 8, 2002. The Joint Reorganization Plan provides that each holder of an allowed Payphone Investor Claim shall receive shares of common stock in the Company in full satisfaction,
settlement, release and discharge of and in exchange for such claim. The number of shares issued has been calculated according to the Payphone Investor Claims Formula provided in the Joint
Reorganization Plan.

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

A
Litigation Trust was created on the Effective Date for the benefit of General Unsecured Claims and Payphone Investor Claims. The Litigation Trust is administered by a trustee selected
by the Creditors' Committee. The Litigation Trust will be funded with property and proceeds of all claims and causes of action of ETS or the Creditors' Committee existing as of the Petition Date
against Charles Edwards, the former CEO of the Company, various insiders, and others as described more fully in the Joint Reorganization Plan. The trustee will make distributions as and when funds
become available and at the trustee's sole discretion. In 2004 the first distribution to Trust beneficiaries was initiated.

Expenses
resulting from the restructuring are reported separately as reorganization expenses in the Statement of Operations. For the year ended December 31, 2004 and 2003,
expenses directly associated with the Chapter 11 bankruptcy proceedings were $169,391 and $641,098, respectively. These reorganization expenses consisted mainly of professional fees for legal,
advisory, and administrative services.

Payments
of restricted cash made by the Company resulting from the plan for the year-ended December 31, 2004 are as follows:

Restricted CashDecember 31, 2003

$
1,335,193Cash received from Litigation Trust for distribution


2,004,3343,339,527Cash Disbursements:Pre-Petition taxes paid


26,640Claims paid


869,272Litigation Trust distributions


1,612,216Total cash disbursements


2,508,128Restricted CashDecember 31, 2004

$
831,399


32

---



NOTE FRETIREMENT PLAN

The Company has a 401k plan that covers all employees who have attained certain service requirements as specified in the plan. The total Company contribution to
the plan for the years ended December 31, 2004 and 2003 was $89,507 and $116,152, respectively.

NOTE GINCOME TAXES

The effective tax rate varies from the maximum federal statutory rate as a result of the following items for the years ended December 31, 2004 and 2003:

2004

2003Tax benefit computed at the maximum federal statutory rate

(34.0
)%
(34.0
)%Decrease in tax benefit resulting from:Depreciation

9.0

12.8Amortization

1.2

1.6Intangible asset impairment

10.3

Non-deductible reorganization costs

1.3

5.3Increase in valuation allowance

12.2

14.3Effective income tax rate

0.0
%
0.0
%


Net
deferred taxes consist of the following components as of December 31, 2004:

Deferred
Tax assets:

Net operating loss carryforwards

$
1,230,120Less valuation allowance


(1,230,120
)$



A
valuation allowance has been recognized to offset the entire net deferred tax asset due to the uncertainty of realizing the benefit of the net deferred tax asset. The Company has
available net operating loss carryforwards totaling approximately $3.62 million that expire in various periods through 2024.

The
Company realized substantial cancellation of debt, or "COD," income as a result of the implementation of the Joint Reorganization Plan. Because the Company was a debtor in a
bankruptcy case at the time it realized the COD income, it is not required to include such COD income in its taxable income for federal income tax purposes. Instead, the Company will be required to
reduce certain of its tax attributes by the amount of COD income so excluded. All of the Company's net operating loss carryforwards related to activities before it emerged from bankruptcy were
eliminated in 2003. Certain of its other tax attributes will be reduced or eliminated as a result of COD income being excluded pursuant to the Joint Reorganization Plan.

NOTE HCOMMITMENTS AND CONTINGENCIES

Operating leases

The Company has entered into various operating leases for its corporate headquarters and warehouses, expiring at various dates through August 2009. Rent
expense for the years ended December 31, 2004 and 2003 was $435,129 and $530,620, respectively.

33

---



Minimum
future lease payments for the years ending December 31 are as follows:

2005

$
374,7592006


322,1322007


267,3592008


257,5032009


137,335$
1,359,088


Litigation

From time to time, the Company is a party to litigation arising in the normal course of its business operations. In the opinion of management, after consulting
with legal counsel, it is not anticipated that the matters will have a material adverse impact on the Company's financial condition, liquidity or results of operations.

NOTE IOTHER INCOME

Other Income for the years ended December 31 is as follows:

2004

2003Dial Around True-Up Settlements (Note B)

$
402,730

$
410,717LEC Refund Settlements





924,749Legal settlements


583,999


MCI/Worldcom bankruptcy dial around settlement


807,285


Other Income, net


121,602


682,545Total

$
1,915,616

$
2,018,011


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

LEC Refund SettlementsThese are payments from Local Exchange Carriers as a result of rebates on phone bills paid by the
Company. Generally this results from efforts made by state or national industry organizations that benefit payphone companies operating in certain states.

Legal SettlementsThis relates to funds received in respect of DAC for phones acquired prior to bankruptcy.

MCI/Worldcom bankruptcy dial around settlementThese are payments received for dial around revenue paid as a result of the MCI
bankruptcy settlement for years prior to 2003. These payments are cents on the dollar payments on the total amounts earned during the time period prior to MCI filing bankruptcy.

34

---





PART III

Item 6. Index to Exhibits and Description of Exhibits.

|Exhibit
Number |  | Description                                                                                                            
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------
|3.1            |  | Certificate of Incorporation of ETS Payphones, Inc. dated November 8, 2002(1)                                          
|3.2            |  | 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)                       
|10.5           |  | Employment Agreement dated December 5, 2002 between ETS Payphones, Inc. and Michael H. McClellan(1)                    
|10.6           |  | Employment Agreement between ETS Payphones, Inc. and Jeffrey E. Fennell(2)                                             
|10.7           |  | Amendment to Employment Agreement between ETS Payphones, Inc. and Guy A. Longobardo(2)                                 
|10.8           |  | Amendment to Employment Agreement between ETS Payphones, Inc. and Michael H. McClellan(2)                              
|10.9           |  | Form Change in Control Agreement(2)                                                                                    
|14.            |  | Code of Ethics                                                                                                         
|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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SIGNATURES

In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.

|      |  |                |  | ETS PAYPHONES, INC.
        (Registrant)
|----- |  | -------------- |  | ----------------------------------------
|Date: |  | April 11, 2005 |  | By:                                     
|Date: |  | April 11, 2005 |  | By:                                     
|Date: |  | April 11, 2005 |  | By:                                     
|Date: |  | April 11, 2005 |  | By:                                     
|Date: |  | April 11, 2005 |  | By:                                     
|Date: |  | April 11, 2005 |  | By:                                     

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