Wireless phone companies Leap Wireless International Inc. (NASDAQ: LEAP) and MetroPCS Communications, Inc. (NYSE: PCS) have now reported quarterly earnings, and their results cast more of a shadow over the proposed $39 billion merger between AT&T (NYSE: T) and T-Mobile USA, currently owned by Deutsche Telekom AG (OTC: DTEGY). Neither MetroPCS nor Leap shows the kind of earnings strength that puts either company in a position to offer a credible alternative to T-Mobile as a low-cost provider of wireless service.Leap, which reported earnings after the markets closed yesterday, posted an EPS loss of -$o.90 on revenue of $763 million. Consensus estimates called for an EPS loss of -$0.79 on revenue of $766 million. Still, the report has gotten a positive reception because Leap managed to add 10,000 new subscribers, compared with a loss of 200,000 customers in the same period a year ago.

MetroPCS did not fare as well. The company reported EPS of $0.19 on revenue of $1.2 billion. Consensus estimates called for EPS of $0.23 and revenue of $1.22 billion. The company added 69,000 new customers in the quarter, a big drop from the 199,000 it added in the second quarter.

The challenge from Sprint Nextel Corp. (NYSE: S) and T-Mobile in the pre-paid market hurt MetroPCS’s revenues and earnings. This does not help the AT&T/T-Mobile plan to sell off some assets to other carriers as the two companies try to get their proposed merger through the regulatory process. MetroPCS was viewed as a possible buyer of those assets, but lower customer additions and lower profits are not usually conducive to expansion plans.

Sprint has no interest in buying any assets that AT&T/T-Mobile want to shed. The number three US carrier has fought the proposed merger every step of the way. Verizon Wireless, the joint venture between Verizon Communications Inc. (NYSE: VZ) and Vodafone plc (NASDAQ: VOD), has had essentially no comment on the proposed merger, but certainly has little to gain from a tie-up between AT&T and T-Mobile.

The US Justice Department’s suit to stop the merger got a boost yesterday when a federal court prevented H&R Block, Inc. (NYSE: HRB) from buying low-cost tax preparer TaxAct, citing anti-trust violations. The deal was worth less than $300 million but the Justice Department argued that the merger would leave just two tax-prep firms, Block and Intuit Inc. (NASDAQ: INTU). Similarly, the AT&T deal would leave just one behemoth, AT&T, while Verizon Wireless would fall to a distant second place and be virtually forced to acquire Sprint in order to stay competitive.

The inability or unwillingness of another company to pick up AT&T/T-Mobile assets, coupled with the Block ruling, could be the beginning of the end for the proposed merger.

MetroPCS shares are down more than -7% this morning at $7.89, after posting a new 52-week low of $7.58. Leap Wireless is faring better, up more than 16%, at $8.09, in a 52-week range of $5.50-$17.66.

Paul Ausick