**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-K**

 

**x****ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2007**

 

**or**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE**

#### **SECURITIES EXCHANGE ACT OF 1934**

#### ** **

**For the transition period from             to**

 

**Commission File Number 0-27024**

 

**METRO ONE TELECOMMUNICATIONS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Oregon**                                                      |   | **93-0995165**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |   | (I.R.S. Employer Identification No.) |

 

**11200 Murray Scholls Place,Beaverton, OR  97007**

(Address of principal executive offices)

 

Registrant’s telephone number, including areacode:   **503-643-9500**

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Title of Each Class** | ** ** | **Name of Exchange on Which Registered** |
|----------------------------------------|------------|-------------------------------------------------------------------|
| Common  Stock, no par value            |       | NASDAQ  Capital Market                                            |

 

Securities registered pursuant to Section 12(g) ofthe Act:  ** NONE**

 

Indicate by check mark if the registrant is a well-knownseasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o    No  x

 

Indicate by check mark if the registrant is not required tofile reports pursuant to Section 13 or Section 15(d) of the Act.Yes  o    No  x

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes  x    No  o

 

Indicate by check mark if disclosure of delinquent filerspursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer o |   | Smaller Reporting  Company x |
|--------------------------------|--------|--------------------------|--------|------------------------------|--------|-----------------------------------|

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Act). Yes  o    No  x

 

The aggregate market value of the voting and non-votingcommon equity held by non-affiliates, based on the closing price of the commonstock as reported by the Nasdaq National Market on June 30, 2007 was$10,437,947.

 

The number of shares outstanding of the registrant’scommon stock as of March 20, 2008 was 6,233,326.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

 

Portions of the registrant’s Proxy Statement for its2008 Annual Meeting, to be filed with the Securities and Exchange Commissionwithin 120 days of the registrant’s fiscal year end, are incorporated by referenceinto Part III of this Report.

 

 

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**METRO ONE TELECOMMUNICATIONS, INC.**

**FORM 10-K ANNUAL REPORT**

**TABLE OF CONTENTS**

 
|       | **PART I**                                                                                                    |       |
|------------|--------------------------------------------------------------------------------------------------------------------|------------|
|       | ** **                                                                                                         |       |
|       | Forward Looking Statements                                                                                         | 3          |
|       |                                                                                                               |       |
| Item 1     | Business                                                                                                           | 3          |
|       |                                                                                                               |       |
| Item 1A    | Risk Factors                                                                                                       | 7          |
|       |                                                                                                               |       |
| Item  1B   | Unresolved Staff Comments                                                                                          | 11         |
|       |                                                                                                               |       |
| Item 2     | Properties                                                                                                         | 11         |
|       |                                                                                                               |       |
| Item 3     | Legal Proceedings                                                                                                  | 11         |
|       |                                                                                                               |       |
| Item 4     | Submission of Matters to a Vote of Security Holders                                                                | 12         |
|       |                                                                                                               |       |
| ** ** | **PART II**                                                                                                   | ** ** |
| ** ** | ** **                                                                                                         | ** ** |
| Item 5     | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities | 12         |
|       |                                                                                                               |       |
| Item 6     | Intentionally  not used                                                                                            |       |
|       |                                                                                                               |       |
| Item 7     | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        | 12         |
|       |                                                                                                               |       |
| Item 8     | Financial  Statements and Supplementary Data                                                                       | 19         |
|       |                                                                                                               |       |
| Item 9     | Changes In and Disagreements with  Accountants on Accounting and Financial Disclosure                              | 41         |
|       |                                                                                                               |       |
| Item 9A    | Controls and Procedures                                                                                            | 41         |
|       |                                                                                                               |       |
| Item 9B    | Other Information                                                                                                  | 41         |
|       |                                                                                                               |       |
| ** ** | **PART III**                                                                                                  | ** ** |
| ** ** | ** **                                                                                                         | ** ** |
| Item 10    | Directors, Executive Officers, and  Corporate Governance                                                           | 41         |
|       |                                                                                                               |       |
| Item 11    | Executive Compensation                                                                                             | 41         |
|       |                                                                                                               |       |
| Item 12    | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                    | 41         |
|       |                                                                                                               |       |
| Item 13    | Certain Relationships and Related  Transactions and Director Independence                                          | 42         |
|       |                                                                                                               |       |
| Item 14    | Principal Accountant Fees and Services                                                                             | 42         |
|       |                                                                                                               |       |
| ** ** | **PART IV**                                                                                                   | ** ** |
| ** ** | ** **                                                                                                         | ** ** |
| Item 15    | Exhibits and Financial Statement  Schedules                                                                        | 42         |
|       |                                                                                                               |       |
|       | Signatures                                                                                                         | 45         |

 

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# ** **

# ***In this annual report on Form 10-K,“Metro One” and the terms “Company,” “we,” “us” and “our” refer to Metro OneTelecommunications, Inc.***

# ** **

# **PART I**

# ** **

***IMPORTANT INFORMATION REGARDINGFORWARD LOOKING STATEMENTS***

 

*Allstatements and trend analyses contained in this annual report on Form 10-Krelative to the future constitute “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements may, but do not necessarily, include words such as “believes,”“expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,”“could,” “continue” or similar expressions. Forward-looking statements are notguarantees. They involve known and unknown business and economic risks,uncertainties and other factors that may cause our actual results, performance orachievements to be materially different from any future results, performance orachievements expressed or implied by such forward-looking statements. Theserisks, uncertainties and other factors include those discussed under Item 1ARisk Factors. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof. Weundertake no obligation to publicly release any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.*

 
| **ITEM 1.** | **BUSINESS.** |
|-------------|---------------|

 

**CurrentBusiness**

 

We are an experiencedoperator of call centers and data management services. Historically, ourrevenues have been derived primarily from accepting inbound calls in our liveoperator call centers from consumers seeking directory assistance (usuallytelephone numbers), accessing that information in our databases and providingthe information to the caller. On March 21, 2008, we announced our intentionto exit this directory assistance business entirely by the end of May 2008.After May 2008, part of our continuing business will leverage our callcenter expertise through expansion of our outbound telesales business which webegan in January 2008. For these operations our operator agents call smallbusinesses and provide relevant information about available telecom services toinduce them to enter into agreements. We have an agreement as a sub-contractorto a master agent of a large Regional Bell Operating Company.  (“RBOC”) Our revenues are earned when thebusinesses we call either renew existing agreements or enter into new contractsfor telephone services with the carrier. We are performing these services inour call center facility in Beaverton, Oregon which is located within ourprincipal executive office. We expect to grow this business over the next year,marketing additional products and services to a wider customer base. We alsointend to enter into agreements to provide other non-directory assistanceinbound call center services from the same facility. We are making thenecessary investments to support approximately 140 operators in our Beaverton,Oregon location and have the option to expand these facilities to approximately250 operators as the need arises.

 

We also will continueproviding directory assistance services in electronic format.  Theseservices are provided to customers who electronically issue directoryassistance queries and use the returned information to complete and correcttheir own data records.  We currently provide electronic directoryassistance services in a number of delivery formats to meet customer needsincluding automated file processing and real-time individual look ups.  Inaddition to directory assistance data, we house national databases of consumerand business information.  We blend this data with directory assistancedata to build products that we sell to a broad range of companies that requireelectronic directory assistance data and marketing data.  These customersinclude companies in the service, marketing, and financial sectors. Thiselectronic services business represents an emerging business that is based oninfrastructure originally developed to support our soon to be abandonedvoice-based directory assistance call center business.

 

We hold a variety ofpatents, trademarks and pending patent applications originally developed fromour provision of enhanced features of directory assistance, but with possibleapplication in other arenas. We have from time to time received unsolicitedinquiries to purchase our portfolio, and recently have received an overturefrom a group expressing significant interest in the portfolio. We intend toaggressively pursue an optimization strategy for leveraging these assets during2008 that may include sale, public or private auction, joint venturing and/orseparately negotiated sale or licensing of all or certain portions of ourintellectual property portfolio.

 

**HistoricalBusiness**

 

We have been in businesssince 1989 and entered into our first contract with a wireless carrier in 1991to provide directory assistance service to that carrier’s subscribers on acharge-per-call basis. Until our recent decision to exit this business wecontracted with wireless carriers, Voice over Internet Protocol (“VoIP”)providers, cable companies, Incumbent Local Exchange Carriers (“ILEC”), CompetitiveLocal Exchange Carriers (“CLEC”), free directory assistance providers, prepaidcarriers, and payphone operators to provide live operator directory assistanceservices to their subscribers and users. Revenues were derived principallythrough fees charged to telecommunications carriers and other customers.

 

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Competition in thetelecommunications industry, and in the directory assistance market in which weparticipated, was and continues to be intense. Carriers seek to reduce costs ofproviding directory assistance and other services through, among other ways,outsourcing to low cost domestic or overseas operators and utilizingautomation.

 

During the last fouryears, several of our largest customers transferred their calls to anotherprovider for a variety of reasons, but primarily in order to obtain lowerprices or as a result of consolidation in the wireless industry. Beginning inthe second quarter of 2005, in response to the loss of these customers and theassociated revenues and as a result of our ongoing operating losses anddeclining cash balance, we significantly restructured our operations to lower ourcost structure and to refocus our efforts on adding new wholesale customers. Inspite of these efforts, we did not win a sufficient number of new accounts andcorresponding revenues to generate the required operating margins necessary tosustain our then-reduced cost structure.

 

On March 21, 2008, we announced that, aspart of a strategic business review and in furtherance of our ongoing effort tocut costs and align expenses with reduced revenues, we had decided to exit thewholesale directory assistance business by the end of May 2008. Thedetermination to exit the directory assistance business on the anticipatedschedule was made by our Board of Directors on March 20, 2008. Ourstrategic review determined that the current economic environment did not providethe potential to deliver an acceptable long-term return on investment and thatour remaining resources would be better spent pursuing our nascent contactservices businesses and monetizing our intellectual property portfolio. Wewill continue to pursue growth in our small data services business that hasbeen developed over the last few years. We have yet to realize the significantopportunities we believe exist there, but we expect this to change with greaterfocus.

 

### **Telecommunications Industry**

### ** **

The U.S. telecommunications industry has generally been characterizedby strong growth and increased competition due to new technologies, a morefavorable regulatory environment and, for carriers, an increasinglysophisticated and demanding subscriber. Telecommunications carriers faceincreasing competitive pressures to differentiate their products and establishbrand loyalty. Costs to acquire new subscribers can be significant, thereforecarriers are emphasizing pricing and plan elements to attract and retain customers.In addition, carriers are increasingly offering local, long distance, wireless,cable and Internet services bundled into one package in order to appeal to awider market. The industry has also experienced a considerable amount ofconsolidation and investment in new technologies while at the same timefacing  increasing competitive pressurefrom alternative providers, including cable companies, VoIP providers, ILEC’sand CLEC’s seeking new market share. These practices have the incumbent “RBOC’s”developing aggressive strategies to retain their existing base of customers.

 

### **Beginningin January 2008, we initiated our outbound contact services business in anattempt to take advantage of opportunities created by this competitiveenvironment. Our first significant engagement requires us to assist an RBOC inits efforts to guard against customer attrition by calling existing  and former customers of the RBOC toincentivize them to enter into long-term agreements for continued service fromthe RBOC.**

### ** **

### **Directory Assistance Market and Customers**

### ** **

The U.S. directory assistance industry generated over 6 billioninformation requests in 2007 primarily from three distinct platforms: wireline,wireless, and VoIP telephone lines. Advertiser funded directory assistanceservices are emerging as a fourth platform generating over 200 million calls in2007.

 

New and improvedofferings for advertiser sponsored directory information are seeing the largestgains in market share with companies such as Microsoft’s TellMe, Google’sGOOG411 and Jingle Network’s FREE411 in this space. Likewise, companies such asCablevision provide directory assistance at no cost to their customers as acompetitive measure.

 

Prior to March 2008 our principal business was to provide EnhancedDirectory Assistance and information services to phone companies who offered itas a feature or product to their customers. Our major directory assistancecustomers include Cablevision, Jingle Networks, SunCom, and XO Communications. Wehave notified all of our current directory assistance customers that we areexiting the directory assistance business and that we will close our remainingcall centers used in servicing these calls in May 2008. 

 

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Customers that accounted for more than 10% of our revenues during theperiods indicated are as follows:

 
| ** **             | ** ** | **Years ended December 31,** | ** ** |
|------------------------|------------|---------------------------------------------|------------|
| **Customer**           | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|                   |       |                                        |       |   |   |   |   |
| Cablevision            |       | 39                                          | %          | 25 | % | 6 | % |
| Jingle Networks        |       | 26                                          | %          | 14 | % | — | % |
| SunCom                 |       | 12                                          | %          | 9 | % | 4 | % |
| Nextel  Communications |       | —                                      | %          | 37 | % | 76 | % |

 

### **Call Centers and Network**

### ** **

To service our soon-to-be-discontinued directory assistance business,we operate six call centers in the United States located in Minneapolis,Charlotte, Orlando, Honolulu, Long Island and Beaverton.

 

During 2006 and 2005 we reduced our headcount by over 2,000 employeesand consolidated the operations of 25 call centers into the remaining six callcenters, all of which were in service at the end of 2007. In the first quarter2008, we continued these consolidation efforts by migrating calls out of ourLong Island and Beaverton call centers into our other remaining centers. On March 21, 2008 we decided toexit the directory assistance business entirely and will maintain the Beavertoncall center to service our outbound telesales operations and other contactservices business. We intend to grow our existing outbound telesales businessand to scale our call center system and telesales agents to accommodate suchgrowth. We are configuring our Beaverton center initially to supportapproximately 140 agents and have expansion plans prepared should we need toincrease capacity further.

 

Our directory assistance business has had strict service levelstandards that required our network systems to support a 24-hour per day service,which in turn required a share network operations center and other redundanciesin order to avoid operational and disaster downtimes. Our outbound business tobusiness telesales operates only during normal business hours, and ourtelesales network configuration utilizes internet protocol to access both dataand voice using standard, off the shelf product offerings.  This design provides excellent voice qualityfor our agents, high speed access for all inbound and outbound data and is ascalable platform. We hire and train personnel at our call center with trainingand testing on products and customer interaction techniques, and we continuallymonitor, test and evaluate agent performance. Call center personnel haveincentives that are based on production but are also trained to maintain strictadherence to predetermined calling scripts. We generally report all calling activity to our customers on a regularbasis.

 

### **Our Services and Features**

### ** **

For our soon-to-be discontinued directory assistance business, we use acustomized array of internally owned and operated hardware and software, alongwith proprietary database search engines, to provide our Enhanced DirectoryAssistance. We receive incoming calls by means of assigned telephone numbers,which, in most cases are “411,” “555-1212,” “00”.  Upon receiving information requests fromcallers, operators search applicable databases using our proprietary searchtools, and where successful in the search, the operator generally connects thecaller to the called party and/or supplies the caller with the requestedinformation.

 

***Contact Services***

 

With respect to our new outbound telesales business, by way ofillustration with our current customer we have a US territory in which we areauthorized to prospect. A database of businesses either developed internally byus or provided by the customer is accessed through automated dialers hosted andowned by a third party outside our call center. We staff the agents, train themand generate the calls to businesses. The agents then inquire for appropriatepersonnel at the business and discuss with that person their business telephoneservice. All calls are recorded to ensure the accuracy and compliance of thecommunications with required protocol. Successful sale information and resultsare electronically provided to the customer for verification.

 

### **Database Systems and Content**

### ** **

In our data servicesbusiness we believe the quality of our services is directly related to thescope, quantity and quality of the information content in our database systems.The majority of the information that we acquire, develop, and maintain istelephone listings data. To ensure high quality and accuracy, we obtain thisdata from multiple sources, including certain of the regional Bell operatingcompanies, independent telephone companies and other commercial sources. Thisdata is enhanced by our direct data collection efforts and a principal databaseof local information is developed for each call center or region. We have beenable to successfully utilize this information content and our data manipulationabilities to generate highly efficient lead input for our telemarketingautomated dialers.

 

With respect to our soonto be discontinued directory assistance services, our proprietary operatorinterface software allows operators to efficiently and simultaneously searchand reverse-search multiple databases. Our search engine was optimized for directory assistance services andlarge national databases, providing sub-second search times even in complexsearches.  We used proprietary databasemanagement systems to maintain and update our directory listings.  We also continually acquired additionalcontent or access to content from a variety of sources that, in many cases,built on this listings data to make them more useful.

 

5

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### **Marketing and Sales**

 

We plan to grow our contact center business in a measured thoughsubstantial way.  Our existing, thoughlimited, customer base builds indirectly on our former directory assistancebusiness in that it involves contacting existing or new customers fortelecommunications carriers.  Theregional bell operating companies for whom we ultimately call are serviced bytelecom agents, and we provide our services through contractual sub-agencysales agreements with these agents. Ultimately we will need to be highly productive in our sales efforts andflexible in our approach in this new sales environment if we are to achieve thesubstantial growth that we desire.  Inour data services business, we are targeting new customers that we believe willconsistently depend on us for large volumes of data access and adeptmanipulation.

 

### **Intellectual Property**

 

In our soonto-be-discontinued directory assistance business we relied on a combination oftrademark, patent and trade secrets laws and confidentiality procedures toprotect our intellectual property rights. We have 45 U.S. patents issued and five foreign patents issued,including several relating to our StarBack technology, our information servicesplatform and others associated with applications for call handling and deliveryof information and other services.  Wehave approximately 67 applications pending for additional U.S. and foreign patents.  We also have U.S. and foreign registeredtrademarks for, among others, “Metro One,” “StarBack,” “AutoBack,” “Infone” andnumerous other applications pending for U.S. trademark registrations.  We have reason to believe that many of ourpatents and pending patents may have applications beyond our historic use, andwe are exploring ways to monetize the value of this intellectual property inall areas of use consistent with our liquidity needs.  These monetization efforts may include thesale or licensing of certain patents to current or former competitors orcustomers, public or private auction of all or select portions of thisportfolio to interested parties, joint venturing with parties interested inpursuing royalty-based methods of monetary recovery, third-party financedefforts to evaluate and enforce certain intellectual property rights and/orvarious combinations of the foregoing with other recovery strategies.  The methods, means and structures pursued inthese monetization efforts will be influenced by our short-term and long-termliquidity needs, whether for survival, working capital, more rapid growth inour other businesses or otherwise.

 

### **Competition**

 

Both the directoryassistance and information services markets are characterized by rapidlychanging market forces, technological advancements and increasing competitionfrom large carrier-affiliated companies and other independent companies.  In our directory assistance business, ourprincipal competitors included RBOC’s and other independent providers.  Telephone carriers, both landline andwireless, provide directory assistance both in and outside their own operatingregions.  These companies have operatedwith greater financial, technical and marketing resources than we had or have,and they offered features that were competitively similar to ours.  We also faced competition in this businessfrom low cost directory assistance provided by overseas operators and firmsoffering information, directories and/or search engines via Internet-enabled devices.

 

In recent years,telephone carriers appeared to us to have become more focused on reducingcosts, even if such reduction resulted in diminished services and quality,thereby discounting the features that we felt had become our competitivedifferentiator.  In addition, othersources of directory assistance, such as automation and those provided byoffshore call centers and the Internet, provided these carriers with the lowcost forms of competitive services that they were now willing to accept.  In direct response, in order to compete effectively,we attempted to reduce our call center network and other costs of servicedelivery. We, however, were unable to reduce costs and obtain new businesssufficient to generate operating capital and as a result determined to exit thedirectory assistance services business.

 

Competition in the dataand outbound call center services business is more fragmented than directoryassistance. The benefit of this market structure is that we do not competeagainst and do not as readily have as customers large carriers with significantmarket power.  One competitivedisadvantage, at least with respect to our outbound telesales business, is thatthere are low barriers to entry, and small businesses that are able to servicethe volume of small to mid-sized businesses may have lower overhead and coststructures than we are able to achieve, at least until we are able to developgreater efficiencies than that of our competition and/or scale into greatercost reductions than our competition can achieve.  We intend to leverage our call centerexpertise as we develop these business opportunities and believe that thisexpertise will provide us a near-term competitive advantage in this market.

 

### **Government Regulation**

 

Certain projects we mayundertake are subject to varying degrees of governmental regulation. Federaland state laws governing consumer privacy, the collection, use and security ofconsumer data, and the use and disclosure of customer proprietary networkinformation impose regulatory and licensing obligations on us. There are alsoself-imposed industry standards that apply to the use and security of certainconsumer data. In addition, both federal and state laws regulate telephonesolicitations to residential customers. 

 

Our telecommunicationsclients are subject to regulations governing the unauthorized disclosure ofcustomer proprietary network information. These regulations limit thedisclosure of non-public customer information regarding telephone services suchas the type of service and usage and billing information. In providing servicesto our telecommunications clients, we are required to comply with theseregulations. 

 

***Outbound Telemarketing Sales***

 

We may engage intelephone solicitation to consumers in which certain additional regulations mayapply. On the federal level, both the Federal Trade Commission (FTC) andthe Federal Communications Commission (FCC) regulate the initiation oftelephone solicitations to residential telephone subscribers. Federalregulations prohibit the use of deceptive, unfair and abusive telemarketingsales practices. States have also enacted and continue to enact legislationgoverning telephone solicitations, which contain similar restrictions, as wellas registration requirements.

 

### **Employees**

 

As of December 31, 2007, we had approximately 632 employees,approximately 21% of whom were employed on a part-time basis.  Most of our employees are operators, and thenumber of full-time and part-time operators varies from time to time as aresult of fluctuations in the volume of calls we receive.  None of our employees is subject to acollective bargaining agreement. 

 

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On March 21, 2008, as a result of our decision to exit the directoryassistance business, we notified approximately 700 employees of our intent toterminate their employment on designated schedules generally over the next 60days. We intend to provide severance payments to all employees working to theirtermination dates based on length of service and other factors.  We consider relations with our employees tobe otherwise satisfacatory. 

 

### **Available Information**

### ** **

We file annual, quarterlyand current reports, proxy statements and other information with the Securitiesand Exchange Commission (the “SEC”). You may read and copy any document we filewith the SEC at the SEC’s public reference room at 100 F Street, NE,Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information onthe public reference room. The SEC maintains an internet site that containsannual, quarterly, and current reports, proxy and information statements andother information that public companies (including us) file electronically withthe SEC. Our electronic filings are available to the public at the SEC’sinternet site, www.sec.gov.

 

We invite you to visitour website at www.metro1.com to access free-of-charge our annual report on Form 10-K,our quarterly reports on Form 10-Q, our current reports on Form 8-Kand any amendments to those reports, which we make available as soon asreasonably practicable after we electronically file such materials with orfurnish such materials to the SEC. The information on our website should not beconsidered part of this filing.

 
| **ITEM 1A.** | **RISK FACTORS** |
|--------------|------------------|

 

The risks described belowshould be carefully considered. These risks are not the only ones that we mayface. Additional issues and uncertainties that we are unaware of, or that wecurrently deem immaterial, also may become important factors that affect us. Ifany of the following risks occur, our business, financial condition, results ofoperations or cash flows could be materially and adversely affected.

 

*We have ahistory of losses and negative cash flows on a quarterly and annual basis, andmay experience additional losses from operations, which raises doubt about ourability to continue as a going concern.*

 

We have experienced netlosses in each of the quarterly and annual periods since the second quarter of2003. In the years ended December 31, 2007 and 2006, we incurred losses of$14.4 million and $19.2 million, respectively. At December 31, 2007, wehad working capital of approximately $9.8 million. Our recent decision to exitthe directory assistance business will lead to increased cash expenditures inthe near term, as we pay the costs of closing those operations. To achieveprofitability, we will need to generate revenue from new and existing lines ofbusiness and continue to decrease our expenditures. We can give no assurancethat we will generate sufficient revenues in our new and continuing businessesor succeed in reducing expenditures enough to achieve profitability on aquarterly or annual basis in the future. These factors, among others, raisedoubt about our ability to continue as a going concern. Even if we doultimately achieve profitability, we may not be able to sustain profitabilityon a quarterly or annual basis.

 

*We willlikely need additional capital in the future, and it may not be available onacceptable terms, or at all.*

 

Our unrestricted cashbalances at March 1, 2008 were approximately $5.4 million. Remaining cashbalances after the costs of exiting the directory assistance business may notbe sufficient to fund operating and other expenses for the next twelve months. Wecan give no assurance that our cost reduction initiatives will yield the resultswe anticipate or that we will generate sufficient cash flows from the sales ofour services. As a result, we will likely need to secure additional financingin the future. We cannot be certain that additional financing will be availableon acceptable terms, or at all. If it is available, the terms of availablefinancing may place limits on our financial and operating flexibility orinclude certain preferences over common shareholders or require the pledge ofall or some of our assets. If adequate financing is not available on acceptableterms, we may be forced to sell remaining assets, further reduce expenditures,or even cease operations, and we may not be able to pursue any of our businessobjectives. An inability to secure additional funding could force us towind-down and liquidate our business or otherwise seriously harm our business,results of operations and financial condition.

 

*Ourdecision to exit the directory assistance call center business could havesignificant adverse impact on our existing cash balances and near-term cashflows, and we may not have sufficient cash to continue our operations.*

 

Our decision to exit thedirectory assistance call center business involves closing all of our remainingdirectory assistance call centers, eliminating the majority of our work force,ending our business dealings with customers prior to the contemplatedexpiration of our existing agreements, disposing of the majority of our callcenter assets and attempting to eliminate vendor agreements associated with ourdirectory assistance business and our call centers. While we expect theseactions to result in future costs savings, they will require near term one-timeuses of cash that otherwise would not be incurred. 

 

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For instance, we willincur severance, retention and other costs and/or cash expenditures inconnection with winding down our call center operations. In addition, incertain cases, we may negotiate an early termination of our existing leases whichlikely will require buyout or early termination payments, and we will incurcosts associated with dismantling our call centers and disposing of our assets.We estimate that these actions will result in cash expenditures of at least$2.3 million. Should we make or be required to make payments in connection withour contract obligations with our current directory assistance customers andothers, or should these customers refuse to pay or attempt to set off amountsowed to us or pursue legal claims against us, our cash expenditures could begreater than we anticipate, perhaps significantly, and our working capitalcould be significantly less than we now contemplate. Our cash balances andnear-term cash flow could be severely adversely impacted and we may be requiredto attempt to dispose of certain remaining assets in a timeframe that may notmaximize their value. As a result, we may not have sufficient cash to executeon our business plans.

 

*Ourremaining business may not generate enough revenues quickly enough and ourremaining cash balances may not be sufficient for us to continue ouroperations.*

 

In March 2008, weannounced plans to exit the directory assistance call center business and focuson our data services business and our contact services call center business inan effort to reduce our operating expenses and losses and focus on businessesthat we believe can be profitable for us. Even after giving effect to the costsavings that we expect to achieve by discontinuing our directory assistancecall center services, we may not have sufficient cash or generate sufficientrevenues quickly enough to continue our operations. Both the continuation ofour data services business and our entry into the contact services businessrequire significant revenue growth to achieve profitability. These businessesare small and operate in a competitive environment. We will need to add largercustomers in the data services business in order to create efficient scale. Thecontact services business requires continual recruitment of effective salesagents to maintain revenue growth. Both of these objectives are difficult andare a critical part of generating cash flow to fund the business going forward.

 

*We areentering the call center contact services business which is substantially different from the inbound directoryassistance operator service with which we have substantial experience, and wemay not be successful making the transition.*

 

We entered the callcenter contact services business only in January 2008 and thus have verylimited experience in this business. Revenues are generated for us generallyonly when agents are successful in negotiating a sale. We have found the skillset required for a successful telesales agent is different than an inbounddirectory assistant agent, and we have little experience sourcing, hiring andevaluating telesales agents. To date, the employee turnover rate in theoutbound telesales contact services business is very high. High turnover ratesincrease recruiting and training costs and decrease operating efficiencies andproductivity. Also, certain individual sales people may account for adisproportionate number of sales, and we may become dependent on theircontinued sales production. Our contact center uses technology that is owned,operated and hosted by third party providers and we are dependent on thattechnology for our outbound calling and sales. Any failure in technology orinability to procure and integrate such technology may impact the businessadversely. If we are unable to efficiently manage our contact services center,our efforts to substantially grow this business may falter and our results ofoperations could be materially adversely affected.

 

*Thesuccess of our new contact service business is subject to the terms and conditionsof our current customer contracts.*

 

We are party to just onecontact services agreement to date and in it we function as a sub-agent for alarge carrier. That agreement is potentially easily cancellable by our contractparty (the direct, master agent to the carrier); commissions paid to us aredependent on the carrier paying our contract party and are subject to certainreductions or offsets that may be levied by the carrier; the commission spreadis subject to change by the carrier on 30 days notice; and we have noexclusivity in products or services to be sold or in territory to be servicedby us. If the agreement is terminated, if commissions are withheld or reduced,or if competition with our contracting party or with other sub-agents were todevelop, we may not be able to grow sufficiently or possibly even continue ourcontact services business, and our operations and financial results couldthereby be materially adversely affected. If any new agreements we enter intowith other customers are in a similar form, we will always be subject to theserisks.

 

*Ourinability to achieve desired and stable pricing levels could adversely affectour ability to return to profitability.*

 

In our data services business,our pricing levels have remained fairly constant and we believe are consistentwith our competitors in the industry. The prices that we charge our datacustomers are subject to the terms of our contracts. Prices in our outboundtelesales contact business under our current contract is dependent on the discountswe negotiate with our master agent and the prices the master agent’s carriercustomers pay them. Carrier customers frequently change incentives and pricespaid for sales of their products and services, and these changes in commissionlevels flow through to us Carrier customers may change or reduce prices paidsuch that we no longer are able to generate profits through those sales.

 

8

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*We facesubstantial competition from a number of other companies.*

 

Our data servicesbusiness faces substantial competition from multiple providers of similarservices and data, many of whom are large diversified companies withsubstantial resources such as infoUSA, Melissa Data, Merkle, Acxiom and Dun &Bradstreet. If we are unable to compete successfully, it could have an adverseeffect on our business, financial condition, results of operations and/or cashflows. Our ability to compete successfully depends, in part, on our ability toanticipate and appropriately respond to many factors, including theintroduction of new services and products by our competitors, changes ineconomic conditions and marketing efforts by consumer companies, and periodicdiscount pricing strategies by our competitors. Many of our competitors havesignificant resources that may allow them to engage in heavy marketing andaggressive discounting that we would not be able to match.

 

Competition in the dataand outbound call center services business is fragmented, and the business haslow barriers to entry. Small businesses are able to service the volume of thesmall to mid-sized businesses that we initially are targeting and likely havelower overhead and cost structures than we are able to achieve, at least in thenear term. If we are unable to compete successfully, we will not be able tocontinue in this business, resulting in a material adverse effect on ourbusiness, financial condition, results of operations and/or cash flows.

 

*Therapidly changing telecommunications market could unfavorably affect us.*

 

Our contact centerbusiness currently provides services only for telecommunications companies. Thetelecommunications market is subject to rapid change and uncertainty that mayresult in competitive situations which could unfavorably affect us. Thesechanges and uncertainties are due to, among other factors, the following:

 

·              Mergers,acquisitions and alliances, and difficult economic conditions among carriers,which can result in fewer carriers in the marketplace, lost carrier customersfor our master agent(s), and termination of residual income streams earned fromprior sales; and

 

·              Changes in theregulatory environment, which may affect us directly by affecting our abilityto access and update listings data or access and update it at a reasonable costor increasing restrictions on our ability to contact customers over the phoneincluding the continual evolution of “do not call” database restrictions.

 

*Ourquarterly and annual operating results may vary significantly in part due tofactors outside our control.*

 

In the future, as in thepast, our quarterly and annual operating results may vary significantly as aresult of a number of factors. We cannot control many of these factors, whichinclude, among others:

 

·              The timing andexpense of our contact services call center network expansion or contraction,including changing staffing and infrastructure expenses related to anticipatedcall volume changes;

 

·              Theaddition or expiration of contracts with carrier customers, master agents orother customers;

 

·              Changesin our or our competitors’, customers’ or suppliers’ pricing policies;

 

·              Lack of marketacceptance or delays or increased development costs related to the introductionof our services or features; and

 

·              Generaleconomic conditions.

 

For these reasons,investors should not rely on period-to-period comparisons of our financialresults as an indication of any future results.

 

*If we areunable to anticipate changes in technology and industry standards and todevelop new services and features, we may not succeed.*

 

In our data servicesbusiness, our ability to succeed depends, in part, on our ability to anticipatechanges in technology and industry standards and to develop and introduce newservices and features that are accepted by the marketplace and cost effectivefor us to provide as a part of our overall service offerings. The developmentof new services and features can be expensive and very uncertain. It can bedifficult to correctly anticipate the needs of the marketplace and theviability of new proposals. If our competitors offer new products and servicesor are able to provide existing products more cost effectively, we may losecustomers and may not be able to grow revenues sufficiently to succeed in ourbusiness.

 

9

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*If we areunable to acquire and update information content at all or at an economicalcost, we may have difficulty providing service.*

 

Our telecom data used inthe operations of our data services business is provided by a limited number ofsuppliers and is contingently supplied based on our compliance with deliverycontracts which include a requirement that we are a directory assistanceprovider. We also use this data to increase the usefulness of our contactcenter calling lists. We have represented to our suppliers that we arecontinuing to provide directory assistance information through electronicdelivery even after we exit the live operator-delivered directory informationcall center business. If our suppliers subsequently determine we are noteligible to receive or are misusing the data provided or that we are otherwisenot complying with our contracts, they may increase the cost of providing thedata or stop supplying it all together, both of which would negatively impact andpossibly even preclude our ability to provide data services to our customersand to our contact services business..

 

*If we areunable to continue to attract and retain qualified senior management, sales andtechnical personnel and call center agents our operations could be adverselyaffected.*

 

Our success depends to asignificant extent on the efforts and abilities of our senior management, salesand technical personnel and call center agents. The loss of the services of oursenior management and technical personnel could have a material adverse effecton our business and our ability to meet our strategic objectives. In addition,increasing our revenues is critical to our success. If we are unable to attractand retain qualified and productive sales personnel, we may not be able toincrease our revenues which would have an adverse effect on our plans and ourbusiness. We also depend on the continued service of our call center agents,whom we hire from the available labor pool. The ability to attract and retainqualified senior management, sales and technical personnel, operators and otherskilled employees is extremely important to the operation of our business. Ifwe are unable to attract and retain qualified individuals or if we are requiredto pay significantly higher wages and other benefits to such individuals, ourbusiness operations could be adversely affected..

 

*Ourcommon stock may be delisted from the Nasdaq Capital Market if we are unable tomaintain compliance with Nasdaq Capital Market continued listing requirements.*

 

Our common stock listingwas transferred to the Nasdaq Capital Market in February 2006 because wehad been unable to regain compliance with the $1.00 minimum bid pricerequirement for continued listing. In July 2006, we effected a one-for-fourreverse stock split and regained compliance with the Nasdaq listingrequirements. However, since March 6, 2008, our stock price has againtraded for less than $1.00.

 

In June 2007, wereceived a Nasdaq Staff Deficiency Letter informing us that we no longercomplied with Nasdaq’s audit committee requirements for continued listing asset forth in Marketplace Rule 4350. Marketplace Rule 4350(d)(2)(A) requiresthat the audit committee of each Nasdaq issuer have at least three members,each of whom, among other things, must be independent as defined underMarketplace Rule 4200(a)(15) and meets the criteria for independence setforth in SEC Rule 10A-3(b)(1) under the Securities Exchange Act of1934, as amended. At that time, our Audit Committee was comprised of twoindependent members. We were advised in the letter that we would be provided acure period in order to regain compliance until December 3, 2007. Theletter also stated that, in the event we did not regain compliance within thisperiod, we would be provided written notification that our securities would bedelisted. On November 30, 2007, the Board of Directors appointed RichardB. Keller II to fill the remaining vacancy on the Board and further appointed Mr. Kellerto serve as the third independent member of our Audit Committee. Mr. Keller’sappointment to the Board and to the Audit Committee avoided the commencement ofdelisting proceedings against us by Nasdaq.

 

If our common stock wereto be delisted from the Nasdaq Capital Market for any reason, the marketliquidity of our common stock could be significantly reduced and an investorwould find it more difficult to dispose of, or obtain accurate quotations for,our common stock.

 

*Ourcommon stock price is volatile.*

 

The market price of ourcommon stock has experienced volatility and is likely to continue to experiencesignificant fluctuations in response to a number of factors. These factorsinclude, among others, those that have or will affect our quarterly and annualoperating results and the following:

 

·              Announcements ofextensions, expirations, changes in or breach of our contracts and the effectson our businesses and infrastructure of such activities;

 

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·              Announcementsrelating to material events concerning our customers;

 

·              Actualor anticipated variations in our results of operations;

 

·              Announcementsof new product initiatives or business strategies or the acquisition ordisposition of assets; and

 

·              Generalmarket conditions.

 

From January 1, 2007through December 31, 2007, our common stock price fluctuated from a low of$1.33 per share to a high of $2.51 per share and has on several occasionsfluctuated more than 10% during a trading day. These trading prices may changesignificantly and arbitrarily. In addition, broad market factors affectingtelecommunications or technology stocks may adversely affect the market priceof our common stock. General economic, political and market conditions,including interest rate changes and recession, may also adversely affect ourstock price.

 

*Themarket price of our common stock may be reduced by future sales of our commonstock in the public market.*

 

In 2007, we issuedconvertible preferred securities in a private placement transaction that can beconverted into a significant percentage of our outstanding common stock. Aspart of the sale of those securities we agreed to register a portion of theunderlying shares of common stock for potential resale by the purchasers. Salesof substantial amounts of our common stock in the public market, or even thepotential for such sales, may have had and may continue to have an adverseeffect on the market price for shares of our common stock and could impair theability of sellers of our common stock to recover their investment or make aprofit.

 

*Theissuance of securities in the financing transaction that we completed in 2007substantially reduced the relative equity ownership and influence of our commonshareholders who did not participate in the financing.*

 

After completing ourprivate financing transaction, which closed in June and August 2007,two shareholders owned a substantial equity ownership in our company. Becausethe investors acquired a preferred class of our capital stock, these investorsalso acquired a claim against our assets that is senior to the claim of theholders of our common stock in the event of a liquidation and certain otherevents. In addition, holders of common stock now have significantly lessinfluence on our affairs and the ability to influence major corporate decisionsthan they did prior to the transaction. The holders of our convertiblepreferred stock are also entitled to elect a majority of the members of ourBoard of Directors, further increasing their control over our operations. Accordingly,these investors have significant influence over matters submitted to ourpreferred stock shareholders, including potential change-of-controltransactions, proposals for asset sales and any liquidation. It is important toconsider that the interests of our significant preferred stock shareholders maybe different from the interests of holders of common stock, and they may be ina position to influence us to act in a manner that is  inconsistent with the interests of commonshareholders generally.

 
| **ITEM 1B.** | **UNRESOLVED STAFF COMMENTS** |
|--------------|-------------------------------|

 

None.

 
| **ITEM 2.** | **PROPERTIES.** |
|-------------|-----------------|

 

We lease our principal executive and administrative offices which alsohouses our data services and our contact services call center, consisting ofapproximately 36,000 square feet of space, in Beaverton, Oregon. The lease termextends through mid-2009. We also lease call centers and other operationalfacilities, which as of December 31, 2007, ranged in size from 5,000 to30,000 square feet. At December 31, 2007, these 6 additional leases forcall centers and other remote facilities had remaining terms of up to two years.On March 21, 2008, we announced our intention to exit the inbounddirectory assistance business with the wind-down to be substantially completedby the end of May 2008. At that time all existing directory assistance callcenters will be closed and leases will be terminated or held until expirationand marketed for sublease. Our data services and our contact services callcenter operation will continue in our Beaverton, Oregon office after the otherinbound directory assistance call centers have closed.

 
| **ITEM 3.** | **LEGAL  PROCEEDINGS.** |
|-------------|-------------------------|

 

On or about June 4,2007, we filed a petition in the United States Tax Court opposing a statutorynotice of deficiency issued by the Commissioner of Internal Revenue against usfor our tax year 2002 asserting a deficiency of approximately $630,000. Withinterest and penalties, the amount in controversy as of March 31, 2008 isapproximately $849,000. We assert that we may carryover our alternative minimumtax net operating loss arising in its 2004 tax year to reduce alternativeminimum taxable income in our 2002 tax year. 

 

11

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We believe thatameliorative legislation enacted after the terrorist attacks in New Yorkoccurring on September 11, 2000 permits this tax adjustment. The case isMetro One Telecommunications, Inc. v. Commissioner of Internal Revenue,Tax Court Docket No. 12651-07.

 
| **ITEM 4.** | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS** |
|-------------|----------------------------------------------------------|

 

No matters were submittedto a vote of security holders during the quarter ended December 31, 2007.

 

# **PART II**

# ** **

| **ITEM 5.** | **MARKET  FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES** |
|-------------|-------------------------------------------------------------------------------------------------------------------------|

 

**MarketInformation For Common Stock**

 

Our common stock tradeson the Nasdaq Capital Market under the symbol “INFO.”  In July 2006, we effected a one-for-fourreverse stock split. The high and low closing sales prices, on a post-splitadjusted basis, as reported on the Nasdaq Capital Market for each quarterlyperiod within the two most recent fiscal years were as follows:

 
| **2007**                               | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------|------------|----------|------------|---------|------------|
| Quarter ended  December 31, 2007  |       | $        | 2.12       |    | $          | 1.33 |   |
| Quarter ended  September 30, 2007 |       | $        | 2.20       |    | $          | 1.80 |   |
| Quarter ended  June 30, 2007      |       | $        | 2.18       |    | $          | 1.99 |   |
| Quarter ended  March 31, 2007     |       | $        | 2.51       |    | $          | 2.00 |   |

 
| **2006**                                            | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------------------|------------|----------|------------|---------|------------|
| Quarter ended December 31, 2006 |       | $        |  2.74 |    | $          |  2.03 |   |
| Quarter ended  September 30, 2006              |       | $        | 2.83       |    | $          | 1.85 |   |
| Quarter ended  June 30, 2006                   |       | $        | 2.68       |    | $          | 1.96 |   |
| Quarter ended  March 31, 2006                  |       | $        | 3.77       |    | $          | 1.32 |   |

 

The approximate number ofshareholders of record as of March 20, 2008 was 126. On March 20,2008, the closing price of our common stock, as reported on the Nasdaq CapitalMarket, was $0.71 per share.

 

**DividendPolicy**

 

We have never declared orpaid cash dividends on our common stock. We intend to retain earnings fromoperations for use in the operation and expansion of our business and do notanticipate paying cash dividends with respect to our common stock in theforeseeable future.

 

In 2007 we issued a totalof 1,000 shares of convertible preferred stock which carries a cumulativedividend of 4%, and 350 warrants to purchase convertible preferred stock, noneof which as yet has been exercised. The cumulative dividends have been accrued butare unpaid as of December 31, 2007.

 
| **ITEM 7.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.** |
|-------------|--------------------------------------------------------------------------------------------------|

 

*Resultsof operations for the periods discussed below should not be consideredindicative of the results to be expected in any future period and fluctuationsin operating results may also result in fluctuations in the market price of ourcommon stock. Our quarterly and annual operating results have in the past andmay in the future vary significantly depending on factors such as changes inthe telecommunications market, the addition or expiration of customercontracts, increased competition, changes in pricing policies by us or ourcompetitors, lengthy sales cycles, the timing and expense of the expansion orcontraction of our call center network, and other factors including thosediscussed under Item 1A, Risk Factors.*

 

### **Overview**

### ** **

***Pending Changes for theHistorical Business***

 

On March 21, 2008, we announced that, aspart of a strategic business review and in furtherance of our ongoing effort tocut costs and align expenses with reduced revenues, we had decided to exit thewholesale directory assistance business by the end of May 2008. Thedetermination to exit the directory assistance business on the anticipatedschedule was made by our Board of Directors on March 20, 2008. Ourstrategic review determined that the current economic environment did notprovide the potential to deliver an acceptable long-term return on investmentand that our remaining resources would be better spent pursuing our nascentcontact services businesses and monetizing our intellectual property portfolio.

 

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We will continue to pursue growth in our small data services businessthat has been developed over the last few years. We have yet to realize thesignificant opportunities we believe exist there, but we expect this to changewith greater focus.

 

Thedirectory assistance call centers in Minneapolis, Orlando, Charlotte andHonolulu are slated for closure on May 5, 2008. We also intend to reducecorporate staff at the Beaverton headquarters. Currently, we expect to completethis plan by the end of May 2008. We estimate a head-count reduction ofapproximately 700 employees in connection with the closure of these callcenters and the reduction in force at the Beaverton corporate headquarters.Closure of the directory assistance call center in Long Island commenced priorto our Board’s decision to leave the directory assistance business and isexpected to be completed by March 31, 2008.

 

***Discussion of the Historical Business***

 

We have been a providerof Enhanced Directory Assistance® and other information services deliveredthrough live operators and by electronic means. We have contracted primarilywith wireless carriers, VoIP providers, cable companies, ILECs, CLECs, freedirectory assistance providers, prepaid carriers, and payphone operators toprovide our services to their subscribers and users. Our proprietary EnhancedDirectory Assistance platform provided comprehensive directory assistancelistings and other informational content and services. Other non-directoryassistance services and content included reservation services, movie listingsand a variety of other unique services. Our special return-to-operatorfeatures, StarBack® and AutoBack®, have made the telephone easier to use andhave been offered exclusively by Metro One. All of our services have beenprovided by operators located only in the United States, or electronically. Manyof our features or aspects thereof are the subject of patents or pending patentapplications. Revenues have been derived principally through fees charged totelecommunications carriers and other customers.

 

In addition tovoice-based services, we also provide Enhanced Directory Assistance services inelectronic format.  These services are provided to customers whoelectronically issue directory assistance queries and use the returnedinformation to complete and correct their own data records.  We currentlyprovide electronic directory assistance services in a number of deliveryformats to meet customer needs including automated file processing andreal-time individual look ups.  In addition to pure directory assistancedata, we house national databases of consumer and business information. We blend this data with directory assistance data to build products we sell toa broad range of companies that require electronic directory assistance dataand marketing data.  These customers include companies in the service, marketing,and financial sectors.  Our data services business represents an emergingbusiness based on infrastructure originally developed to support ourvoice-based call center business.

 

Under a typical wholesalecontract, a carrier agrees to route some or all of their directory assistancecalls to us. We have offered our services to multiple carriers within the samemarket. When a carrier’s subscribers dial a typical directory assistancenumber, such as “411,” “555-1212” or “00,” the calls are routed to and answeredby our operators identifying the service by that carrier’s brand name.

 

Each carrier customer establishes its own directory assistance feestructure for its subscribers. Wireless subscribers typically pay fees rangingfrom $1.25 to $1.79 plus airtime charges for our services. We bear nosubscriber collection risk with respect to carrier subscribers; however, theremay be collection risk to the extent growth and profitability in thetelecommunications industry decreases and to the extent we provide services toother types of customers.

 

We charge our carriercustomers on a per call basis. Prices for services provided to other types ofcustomers, including businesses, governmental units or customers who receiveour services in electronic form, may vary based on the nature of the service,volume and other circumstances.

 

As a result of the termination of contracts with significant customers,we have experienced significant financial losses and reduction of cash flowsover the last several years. These losses have had, and will continue to have,a significant adverse impact on our results of operations and cash flows. Wehave experienced net losses in each of the quarterly and annual periodsbeginning with the second quarter of 2003. It is likely that we will continueto experience operating losses in parts or all of 2008. We are working toaggressively pursue new and additional sources of revenues to support ourreduced cost structure, develop and grow our data services business and ouroutbound telesales business. There can be no assurance that our plans will besuccessful. In that case, we may need additional cash to fund our operationsand/or pursue our business initiatives during 2008. We may attempt to establishborrowing arrangements or otherwise raise additional funds in order to maintainadequate liquidity. We cannot provide assurance that borrowing or other fundingwill be available in amounts or on terms acceptable to us. If we are unable toexecute our operations according to our plan or obtain additional financing, wemay be forced to cease operations.

 

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**Restructuringand exit activities**

 

In 2006, we undertooksignificant restructuring activities, due primarily to the departure of callvolume from Nextel, a major customer. During 2006, we closed 13 call centersand significantly reduced the number of call center and administrativeemployees. As a result of the closure and other restructuring activities, wepaid or accrued approximately $2.8 million of termination and retentionbenefits. We also recorded approximately $1.7 million of expenses related totermination of lease obligations of closed facilities during 2006. In addition,we recorded approximately $2.2 million of other costs, primarily legal and advisoryservices and dismantling costs in 2006. Included in these costs were lossesincurred on disposal, in the second quarter, of certain corporate and callcenter assets in the amount of $935,000. These assets had a net book valuetotaling $1,574,000 at the time of disposal, and we received proceeds of$639,000 from the sale. At December 31, 2006, we had approximately$712,000 of accrued restructuring costs, primarily related to remaining leaseobligations of closed facilities and accrued termination benefits related tocertain corporate employees. In 2007, we continued our restructuringinitiatives, incurring approximately $1.1 million in incremental costs, forheadcount reductions and primarily for the purpose of engaging XRoads SolutionsGroup, a strategic consulting firm specializing in troubled companyrestructuring, to evaluate our operations, the market, and strategicalternatives and recommend the most prudent course of action for ourstakeholders. There were no remaining restructuring costs accrued at December 31,2007.

 

### **Results of Operations**

### ** **

The following table showsselected items of our consolidated statements of operations data expressed as apercentage of revenues:

 
| ** **                                    | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
| Revenues                                      |       | 100.0                                       | %          | 100.0 | % |
| Direct operating  expenses                    |       | 84.2                                        |       | 62.9 |   |
| Selling, general  and administrative expenses |       | 81.0                                        |       | 68.1 |   |
| Depreciation and  amortization                |       | 11.9                                        |       | 12.3 |   |
| Restructuring  charges                        |       | 6.0                                         |       | 21.8 |   |
| Loss from  operations                         |       | (83.1                                       | )          | (65.1 | ) |
| Loss on  revaluation of warrants              |       | (0.2                                        | )          | — |   |
| Other income,  net                            |       | 2.5                                         |       | 1.9 |   |
| Loss before  income taxes                     |       | (80.8                                       | )          | (63.2 | ) |
| Income tax  expense (benefit)                 |       | (0.2                                        | )          | 0.2 |   |
| Net loss                                      |       | (80.6                                       | )%         | (63.4 | )% |

 

**2007Compared to 2006**

 

*Revenues.*Revenues decreased 41% to $17.9 million from $30.3 million. Callvolume decreased to approximately 82 million calls from approximately 85million calls. These decreases resulted primarily from the elimination of callsas a result of the termination of the Nextel agreement and was offset byincreased volume in Cablevision and Jingle calls. In addition, our overallaverage revenue per call was approximately $0.20 in 2007 compared toapproximately $0.27 in 2006 primarily due to downward pricing adjustments toretain contracts and new contracts at rates lower than the existing averages. Additionallyin the first quarter of 2006, we received $5.75 million recorded as revenuefrom Nextel as part of a settlement agreement entered into the first quarter of2006.

 

*Directoperating expenses.*Direct operating expenses, consisting ofthe costs of salaries, wages, benefits and taxes of call center personnel,listings data and content acquisition costs, decreased 21% to $15.1 millionfrom $19.1 million. This decrease was primarily due to lower personnel and datacost associated with servicing lower call volumes and increased efficiencies. Asa percentage of revenues, direct operating expenses increased to 84.2% from62.9%, due primarily to lower revenues.

 

*Selling,general and administrative expenses.*Selling, general andadministrative expenses decreased 30% to $14.5 million from $20.7 millionresulting primarily from cost-cutting efforts in response to the 2005termination of our contract with Nextel, including the closing of 12 callcenters. As a percentage of revenues, selling, general and administrativeexpenses increased to 81% in 2007 compared to 68.1% in 2006 primarily due tolower revenues.

 

*Depreciationand amortization.*Depreciation and amortization expense was$2.1 million in 2007 compared to $3.7 million in 2006. The decrease in depreciationand amortization was due primarily to a reduction in the acquisition of fixedassets in 2007 and the disposal of assets related to call center closures in2006 in addition to a larger percentage of assets reaching full  depreciation*.*

 

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*Restructuringcharges.*Restructuring charges of approximately $1.1 millionin 2007 consisted primarily of one-time termination benefits paid to employeesof $156,000, lease termination costs of $8,000 and $906,000 of other costs*.*Other costs were largely for consultants that we engagedto assist us with redesigning our business model. The remaining restructuringcharges related primarily to the 13 call centers we closed in 2006 and othercost cutting efforts at our corporate headquarters.

 

*Otherincome and expense*. Loss associated with revaluation ofwarrants was $17,000 in 2007 and $-0- in 2006 and represents the change inmarket value of the warrant liability incurred in connection with the issuanceof 1,000 shares of convertible preferred stock. See Note 5 to the Notes toConsolidated Financial Statements for further information on this financingtransaction. Other income, net in 2007 was approximately $444,000 consistingprimarily of interest earned on cash and cash equivalents partially offset byother miscellaneous non-operating expenses.

 

*Incometaxes*. Income tax benefit in 2007 was $29,000 primarilyrelated to state income tax refunds. Income tax expense in 2006 was $51,000,primarily related to state income taxes. Our effective tax rate for 2007 was abenefit of approximately 0.2% and an expense of 0.3% for 2006. The rates forboth years differ from the statutory rates primarily due to the increase in thevaluation allowance, against deferred tax assets as it is more likely than notthat some portion or all of the deferred tax assets may not be realized.

 

### **Liquidity and Capital Resources**

### ** **

Cash and cash equivalents, short-term investments and restricted cashare recorded at cost which approximates their fair market value. As of December 31,2007, we had approximately $11.0 million in cash and cash equivalents andrestricted cash (including $3.0 million of restricted cash) compared toapproximately $16.7 million (including $4.7 million of restricted cash) at December 31,2006. The net decrease of $5.7 million resulted primarily from net operatinglosses of $14.4 million partially offset by net proceeds received from theissuance of convertible preferred stock in the amount of $9.1 million. We haveno outstanding debt.

 

Working capital was $9.8 million at December 31, 2007, compared to$13.3 million at December 31, 2006. This change was primarily due to netoperating losses incurred in 2007 partially offset by net proceeds receivedfrom the issuance of convertible preferred stock. See Item 1A. “Risk Factors”and the subheading “Critical Accounting Policies – Accounts Receivable” in thissection below for a discussion of certain risk that could affect the amount andsufficiency of our working capital.

 

*Cash flow from operations.*Netcash used in operations in 2007 was $14.7 million compared to net cash used of$8.6 million in 2006; accordingly, we used approximately $6.1 million more cashin operations in 2007 as compared to 2006. The increase in cash used inoperations was primarily as follows: we received approximately $22.5 millionless in cash collections from our customers due to reduced sales and theone-time contract termination settlement payment of $5.75 million received in2006 from Nextel, partially offset by reduced cash used for payroll andbenefits of approximately $8.5 million and a reduction in cash paid for goodsand services of approximately $9.0 million.

 

*Cash flow from investing activities.*Cashprovided by investing activities was $1.6 million in 2007 primarily resultingfrom the release of cash used to secure a letter of credit. Cash provided byinvesting activities was $2.8 million in 2006, also primarily resulting fromthe release of cash used to secure a letter of credit and cash proceeds fromthe sale of excess equipment and other assets, partially offset by cash usedfor capital purchases. In 2007 and 2006, capital expenditures were primarilyfor equipment to upgrade existing call centers, corporate networks andinfrastructure.

 

*Cash flow from financing activities*.Cash provided by financing activities of $9.1 million in 2007 was the result ofthe net proceeds received upon the issuance of 1,000 shares of convertiblepreferred stock. See Note 5 to the Notes to Consolidated Financial Statementsfor further information on this financing transaction.

 

*Future capital needs and resources.*Theprimary uses of our capital in the near future are expected to be for basicworking capital needs and for the costs of disposing of our directoryassistance call center operations. We expect to adjust personnel and networkcapacities in order to address varying business circumstances, includingchanges in volume and pricing and other provisions of customer contracts.

 

Although cash on hand (including restricted cash) and short-terminvestments at December 31, 2007 was approximately $11.0 million, ouroperations and future activities, including planned and perhaps additionalrestructuring efforts, will reduce available cash.

 

Our existing cash and cash equivalents will likely not be sufficient tofund our operations for the remainder of 2008 or beyond. We are aggressivelypursuing new, potentially more profitable sources of revenues, includingoutbound contact services and are working to grow our data services business. Overthe past two years, we have significantly reduced the direct cost of deliveringour services as well as our general and administrative overhead.

 

15

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In addition, we are investigating and pursuing strategic alternativesfor us to improve operations, improve liquidity and capital resources, andprovide stability to our financial position as evidenced by the March 21,2008 announcement that we would further restructure our business.  There can be no assurance that our efforts inthese areas will be successful.  In suchevent, we may attempt to establish borrowing arrangements in order to maintainadequate liquidity, although we cannot provide assurance that financing will beavailable in amounts or on terms acceptable to us.  If we are unable to conduct our operationsaccording to our plans and do so profitably or obtain additional financing, wemay be forced to cease operations.

 

### **Effect of Inflation**

### ** **

Inflation did not materially affect our business during the lastseveral years.

 

### **Critical Accounting Policies**

### ** **

We prepare our financial statements in conformity with accountingprinciples generally accepted in the United States of America.  As such, we are required to make certainestimates, judgments and assumptions that we believe are reasonable based uponthe information available.  Theseestimates and assumptions affect the reported amounts of assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the periods presented. Management believes that of our significant accounting policies (seeNote 1 to Notes to Consolidated Financial Statements), those governing accountsreceivable, the lives and recoverability of the carrying amount of equipmentand other long-lived assets, such as existing intangible assets, estimatesinvolving the levels of our contingent liabilities for workers’ compensationand medical self-insurance, estimates of current taxes owed and estimated ofrestructuring costs may involve a higher degree of judgment, estimation anduncertainty.

 

***Accountsreceivable****.*Our wholesalecustomer base has primarily consisted of large telephone carriers in the UnitedStates.  As such, we have had minimalrisk of uncollectibility, at any point in time, related to outstanding accountsreceivable with these customers.  We havenot experienced significant collection issues or write-offs related to thesecustomers.  Since our accounts receivableare concentrated in relatively few of these wholesale customers, a significantchange in the liquidity or financial position of any one of them couldadversely impact collection of our accounts receivable and therefore have amaterial adverse effect on our financial position and future operatingresults.  In addition, our data servicesbusiness is generating receivables from customers that may not be asfinancially stable as our large carrier customers which to date has not but mayin the future expose us to greater risk of uncollectible receivables than wehave experienced in the past.

 

On March 21, 2008, wenotified all of our existing customers that effective May 5, 2008 we would nolonger accept their directory assistance calls. Should we make or be required tomake payments in connection with our contract obligations with our currentdirectory assistance customers and others, or should these customers refuse topay or attempt to set off amounts owed to us or pursue legal claims against us,our cash collected from our accounts receivable could be less than weanticipate, perhaps significantly, and our working capital could besignificantly less than we believe.

 

***Long-livedassets and intangibles****.* We evaluate the remaining life andrecoverability of equipment and other assets, including patents and trademarksand internally developed software, whenever events or changes in circumstancesindicate that the carrying amount of the assets may not be recoverable.  At such time, we estimate the future cashflows expected from use of such assets and their eventual disposition and, iflower than the carrying amounts, adjust the carrying amount of the assets totheir estimated fair value.  Because ofour changing business conditions, including lower wholesale prices and dependenceon a relatively small number of customers for a significant portion of ourrevenues, our estimates of future cash flows to be generated from ouroperations could change materially, resulting in the need for us to recordadditional impairment charges.  Inaddition, as a result of our changing business conditions, we expect to adjustpersonnel, call centers and network capacities. If any of these activities result in certain of our assets no longerbeing used in operations, we may need to record an additional impairmentcharge.    As a result of the 2005decision by Nextel to terminate its contract with us and because of continuingoperating losses, we evaluated our fixed assets and intangibles as of December 31,2007 and 2006 for impairment in accordance with SFAS No. 144.  Our evaluation determined that the assetswere not impaired as of December 31, 2007 and 2006.

 

***Self-insurancereserves****. *In the past, we have self-insureda portion of our workers’ compensation and employee medical insurance programs. In some periods we purchased stop loss coverage at varying levels in order tomitigate our potential future losses.  The nature of the liabilitiesassociated with these self-insurance programs, which may not fully manifestthemselves for several years, requires significant judgment.  We evaluateopen workers’ compensation and medical claims under these policies periodicallyto determine the reasonableness of the reserves we have recorded for suchclaims.  Our evaluation includesestimates of potential incurred-but-unreported claims as well as factors thatmay cause original estimates of such claims to increase over time, such asavailable claims data and historical trends and experience, as well as futureprojections of ultimate losses, expenses, premiums and administrativecosts.  We adjust these reserves if events or changes in circumstancesindicate that ultimate payments related to the claims will be more than therecorded reserves.  At December 31,2007, we have reserved approximately $1.2 million related to self-insuredworkers’ compensation programs.  As of December 31,2007, there were no reserves required or remaining for medical insurance as allpotential claims periods have expired. While we believe that the amounts reserved for these obligations aresufficient, any significant change in the status of open claims or costsassociated with claims made under these plans could have a material adverseeffect on our financial position, results of operations or cash flows.

 

16

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***Incometaxe*s.**  Accounting for income taxes requires us toestimate our income taxes in each jurisdiction in which we operate.  Dueto differences in the recognition of items included in income for accountingand tax purposes, temporary differences arise which are recorded as deferredtax assets or liabilities.  We estimate the likelihood of recovery ofthese assets, which is dependent on future levels of profitability and enactedtax rates.  Should any amounts be determined not to be recoverable, orassumptions change, we would be required to take a charge to establish avaluation allowance against such deferred tax assets, which could have amaterial effect on our financial position, results of operations or cash flows.  At December 31, 2007 and 2006, avaluation allowance reduced net deferred tax assets to zero.

 

***Restructuring*. **We account for restructuring costs inaccordance with Statement of Financial Accounting Standards No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*whereby liabilities are recognized only as incurred.  One-time termination benefits are recordedwhen the qualifying termination plan is communicated to employees.  In addition, liabilities for costs related tothe early termination our operating leases are recognized and measured at fairvalue when the lease is terminated in accordance with the early terminationprovisions of the lease agreement. Further, asset write-down or impairment charges required as a result ofa restructuring activity is accounted for consistent with Statement ofFinancial Accounting Standards No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, whereby thedepreciable lives of fixed assets will be shortened in accordance with the planof abandonment.

 

### **Recent Accounting Pronouncements**

### ** **

In February 2008,the Financial Accounting Standards Board (“FASB”) issued staff positon No. 157-1(“FSP 157-1”) amending SFAS 157 to exclude FASB Statement No. 13, *Accounting for Leases*(“SFAS 13”), and other accountingpronouncements that address fair value measurements for purposes of leaseclassification or measurement under SFAS 13. This scope exception does notapply to assets acquired and liabilities assumed in a business combination thatare required to be measured at fair value under SFAS 141 or SFAS 141Rregardless of whether those assets and liabilities are related to leases.  FSP 157-1 shall be effective upon the initialadoption of SFAS 157.  See discussion ofthe effective date of SFAS 157 below.  Wedo not expect the adoption of this statement to have a material effect on ourconsolidated financial position or results of operations.

 

In December 2007,the FASB issued SFAS No. 160*****NoncontrollingInterests in Consolidated Financial Statements—an amendment of ARB No. 51*(“SFAS 160”)*.  *SFAS 160 establishes accountingand reporting standards for a parent company’s noncontrolling, or minority,interests in its subsidiaries.  SFAS 160also provides accounting and reporting standards for changes in a parent’sownership interest of a noncontrolling interest as well as deconsolidationprocedures. This Statement aligns the reporting of noncontrollinginterests in subsidiaries with the requirements in International AccountingStandards 27 and is effective for fiscalyears beginning on or after December 15, 2008, and interim periodswithin those fiscal years.   Wedo not expect the adoption of this statement to have a material effect on ourconsolidated financial position or results of operations.

 

In December 2007,the FASB issued SFAS No. 141, *Business Combinations-Revised*(“SFAS 141R”).  SFAS141R changes the accounting for business combinations including the measurementof acquirer shares issued in consideration for a business combination, therecognition of contingent consideration, the accounting for preacquisition gainand loss contingencies, the recognition of capitalized in-process research anddevelopment, the accounting for acquisition-related restructuring costaccruals, the treatment of acquisition related transaction costs and therecognition of changes in the acquirer’s income tax valuation allowance. SFAS No. 141(R) iseffective for fiscal years beginning after December 15, 2008, with earlyadoption prohibited. The Company will be required to adopt SFAS No. 141(R) inthe first quarter of fiscal year 2009 We do not expect the adoption of thisstatement to have a material effect on our consolidated financial position orresults of operations as we have no plans for acquisitions at this time.

 

In February 2007,the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities* (“SFAS 159”).  SFAS 159 provides companies with an option toreport selected financial assets and liabilities at fair value.  SFAS 159 also establishes presentation anddisclosure requirements designed to facilitate comparisons between companiesthat choose different measurement attributes for similar types of assets andliabilities and to provide additional information that will help investors andother financial statement users to more easily understand the effect of acompany’s choice to use fair value on its earnings.  Finally, SFAS 159 requires entities todisplay the fair value of those assets and liabilities for which a company haschosen to use fair value on the face of the balance sheet.  SFAS 159 is effective as of the beginning ofan entity’s first fiscal year beginning after November 15, 2007.  We are currently assessing the impact of SFAS159 which we will be required to adopt in the first quarter of our 2008 fiscalyear.

 

17

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In September 2006,the FASB issued SFAS No. 157, “*Fair Value Measurements*”(“SFAS 157”), which establishes a framework for measuring the fair value ofassets and liabilities in generally accepted accounting principles (“GAAP”) andexpands disclosures about fair value measurements.  The FASB has issued a proposed interpretationthat would defer the implementation of SFAS No. 157 for non-financialassets and liabilities until fiscal years beginning after November 15,2008. The remaining provisions of SFAS No. 157 are effective for fiscalyears beginning after November 15, 2007 and interim periods within thosefiscal years. We do not expect that the adoption of SFAS No. 157 will havea material impact on our financial position and results of operations.

 

In December 2007,the SEC issued SAB No. 110 which expressed the views of the staffregarding the use of a “simplified” method, as discussed in SAB No. 107,in developing an estimate of expected term of “plain vanilla” share options inaccordance with SFAS No. 123. In particular, the staff indicated in SAB No. 107that it will accept a company’s election to use the simplified method,regardless of whether the Company has sufficient information to make morerefined estimates of expected term. At the time SAB No. 107 was issued,the staff believed that more detailed external information about employeeexercise behavior would, over time, become readily available to companies.Therefore, the SEC staff stated in SAB No. 107 that it would not expect acompany to use the simplified method for share option grants after December 31,2007. The staff understands that such detailed information about employeeexercise behavior may not be widely available by December 31, 2007.Accordingly, the staff will continue to accept, under certain circumstances,the use of the simplified method beyond December 31, 2007. We do notexpect the adoption of SAB No. 110 to have a material effect on ouroperations or financial position.

 

18

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**ITEM 8.****     FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA.**

 

**MANAGEMENT’SREPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

Our management is responsible forestablishing and maintaining adequate internal control over financial reportingfor the Company and for assessing the effectiveness of the Company’s internalcontrol over financial reporting as of December 31, 2007. As defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles (GAAP).

 

The Company’s internal control overfinancial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof the Company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the Company’s assets that could have a material effect on the financialstatements.

 

Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Projections of any evaluation of effectiveness to future periodsare subject to the risk that controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

 

Management conducted, with theparticipation and supervision of our Chief Executive Officer and ChiefFinancial Officer, an evaluation of the effectiveness of our internal controlover financial reporting as of December 31, 2007. Management’s assessmentof internal control over financial reporting was conducted using the criteriaset forth in the report entitled *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”).   Our assessment included an evaluation of the design of ourinternal control over financial reporting and testing of the operationaleffectiveness of our internal control over financial reporting.

 

During the fourthquarter 2007, we enhanced our control structure by adding additional expertisein the area of financial accounting and SEC reporting.  Other than this enhancement, there has notbeen any change in our internal control over financial reporting that occurredduring the fiscal quarter covered by this report that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

 

Based on our assessment our managementconcluded that, as of December 31, 2007, our internal control overfinancial reporting was effective based on the criteria established in *Internal Control—Integrated Framework*issuedby COSO.

 

Management’s assessment of theeffectiveness of our internal control over financial reporting as of December 31,2007 has not been audited by BDO Seidman LLP, an independent registered publicaccounting firm.

 

19

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Shareholders ofMetro One Telecommunications, Inc.Beaverton, Oregon

 

We have audited theaccompanying consolidated balance sheets of Metro One Telecommunications, Inc.and subsidiaries (the “Company”) as of December 31, 2007 and December 31,2006, and the related consolidated statements of operations, shareholders’equity, and cash flows for the years then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of the Company as of December 31,2007 and December 31, 2006, and the results of its operations and its cashflows for the years then ended, in conformity with accounting principlesgenerally accepted in the United States of America.

 

The accompanying consolidatedfinancial statements have been prepared assuming that the Company will continueas a going concern.  As described in Note2 to the financial statements, the Company’s recurring losses from operationsand loss of a significant customer raise substantial doubt as to its ability tocontinue as a going concern. As described in Note 17, Subsequent Event, on March 21,2008, the Company decided to discontinue its primary business operations.  The consolidated financial statements do notcontain any adjustments that might result from the outcome of this uncertainty.

 
| BDO SEIDMAN, LLP     |
|----------------------|
| Seattle,  Washington |
| March 31,  2008 |

 

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**Metro OneTelecommunications, Inc.**

**Consolidated Statements of Operations**(Inthousands, except per share amounts)

 
| ** **                                                                                            | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
|                                                                                                  |       |                                        |       |   |   |
| Revenues                                                                                              |       | $                                           | 17,888     |   | $ | 30,339 |   |
|                                                                                                  |       |                                        |       |   |   |
| Costs and  expenses:                                                                                  |       |                                        |       |   |   |
| Direct operating                                                                                      |       | 15,070                                      |       | 19,074 |   |
| Selling, general  and administrative                                                                  |       | 14,488                                      |       | 20,664 |   |
| Depreciation and  amortization                                                                        |       | 2,133                                       |       | 3,744 |   |
| Restructuring  charges                                                                                |       | 1,070                                       |       | 6,610 |   |
|                                                                                                  |       | 32,761                                      |       | 50,092 |   |
|                                                                                                  |       |                                        |       |   |   |
| Loss from  operations                                                                                 |       | (14,873                                     | )          | (19,753 | ) |
|                                                                                                  |       |                                        |       |   |   |
| Loss associated  with revaluation of warrants                                                         |       | (17                                         | )          | — |   |
| Other income,  net                                                                                    |       | 444                                         |       | 583 |   |
|                                                                                                  |       |                                        |       |   |   |
| Loss before  income taxes                                                                             |       | (14,446                                     | )          | (19,170 | ) |
| Income tax  expense (benefit)                                                                         |       | (29                                         | )          | 51 |   |
| Net loss                                                                                              |       | $                                           | (14,417    | ) | $ | (19,221 | ) |
|                                                                                                  |       |                                        |       |   |   |
| Preferred stock  dividends                                                                            |       | (230                                        | )          | — |   |
| Preferred stock  deemed dividends                                                                     |       | (2,115                                      | )          | — |   |
| Accretion on  preferred stock                                                                         |       | (326                                        | )          | — |   |
|                                                                                                  |       |                                        |       |   |   |
| Net loss  attributable to common shareholders                                                         |       | $                                           | (17,088    | ) | $ | (19,221 | ) |
|                                                                                                  |       |                                        |       |   |   |
| Net loss per  share attributable to common shareholders:                                              |       |                                        |       |   |   |
| Basic and  diluted                                                                                    |       | $                                           | (2.74      | ) | $ | (3.08 | ) |
|                                                                                                  |       |                                        |       |   |   |
| Weighted average  shares outstanding used in computing net loss attributable to common  shareholders: |       |                                        |       |   |   |
| Basic and  diluted                                                                                    |       | 6,233                                       |       | 6,233 |   |

 

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

 

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**Metro One Telecommunications, Inc.**

**ConsolidatedBalance Sheets**(In thousands except for share information)

 
| ** **                                                                                                                                                                                                                                                      | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                      | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| **Assets**                                                                                                                                                                                                                                                      |       |                  |       |   |   |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                                                                                 |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                                      |       | $                     | 7,999      |   | $ | 11,965 |   |
| Restricted cash                                                                                                                                                                                                                                                 |       | 3,000                 |       | 4,741 |   |
| Accounts  receivable, net                                                                                                                                                                                                                                       |       | 2,421                 |       | 2,179 |   |
| Prepaid costs  and other current assets                                                                                                                                                                                                                         |       | 573                   |       | 961 |   |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Total current  assets                                                                                                                                                                                                                                           |       | 13,993                |       | 19,846 |   |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Furniture,  fixtures and equipment, net                                                                                                                                                                                                                         |       | 1,438                 |       | 3,014 |   |
| Intangible assets                                                                                                                                                                                                                                               |       | 4,055                 |       | 4,666 |   |
| Other assets                                                                                                                                                                                                                                                    |       | 81                    |       | 86 |   |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Total assets                                                                                                                                                                                                                                                    |       | $                     | 19,567     |   | $ | 27,612 |   |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| **Liabilities,  Redeemable Preferred Stock and Shareholders’ Equity**                                                                                                                                                                                      |       |                  |       |   |   |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Current  liabilities:                                                                                                                                                                                                                                           |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                                                                                                |       | $                     | 281        |   | $ | 983 |   |
| Accrued  liabilities                                                                                                                                                                                                                                            |       | 1,484                 |       | 1,685 |   |
| Accrued payroll  and related costs                                                                                                                                                                                                                              |       | 2,173                 |       | 3,898 |   |
| Preferred stock  dividend payable                                                                                                                                                                                                                               |       | 230                   |       | — |   |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Total current  liabilities                                                                                                                                                                                                                                      |       | 4,168                 |       | 6,566 |   |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Preferred stock  warrants                                                                                                                                                                                                                                       |       | 615                   |       | — |   |
| Other long-term  liabilities                                                                                                                                                                                                                                    |       | 319                   |       | 470 |   |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Total  liabilities                                                                                                                                                                                                                                              |       | 5,102                 |       | 7,036 |   |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Commitments and  contingencies                                                                                                                                                                                                                                  |       |                  |       |   |   |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Redeemable  preferred stock:                                                                                                                                                                                                                                    |       |                  |       |   |   |
| Preferred stock,  no par value, 10,000,000 shares authorized:                                                                                                                                                                                                   |       |                  |       |   |   |
| Series A  convertible preferred stock, 1,385 shares authorized 1,000 and 0 shares  issued and outstanding at December 31, 2007 and December 31, 2006,  respectively; liquidation preference of $10,000 plus cumulative unpaid  dividends of $230 |       | 8,798                 |       | — |   |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Shareholders’  equity:                                                                                                                                                                                                                                     |       |                  |       |   |   |
| Common stock, no  par value; 50,000,000 shares authorized, 6,233,000 shares issued and  outstanding at December 31, 2007 and 2006.                                                                                                                         |       | 122,246               |       | 120,067 |   |
| Accumulated  deficit                                                                                                                                                                                                                                            |       | (116,579              | )          | (99,491 | ) |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Shareholders’  equity                                                                                                                                                                                                                                      |       | 5,667                 |       | 20,576 |   |
|                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Total liabilities,  redeemable preferred stock and shareholders’ equity                                                                                                                                                                                    |       | $                     | 19,567     |   | $ | 27,612 |   |

 

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

 

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**Metro OneTelecommunications, Inc.**

**ConsolidatedStatements of Shareholders’ Equity**(In thousands)

 
| ** **                                                                                                                | ** ** | **Shareholders’ Equity** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                | ** ** | **Common Stock**              | ** ** | **Accumulated** | ** ** | **Shareholders’** | ** ** |
| ** **                                                                                                                | ** ** | **Shares**                         | ** ** | **Amount** | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
|                                                                                                                      |       |                               |       |   |   |   |   |   |   |
| Balances at  December 31, 2005                                                                                       |       | 6,237                              |       | $ | 119,937 |   | $ | (80,270 | ) | $ | 39,667 |   |
|                                                                                                                      |       |                               |       |   |   |   |   |   |   |
| Stock  compensation expense                                                                                               |       | —                             |       | 130 |   | — |   | 130 |   |
| Cancellation of  restricted stock grant                                                                                   |       | (4                                 | )          | — |   | — |   | — |   |
| Net loss                                                                                                                  |       | —                             |       | — |   | (19,221 | ) | (19,221 | ) |
|                                                                                                                      |       |                               |       |   |   |   |   |   |   |
| Balances at  December 31, 2006                                                                                       |       | 6,233                              |       | 120,067 |   | (99,491 | ) | 20,576 |   |
|                                                                                                                      |       |                               |       |   |   |   |   |   |   |
| Stock  compensation expense                                                                                               |       | —                             |       | 64 |   | — |   | 64 |   |
| Beneficial  conversion feature associated with the issuance of 1,000 shares of  Series A convertible preferred stock |       | —                             |       | 2,115 |   | — |   | 2,115 |   |
| Preferred stock  dividends                                                                                                |       | —                             |       | — |   | (230 | ) | (230 | ) |
| Preferred stock  deemed dividends                                                                                         |       | —                             |       | — |   | (2,115 | ) | (2,115 | ) |
| Accretion on  preferred stock                                                                                             |       | —                             |       | — |   | (326 | ) | (326 | ) |
| Net loss                                                                                                                  |       | —                             |       | — |   | (14,417 | ) | (14,417 | ) |
|                                                                                                                      |       |                               |       |   |   |   |   |   |   |
| Balances at  December 31, 2007                                                                                       |       | 6,233                              |       | $ | 122,246 |   | $ | (116,579 | ) | $ | 5,667 |   |

 

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

 

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**Metro OneTelecommunications, Inc.**

**ConsolidatedStatements of Cash Flows**(In thousands)

 
| ** **                                                                   | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                | ** ** | **2006** | ** ** |
|                                                                         |       |                                    |       |   |   |
| Cash flows used  in operating activities:                                    |       |                                    |       |   |   |
| Net loss                                                                     |       | $                                       | (14,417    | ) | $ | (19,221 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                    |       |   |   |
| Depreciation and  amortization                                               |       | 2,133                                   |       | 3,744 |   |
| Loss on disposal  of fixed assets                                            |       | 100                                     |       | 1,101 |   |
| Impairment loss  and non-cash restructuring charges                          |       | 81                                      |       | 129 |   |
| Deferred rent                                                                |       | (151                                    | )          | (156 | ) |
| Stock  compensation expense                                                  |       | 64                                      |       | 130 |   |
| Loss associated  with revaluation of warrants                                |       | 17                                      |       | — |   |
| Changes in  certain assets and liabilities:                                  |       |                                    |       |   |   |
| Accounts  receivable                                                         |       | (242                                    | )          | 9,803 |   |
| Prepaid costs  and other assets                                              |       | 388                                     |       | 1,014 |   |
| Accounts payable  and other liabilities                                      |       | (2,628                                  | )          | (5,158 | ) |
|                                                                         |       |                                    |       |   |   |
| Net cash used in  operating activities                                       |       | (14,655                                 | )          | (8,614 | ) |
|                                                                         |       |                                    |       |   |   |
| Cash flows from  investing activities:                                       |       |                                    |       |   |   |
| Decrease in  restricted cash                                                 |       | 1,741                                   |       | 2,119 |   |
| Capital  expenditures                                                        |       | (155                                    | )          | (120 | ) |
| Proceeds from  sale of fixed assets                                          |       | 33                                      |       | 820 |   |
|                                                                         |       |                                    |       |   |   |
| Net cash  provided by investing activities                                   |       | 1,619                                   |       | 2,810 |   |
|                                                                         |       |                                    |       |   |   |
| Cash flows from  financing activities:                                       |       |                                    |       |   |   |
| Proceeds from  issuance of convertible preferred stock and warrants, net     |       | 9,070                                   |       | — |   |
|                                                                         |       |                                    |       |   |   |
| Net cash  provided by financing activities                                   |       | 9,070                                   |       | — |   |
|                                                                         |       |                                    |       |   |   |
| Net decrease in  cash and cash equivalents                                   |       | (3,966                                  | )          | (5,804 | ) |
|                                                                         |       |                                    |       |   |   |
| Cash and cash  equivalents, beginning of year                                |       | 11,965                                  |       | 17,769 |   |
|                                                                         |       |                                    |       |   |   |
| Cash and cash  equivalents, end of year                                      |       | $                                       | 7,999      |   | $ | 11,965 |   |
|                                                                         |       |                                    |       |   |   |
| Supplemental  disclosure of cash flow information:                           |       |                                    |       |   |   |
| Cash refunded  (paid) for income taxes, net                                  |       | $                                       | 48         |   | $ | (112 | ) |

 

**Non-cashfinancing activities:**

 

The Companyaccrued a liability of approximately $230 related to accumulated dividendspayable on the convertible preferred stock for the year ended December 31,2007.

 

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

 

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**Metro One Telecommunications, Inc.**

**Notes to Consolidated FinancialStatements**

 

**1.****              Summaryof Operations and Significant Accounting Policies**

 

We are an experiencedoperator of call centers and data management services.  We have been a provider of Enhanced DirectoryAssistance® and other information services delivered through live operators andby electronic means.  We have contractedprimarily with wireless carriers, Voice over Internet Protocol (“VoIP”)providers, cable companies, Competitive Local Exchange Carriers (“CLEC”), freedirectory assistance providers, prepaid carriers, and payphone operators toprovide our services to their subscribers and users.  Our proprietary Enhanced Directory Assistanceplatform provides comprehensive directory assistance listings and otherinformational content and services. Other non-directory assistance services and content has includedreservation services, movie listings and a variety of other uniqueservices.  Our special return-to-operatorfeatures, StarBack® and AutoBack®, make the telephone easier to use and areoffered exclusively by Metro One.  All ofour services have been provided by operators located only in the United States,or electronically.  Many of our featuresor aspects thereof are the subject of patents or pending patent applications.Revenues have been derived principally through fees charged totelecommunications carriers and other customers.

 

We also provide EnhancedDirectory Assistance services in electronic format.  These services areprovided to customers who electronically issue directory assistance queries anduse the returned information to complete and correct their own datarecords.  We currently provide electronic directory assistance services ina number of delivery formats to meet customer needs including automated fileprocessing and real-time individual look ups.    We contract with a broad range of companiesthat require electronic directory assistance including companies in theservice, marketing, and financial sectors.

 

***Basis of Consolidation. ***The consolidated financial statements include theaccounts of Metro One Telecommunications, Inc.  and its wholly-owned subsidiaries. Allinter-company accounts, transactions and profits have been eliminated inconsolidation.

 

***SegmentReporting. ***We havetwo reportable business segments defined by product line in accordance withStatement of Financial Accounting Standards (SFAS”) No. 131, *Disclosures about Segments of an Enterprise and Related Information*:  (1) directory assistance services; and (2) dataservices.  Operating segments are definedas components of an enterprise for which separate financial information isavailable and regularly reviewed by senior management. Our operating segmentsare evidence of the internal structure of our organization. Both segmentsoperate in the same industry and in the same service facilities.  Both segments derive revenue from providingdirectory information data.  Directory assistanceservices delivers data to its customers via telephone operators.  Data services delivers data to its customerselectronically.   The operatingfacilities, sales management and chief decision-makers for both operations aremanaged by the same executive team.  Ourchief operating decision maker is our Chief Executive Officer. Segmentdisclosures are presented to the operating profit level as this is the primaryperformance measure for which the segments are evaluated.

 

***MajorCustomers.***In each of the years ended December 31,2007 and 2006, a small number of customers accounted for substantially allrevenue and accounts receivable reported. In 2007, three customers accounted for approximately 39%, 26%, and 12%of our revenues.  In 2006, threecustomers accounted for approximately 37%, 25% and 14% of revenues.  Two customers accounted for approximately 66%of total receivables at December 31, 2007 and three customers accountedfor 71% of total receivables at December 31, 2006.  In 2007 and historically, we have notincurred significant losses related to our accounts receivable.

 

***Useof Estimates.***The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that affect reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the fiscal year. Actual results could differ from those estimates.

 

***Cash,Cash Equivalents, and Restricted Cash***. Cash and cashequivalents include cash deposits in banks and highly liquid investments withmaturity dates of three months or less at the date of acquisition.  Restricted cash consists of cash restrictedto secure a letter of credit related to our workers’ compensation program andis invested in money market funds.

 

***Furniture,Fixtures and Equipment.***Furniture, fixtures and equipmentare stated at cost and are depreciated over their estimated useful lives ofthree to seven years using the straight-line method.  Leasehold improvements are amortized over thelesser of the remaining lease term or the useful life. Depreciation expense was$1.5 million, and $3.2 million in the years ended December 31, 2007 and2006, respectively.  Expenditures forrepairs and maintenance are expensed as incurred.

 

***IntangibleAssets.***Intangible assets include patents, patentspending and trademarks.  These assets arecarried at cost less accumulated amortization and are amortized on astraight-line basis over their estimated useful lives of three to ten yearsbeginning at the time the related patent or trademark is granted.  The related amortization expense was $600,000and $587,000 for the years ended December 31, 2007 and 2006, respectively.

 

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The estimated aggregateamortization expense related to intangible assets for the five years subsequentto 2007 is shown below.  We have notincluded any amounts related to amortization of costs of patents or trademarkscurrently pending but not yet granted, totaling $2.8 million at December 31,2007.

 

| **Year Ending**  | ** ** | **Estimated**                 | ** ** |
|-----------------------|------------|-------------------------------|------------|
| **December 31,** | ** ** | **amortization expense** | ** ** |
| ** **            | ** ** | **(In thousands)**       | ** ** |
| 2008                  |       | $                             | 424        |   |
| 2009                  |       | 261                           |       |
| 2010                  |       | 207                           |       |
| 2011                  |       | 175                           |       |
| 2012                  |       | 98                            |       |
|                       |            |                               |            |  |

 

***Impairmentof Long-lived and Intangible Assets.***In accordance withSFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets (“SFAS 144”)*, we evaluate the carrying value offurniture, fixtures, equipment and intangible assets with finite lives forpossible impairment whenever events or changes in circumstances indicate thatthe carrying amounts of such assets may not be recoverable.  If an asset or group of assets is determinedto be impaired, the impairment loss is measured as the amount by which thecarrying value of the asset or group of assets exceeds its fair value.  We evaluate recoverability of assets to beheld and used by comparing the carrying amount of an asset to estimated futurenet undiscounted cash flows generated by the asset.  As a result of continuing operating losses,we evaluated our fixed assets and intangibles as of December 31, 2007 and2006 for impairment in accordance with SFAS 144.  Our evaluation determined that the assetswere not impaired as of those dates.

 

***Restructuring*. **We account for restructuring costs inaccordance with Statement of Financial Accounting Standards No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*whereby liabilities are recognized only as incurred.  One-time termination benefits are recordedwhen the qualifying termination plan is communicated to employees.  In addition, liabilities for costs related tothe early termination our operating leases are recognized and measured at fairvalue when the lease is terminated in accordance with the early terminationprovisions of the lease agreement. Further, assets to be abandoned as a result of a restructuring activityare accounted for consistent with SFAS 144, whereby the depreciable lives of fixedassets are shortened in accordance with the plan of abandonment.

 

***IncomeTaxes.***Income taxes are accounted for using the asset andliability method in accordance with SFAS No. 109, *Accountingfor Income Taxes*.  Under thismethod, deferred tax liabilities and assets are recognized for the expectedfuture tax consequences of differences between the carrying amounts and the taxbases of assets and liabilities.  Avaluation allowance is provided when it is more likely than not that all orsome portion of deferred tax assets will not be realized.

 

***FairValue of Financial Instruments.***The carrying value ofcash and cash equivalents, short-term investments, restricted cash, accountsreceivable, accounts payable, accrued liabilities and accrued payroll and relatedcosts approximates fair value due to their short-term maturities.

 

***RevenueRecognition.***Under existing contracts withtelecommunications carriers, we record revenue for the number of callsprocessed at the agreed upon price per call, calculated on a monthlybasis.  Revenue per call may vary basedon monthly volumes achieved.  Revenue isrecognized as services are provided. Revenue in 2006 also includes $5.75 million received from a former majorcustomer as part of a contract termination settlement arrangement discussed inNote 4.  Revenue does not include salestax collected from customers.

 

***NetLoss Per Share.***We report basic and diluted net loss pershare in accordance with SFAS No. 128, *Earnings per Share*.  Basic net loss per share is calculated basedon the weighted average number of common shares outstanding during eachperiod.  Diluted net loss per share iscalculated based on these same shares plus potential shares issuable uponassumed exercise of both outstanding stock options and warrants for convertiblepreferred stock, based on the treasury stock method, plus potential commonshares issuable upon conversion of convertible preferred stock using the “if-converted” method.  However,  SFAS No. 128 requires that the effect ofpotential dilutive common stock equivalents be excluded from the calculation ofdiluted net loss per share if the effect is antidilutive.

 

***Reversestock split.*** On July 6, 2006, we effected aone-for-four reverse split of our common stock. All share and per share data presented in the accompanying consolidatedfinancial statements and notes thereto have been adjusted for the reverse stocksplit.

 

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***Self-insurancereserves****. *In the past, we have self-insureda portion of our workers’ compensation and employee medical insuranceprograms.  In some periods we purchased stop loss coverage at varyinglevels in order to mitigate our potential future losses.  The nature ofthe liabilities associated with these self-insurance programs, which may notfully manifest themselves for several years, requires significantjudgment.  We evaluate open workers’ compensation and medical claims underthese policies periodically to determine the reasonableness of the reserves wehave recorded for such claims.  Ourevaluation includes estimates of potential incurred-but-unreported claims aswell as factors that may cause original estimates of such claims to increaseover time, such as available claims data and historical trends and experience,as well as future projections of ultimate losses, expenses, premiums andadministrative costs.  We adjust these reserves if events or changes incircumstances indicate that ultimate payments related to the claims will bemore than the recorded reserves.  At December 31,2007, we have reserved approximately $1.2 million related to self-insuredworkers’ compensation programs.  As of December 31,2007, there were no reserves required or remaining for medical insurance as allpotential claims periods have expired. While we believe that the amounts reserved for these obligations aresufficient, any significant change in the status of open claims or costsassociated with claims made under these plans could have a material adverseeffect on our financial position, results of operations or cash flows.

 

***Stock-BasedCompensation.***Effective January 1, 2006, we adoptedthe fair value recognition provisions of SFAS No. 123R, *Share-Based Payment*, under which compensation expense isrecognized in the statement of operations for the fair value of employeestock-based compensation.  We elected themodified-prospective transition method as permitted by SFAS No. 123R andaccordingly, prior periods have not been restated to reflect the effect of SFASNo. 123R.  The modified-prospectivetransition method requires that stock-based compensation expense recognized inthe statement of operations include (1) quarterly amortization of allstock-based compensation granted prior to, but not vested as of January 1,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS No. 123 and (2) quarterly amortization ofall stock-based payments granted subsequent to January 1, 2006, based onthe grant date fair value estimated in accordance with the provisions of SFAS No. 123R.  In addition, pursuant to SFAS No. 123R,we estimate forfeitures when calculating stock-based compensation expense,rather than accounting for forfeitures as incurred, which was our previousmethod.  Compensation expense isrecognized over the requisite service (vesting) period using the straight-lineamortization method.

 

As a result of adoptingSFAS 123R, net loss for 2006 was $130,000 greater than if we had continued toaccount for stock-based compensation under APB Opinion No. 25 as we did in2005.  The effect of recordingstock-based compensation on basic and diluted earnings per share for 2006 was aper share increase in our net loss of $0.02. Costs related to stock-based compensation are recorded in selling,general, and administrative expenses in the statement of operations.

 

Options to purchase ourcommon stock are granted at prices equal to or greater than the fair marketvalue on the date of grant.  Optionsgranted to directors generally vest immediately while options granted to employeesgenerally vest and become exercisable quarterly over a four year period.  All options generally expire ten years fromthe date of the grant.

 

We estimate the fairvalue of stock options using the Black-Scholes option pricing model.  Key input assumptions used to estimate thefair value of stock options include the exercise price of the award, theexpected option term, the expected volatility of our stock over the option’sexpected term, and the risk-free interest rate over the option’s expected termand the Company’s expected annual common stock dividend yield.  The expected option term represents theestimated time until exercise and is based on our historical experience withsimilar awards, taking into consideration contractual terms, vesting schedulesand expected employee behavior.  Theexpected stock price volatility is based on the historical volatility of ourstock over the most recent period equal to the expected term of the option,adjusted for activity that is not expected to occur in the future.  The risk-free interest rate is based on theU.S. Treasury yield curve in effect at the time of grant for periodscorresponding with the expected term of the option.  We have not yet paid a dividend on commonstock, and thus the dividend yield is 0.0%.  Prospectively, the assumptions will beevaluated and revised as necessary to reflect changes in market conditions andour experience.

 

Estimates of fair valueare not intended to predict actual future events or the value ultimatelyrealized by people who receive equity awards.

 

The fair value of each option grant was estimated on the date of grantusing the Black-Scholes option-pricing model with the following assumptions forthe years ending December 31:

 
| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |
| Common stock  dividend yield                    |       | 0.0      | %          | 0.0      | %          |
| Risk free  interest rate                        |       | 4.1      | %          | 4.8      | %          |
| Expected  volatility                            |       | 43.3     | %          | 96.9     | %          |
| Expected life in  years                         |       | 3.8      |       | 4.0      |       |
| Weighted-average  fair value of options granted |       | $        | 0.76       |     | $          | 2.33 |   |
|                                                 |            |          |            |          |            |  |  |

 

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***Commitmentsand Contingencies.***We are party to various legal actionsand administrative proceedings arising in the ordinary course of business.  We believe the disposition of these matterswill not have a material adverse effect on our financial position, results ofoperations or cash flows.

 

From time to time, in the normal course of our business, we issuestandby letters of credit and bank guarantees. At December 31, 2007, we had one letter of credit outstanding inthe amount of $3.0 million related to our workers’ compensation program.  The letter of credit is secured by acertificate of deposit for the same amount that is recorded as restrictedcash.  This commitment expires on April 1,2008 and is typically renewed on an annual basis.

 

***Adoption of Accounting Standard****.*In July 2006, the FASB issued Interpretation No. 48,“*Accounting for Uncertainty in Income Taxes – an Interpretationof FASB Statement No. 109*” (“FIN 48”).  FIN 48 prescribes a recognition threshold andmeasurement attribute for financial statement recognition and measurement of atax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition.  FIN48 was effective for our fiscal year beginning January 1, 2007.   In May 2007, the FASB issued FSP FIN48-1, *Definition of Settlement in FASBInterpretation No. 48* (“FSP FIN 48-1”).  FSP FIN 48-1clarifies when a tax position is considered settled under FIN 48.  Per FSPFIN 48-1, a tax position is considered “effectively settled” upon completion ofthe examination by the taxing authority without being legallyextinguished.  For “effectively settled” tax positions, a company canrecognize the full amount of the tax benefit.  FSP FIN 48-1 is effectiveupon a company’s adoption of FIN 48.  FSP FIN 48-1 did not have a materialimpact on our consolidated financial position or results of operations.  See Note 12 for a discussion of theapplication of these pronouncements.

 

**2.****              GoingConcern**

 

We have experienced netlosses in each of the quarterly and annual periods beginning with the secondquarter of 2003.  It is likely that wewill continue to experience operating losses in parts or all of 2008.  We are working to aggressively pursue new andadditional sources of revenues to support our reduced cost structure, furtherreduce the direct cost of delivering our services and reduce our general andadministrative overhead, and develop and grow our Data Services and Contact Servicesbusinesses as evidenced by the March 21, 2008 announcement to discontinuethe directory assistance business.  SeeNote 17 “Subsequent Events.” There can be no assurance that our plans will besuccessful.  In that case, we may needadditional cash to fund our operations and/or pursue our business initiativesduring 2008.  We may attempt to establishborrowing arrangements or otherwise raise additional funds in order to maintainadequate liquidity.  We cannot provideassurance that borrowing or other funding will be available in amounts or onterms acceptable to us.  If we are unableto execute our operations according to our plan or obtain additional financing,we may be forced to cease operations.

 

**3.****              RecentAccounting Pronouncements.**

 

In February 2008, theFinancial Accounting Standards Board (“FASB”) issued staff positon No. 157-1(“FSP 157-1”) amending SFAS 157 to exclude FASB Statement No. 13, *Accounting for Leases*(“SFAS 13”), and other accountingpronouncements that address fair value measurements for purposes of leaseclassification or measurement under SFAS 13. This scope exception does notapply to assets acquired and liabilities assumed in a business combination thatare required to be measured at fair value under SFAS 141 or SFAS 141R regardlessof whether those assets and liabilities are related to leases.  FSP 157-1 shall be effective upon the initialadoption of SFAS 157.  See discussion ofthe effective date of SFAS 157 below.  Wedo not expect the adoption of this statement to have a material effect on ourconsolidated financial position or results of operations.

 

In December 2007,the FASB issued SFAS No. 160*****NoncontrollingInterests in Consolidated Financial Statements—an amendment of ARB No. 51*(“SFAS 160”)*.  *SFAS 160 establishes accountingand reporting standards for a parent company’s noncontrolling, or minority,interests in its subsidiaries.  SFAS 160also provides accounting and reporting standards for changes in a parent’sownership interest of a noncontrolling interest as well as deconsolidationprocedures. This Statement aligns the reporting of noncontrollinginterests in subsidiaries with the requirements in International AccountingStandards 27 and is effective forfiscal years beginning on or after December 15, 2008, and interim periodswithin those fiscal years.   Wedo not expect the adoption of this statement to have a material effect on ourconsolidated financial position or results of operations.

 

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In December 2007,the FASB issued SFAS No. 141, *Business Combinations-Revised*(“SFAS 141R”).  SFAS141R changes the accounting for business combinations including the measurementof acquirer shares issued in consideration for a business combination, therecognition of contingent consideration, the accounting for preacquisition gainand loss contingencies, the recognition of capitalized in-process research anddevelopment, the accounting for acquisition-related restructuring costaccruals, the treatment of acquisition related transaction costs and therecognition of changes in the acquirer’s income tax valuation allowance. SFAS No. 141(R) iseffective for fiscal years beginning after December 15, 2008, with earlyadoption prohibited. The Company will be required to adopt SFAS No. 141(R) inthe first quarter of fiscal year 2009 We do not expect the adoption of thisstatement to have a material effect on our consolidated financial position orresults of operations as we have no plans for acquisitions at this time.

 

In February 2007,the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities* (“SFAS 159”).  SFAS 159 provides companies with an option toreport selected financial assets and liabilities at fair value.  SFAS 159 also establishes presentation anddisclosure requirements designed to facilitate comparisons between companiesthat choose different measurement attributes for similar types of assets andliabilities and to provide additional information that will help investors andother financial statement users to more easily understand the effect of acompany’s choice to use fair value on its earnings.  Finally, SFAS 159 requires entities todisplay the fair value of those assets and liabilities for which a company haschosen to use fair value on the face of the balance sheet.  SFAS 159 is effective as of the beginning ofan entity’s first fiscal year beginning after November 15, 2007.  We are currently assessing the impact of SFAS159 which we will be required to adopt in the first quarter of our 2008 fiscalyear.

 

In September 2006,the FASB issued SFAS No. 157, “*Fair Value Measurements*”(“SFAS 157”), which establishes a framework for measuring the fair value ofassets and liabilities in generally accepted accounting principles (“GAAP”) andexpands disclosures about fair value measurements.  The FASB has issued a proposed interpretationthat would defer the implementation of SFAS No. 157 for non-financialassets and liabilities until fiscal years beginning after November 15,2008. The remaining provisions of SFAS No. 157 are effective for fiscalyears beginning after November 15, 2007 and interim periods within thosefiscal years. We do not expect that the adoption of SFAS No. 157 will havea material impact on our financial position and results of operations.

 

In December 2007,the SEC issued SAB No. 110 which expressed the views of the staffregarding the use of a “simplified” method, as discussed in SAB No. 107,in developing an estimate of expected term of “plain vanilla” share options inaccordance with SFAS No. 123. In particular, the staff indicated in SAB No. 107that it will accept a company’s election to use the simplified method,regardless of whether the Company has sufficient information to make morerefined estimates of expected term. At the time SAB No. 107 was issued,the staff believed that more detailed external information about employeeexercise behavior would, over time, become readily available to companies.Therefore, the SEC staff stated in SAB No. 107 that it would not expect acompany to use the simplified method for share option grants after December 31,2007. The staff understands that such detailed information about employeeexercise behavior may not be widely available by December 31, 2007.Accordingly, the staff will continue to accept, under certain circumstances,the use of the simplified method beyond December 31, 2007. We do notexpect the adoption of SAB No. 110 to have a material effect on ouroperations or financial position.

 

**4.****              Terminationof Contract**

 

In February 2005, weentered into a Master Services Agreement for Directory Assistance Services (the“Services Agreement”) with Nextel Operations, Inc., acting on behalf ofcertain affiliates (collectively “Nextel”) of Nextel Communications, Inc.  The Services Agreement superseded ourprevious services agreement dated in June 1999.  Under the Services Agreement, we agreed toprovide directory assistance services to Nextel’s customers on a non-exclusivebasis, and Nextel could transition call volume away from us on short noticeand/or terminate services entirely.

 

In October 2005, wereceived notification from Nextel that it would be terminating the ServicesAgreement effective January 9, 2006. In February 2006, we entered into a Settlement Agreement andDisentanglement Transition Plan (the “Plan”) with Nextel that resolved certaindisputed matters in connection with the termination of the ServicesAgreement.  Under the Plan, we continuedto provide services to Nextel callers through March 31, 2006 in return forthe payment by Nextel of approximately $5.75 million.  Those payments were in addition to $2.5million previously paid by Nextel in December 2005 in connection with thetransition and in addition to the contractual payments by Nextel for normalservice provided by Metro One to Nextel callers through the transitionperiod.  Calls from Nextel weresubstantially transitioned away from us by March 31, 2006, and we havereceived all amounts due from Nextel. Including the $5.75 million received in the first quarter of 2006 aspart of the settlement payments, Nextel represented approximately 37% of ourrevenues in 2006.

 

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**5.****              ConvertiblePreferred Stock Financing Arrangement and Preferred Stock Warrants**

 

On June 5,2007, we entered into a private financing transaction (“financing transaction”)pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) by andamong Metro One and Columbia Ventures Corporation (“Columbia”) and EverestSpecial Situations Fund L.P. (“Everest”, together with Columbia, the “investors”). Pursuant to the Purchase Agreement, on June 5, 2007, we issued to theinvestors (i) 220 shares of its newly authorized Series A ConvertiblePreferred Stock, no par value (the “convertible preferred stock”), at a statedvalue of $10,000 per share, (ii) Stock Purchase warrants to purchase anadditional 77 shares of the convertible preferred stock at an initial exerciseprice of $10,000 per share of convertible preferred stock (the “warrants”) and (iii) SeniorSecured Convertible Revolver Bridge Notes having a maximum principal amount of$7.8 million and, subject to approval of our shareholders, convertible intoshares of convertible preferred stock (the “notes” and together with theconvertible preferred stock and the warrants, the “securities”).  We received $2.2 million in gross proceeds inthe initial closing.

 

At the annualmeeting of shareholders held on August 14, 2007, the holders of our commonstock approved, among other things, the issuance of additional shares in thefinancing, permitting the second closing to take place.  At a second closing held on August 15,2007, we simultaneously drew down the maximum principal amount of $7.8 millionunder the notes and immediately converted the notes into 780 shares ofconvertible preferred stock.  No amountshad been drawn under the notes prior to the second closing.  In addition, we issued warrants to theinvestors for the purchase of an additional 273 shares of convertible preferredstock at an initial exercise price of $10,000 per share.  We received $7.8 million in gross proceeds atthe second closing.

 

The number ofshares of convertible preferred stock that can be purchased on exercise of thewarrants represents 35% of the number of shares of convertible preferred stockissued in the financing.  The warrantsare currently exercisable over a two year period at an initial all cashexercise price of $10,000 per share.  Ifall of the convertible preferred stock issued to the investors is convertedinto shares of common stock, the warrants will be exchanged for warrants topurchase common stock.

 

At the initialconversion price, the 1,000 shares of convertible preferred stock currentlyoutstanding are convertible into an aggregate of 5,617,977 shares of our commonstock and, if the warrants are exercised in full, we will receive an additional$3.5 million and the 350 shares of convertible preferred stock purchased onexercise of the warrants will be convertible into an aggregate of 1,966,292shares of common stock at the initial conversion price.  A cumulative dividend of 4% is payable oneach share of outstanding convertible preferred stock on June 5thof each year with the first dividend payment due on June 5, 2008.

 

In connection with the sale of the securities to the investors, weentered into a Registration Rights Agreement with the investors dated as of June 5,2007 (the “Registration Rights Agreement”), which requires us to use our bestefforts to register on Form S-3 under the Securities Act of 1933, as amended(the “Securities Act”), the shares of common stock issuable upon conversion ofthe convertible preferred stock (including those shares of convertiblepreferred stock issuable on exercise of warrants). Should it be determinedthat we are not eligible to register these shares on Form S-3, we will berequired to register the shares on Form S-1 and will be required to filethe Form S-1 within 60 days after it is determined that the Form S-3registration is not available.  Under theRegistration Rights Agreement, as currently amended, we will incur penaltiesif, among other things, the Form S-3 registration statement is notdeclared effective by the Securities and Exchange Commission on or prior to March 31,2008, or if the registration is on Form S-1, within 120 days after beingfirst filed on Form S-1. The penalties, payable to the holders of theconvertible preferred stock and warrants proportionately to their holdings, is1.25% of the purchase price of the preferred stock (or $125,000) for each30-day period during which the effectiveness of the registration statement isdelayed beyond the applicable final date, which amount is prorated for anypartial period of delay.  Penalties maynot exceed 20% of the purchase price of the preferred stock (or $2,000,000).  The Registration Rights Agreement alsoprovides the investors with demand and piggyback registration rights under theSecurities Act for shares of common stock issuable upon conversion of theconvertible preferred stock (including shares of convertible preferred stockissuable on exercise of warrants or conversion of the notes).

 

Due to certainrights granted to its holders, the convertible preferred stock is classified asnon-permanent equity in the consolidated balance sheets, pursuant to Rule 5-02.28of the Securities and Exchange Commission’s Regulation S-X and as furtherclarified by the Emerging Issues Task Force Issue No. D-98, *Classification and Measurement of Redeemable Securities.* Thefair value of the warrants, as based on intrinsic value, was approximately$598,000 at the time of their issuance. Pursuant to FASB Staff Position FAS 150-5, *Issuer’sAccounting Under FAS 150 for Freestanding Warrants and Other SimilarInstruments That Are Redeemable*, the warrants are classified asliabilities also due to certain rights granted to its holders.  The warrants are subject to periodicmark-to-market adjustments which are recorded in the consolidated statement ofoperations.

 

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The convertiblepreferred stock is convertible into shares of our common stock at an initialconversion price of $1.78 per share.  In accordance with EITF Issue 98-5, *Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Conversion Ratios* we haveevaluated if the convertible preferred stock has a beneficial conversionfeature as the conversion price was less than the fair value of our commonstock on the measurement date.  Underparagraph 6 of EITF 98-5, the discount related to the beneficial conversionfeature would be calculated based on its intrinsic value which wasapproximately $2.1 million.  The value ofthe beneficial conversion feature was recorded in accumulated deficit and theoffsetting discount to the convertible preferred stock was immediatelywritten-off to accumulated deficit as a deemed dividend to preferredshareholders because the convertible preferred stock is immediatelyconvertible.

 

We incurred costsof approximately $930,000 related to the issuance of the convertible preferredstock.  These costs were recorded as adiscount to the convertible preferred stock and, along with the discountassociated with the warrants, will be accreted to Accumulated deficit over the2-year non-redemption period of the convertible preferred stock.   This accretion reduces net income availableto common shareholders.

 

**6.****             RestructuringCharges and Exit Activities**

 

In 2006, we undertooksignificant restructuring activities due primarily to the departure of call volumefrom Nextel See note 4.  During 2006, weclosed 13 call centers and significantly reduced the number of call center andadministrative employees.  See discussionof further restructuring actions taken in 2008 in Note 17, “Subsequent Event.”As a result of the closure and other restructuring activities, in 2006 we paidor accrued approximately $2.8 million of termination and retention benefits,recorded approximately $1.7 million of expenses related to termination of leaseobligations of closed facilities, and recorded approximately $2.2 million ofother costs, primarily legal and advisory services and dismantling costs.  Included in these costs were losses incurredon the disposal of certain corporate and call center assets in the amount of$935,000.  These assets had a net bookvalue totaling $1,574,000 at the time of disposal, and we received proceeds of$639,000 from the sale.  At December 31,2006, we had approximately $712,000 of accrued restructuring costs, primarilyrelated to remaining lease obligations of closed facilities and accruedtermination benefits related to certain corporate employees.  In 2007, we continued our restructuringinitiatives, incurring approximately $1.1 million in incremental costs, largelyfor Xroads Solutions Group, whom we engaged to assist us with assessingstrategic alternatives for our business model. There were no remainingrestructuring costs accrued at December 31, 2007.

 

Costsincurred in restructuring activities during the years ended December 31,2007 and 2006 are as follows:

 
| ** **                     | ** ** | **December 31,**   | ** ** |
|--------------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **(In thousands)** | ** ** |
| Major cost type:               |       |                    |       |   |   |
| One-time  termination benefits |       | $                       | 156        |   | $ | 2,766 |   |
| Lease  termination costs       |       | 8                       |       | 1,670 |   |
| Consulting fees  and other     |       | 906                     |       | 2,174 |   |
|                           |       | $                       | 1,070      |   | $ | 6,610 |   |

 

Thefollowing summarizes the provisions, payments, adjustments and liability forcosts associated with our cost reduction efforts for the period shown:

 
| **(In thousands)**            | ** ** | **One-time  termination  benefits** | ** ** | **Lease termination  costs** | ** ** | **Consultants and  Other** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|-----------|------------|
| Balance at December 31,  2005 |       | $                                   | —     |                              | $          | 355                             |       | $         | 143        |   | $ | 498 |   |
| Provisions                         |       | 2,766                               |       | 1,670                             |       | 2,174                           |       | 6,610     |       |
| Payments                           |       | (2,246                              | )          | (1,814                            | )          | (1,136                          | )          | (5,196    | )          |
| Adjustments and  non-cash items    |       | —                              |       | (19                               | )          | (1,181                          | )          | (1,200    | )          |
| Balance at  December 31, 2006 |       | 520                                 |       | 192                               |       | —                          |       | 712       |       |
| Provisions                         |       | 156                                 |       | 8                                 |       | 906                             |       | 1,070     |       |
| Payments                           |       | (676                                | )          | (119                              | )          | (906                            | )          | (1,701    | )          |
| Adjustments and  non-cash items    |       | —                              |       | (81                               | )          | —                          |       | (81       | )          |
| Balance at  December 31, 2007 |       | $                                   | —     |                              | $          | —                          |       | $         | —     |   | $ | — |   |

 

31

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As discussed in Note 17. “SubsequentEvent”, we will undertake additional restructuring efforts in the future thatwill cause us to incur additional restructuring charges.

 

**7.****             Furniture,Fixtures and Equipment**

 

Furniture, fixtures andequipment by major classification are summarized as follows:

 
| ** **                                    | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **(In thousands)** | ** ** |
|                                          |       |                    |       |   |   |
| Equipment                                     |       | $                       | 8,667      |   | $ | 8,764 |   |
| Furniture and  fixtures                       |       | 778                     |       | 778 |   |
| Leasehold  improvements and other             |       | 60                      |       | 19 |   |
|                                          |       |                    |       |   |   |
|                                          |       | 9,505                   |       | 9,561 |   |
| Accumulated  depreciation                     |       | (8,067                  | )          | (6,547 | ) |
|                                          |       |                    |       |   |   |
| Total furniture,  fixtures and equipment, net |       | $                       | 1,438      |   | $ | 3,014 |   |

 

**8.****             Intangibleassets**

 

Below is a summary ofother intangible assets at December 31:

 
| ** **             | ** ** | **2007**                | ** ** | **2006**         | ** ** |
|------------------------|------------|-------------------------|------------|------------------|------------|
| ** **             | ** ** | **Gross carrying** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** | **Gross carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **amount**              | ** ** | **amortization** | ** ** | **Net** | ** ** | **amount** | ** ** | **amortization** | ** ** | **Net** | ** ** |
| ** **             | ** ** | **(in thousands)** | ** ** |
| Amortized  intangibles | ** ** | ** **              | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Patents                |       | $                       | 6,851      |             | $          | (2,933 | ) | $ | 3,918 |   | $ | 6,851 |   | $ | (2,391 | ) | $ | 4,460 |   |
| Trademarks             |       | 712                     |       | (575             | )          | 137 |   | 720 |   | (514 | ) | 206 |   |
|                   |       |                    |       |             |       |   |   |   |   |   |   |   |   |
| Totals                 |       | $                       | 7,563      |             | $          | (3,508 | ) | $ | 4,055 |   | $ | 7,571 |   | $ | (2,905 | ) | $ | 4,666 |   |

 

During 2007, we wrote off$83,000 and $6,000 of intangibles and related accumulated amortization,respectively. The 2007 write offs were classified in selling general &adminstrative expenses in our consolidated financial statements.  During 2006, we wrote off $130,000 and $1,000of intangibles and related accumulated amortization, respectively.  The 2006 write-offs related to abandonedtrademark efforts and have been classified as restructuring charges in ourconsolidated financial statements.

 

**9.**             **Lease Obligations**

 

We lease operatingfacilities and equipment under operating leases with remaining terms of one totwo years.  Rental expenses related tooperating leases were approximately $1,802,000 and $2,458,000 in 2007 and 2006,respectively.

 

Minimum annual rentpayments subsequent to 2007 for the remaining lease terms are as follows:

 
| **Year Ending**          | ** ** | ** **                          | ** ** |
|-------------------------------|------------|-------------------------------------|------------|
| **December 31,**         | ** ** | **Annual lease payments** | ** ** |
| ** **                    | ** ** | **(In thousands)**             | ** ** |
| 2008                          |       | $                                   | 1,656      |   |
| 2009                          |       | 821                                 |       |
| Thereafter                    |       | —                              |       |
| Total minimum  lease payments |       | $                                   | 2,477      |   |

 

**10.          Common Stock Options, Stock BasedCompensation**and Common Stock Warrants.**

 

***2006Stock Incentive Plan***

 

In 2006, our shareholdersapproved the 2006 Stock Incentive Plan (the “Plan”), which provides for theaward of incentive stock options to key employees and the award ofnon-qualified stock options, stock sales and grants to employees, outsidedirectors, independent contractors and consultants.  As of December 31, 2007, approximately408,000 shares of common stock remained reserved for issuance under thePlan.  It is intended that the Plan willbe used principally to attract and retain key employees.

 

32

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The option price pershare of an incentive stock option may not be less than the fair market valueof a share of common stock as of the date of the option grant.  The option price per share of a non-qualifiedstock option may be at a price established by the board of directors or acommittee thereof charged with administering the plan, which price generallyequals the fair market value of a share of common stock as of the optiongrant.  Options become exercisable at thetimes and subject to the conditions prescribed by the board of directors.  Generally, options vest over a period of fouryears and the term may not exceed ten years. Payment for shares purchased pursuant to options may be made, at theoption of the board of directors, in cash or by delivery of shares of commonstock having a market value equal to the exercise price of the options.

 

A summary of the status of our option plan as of December 31, andchanges during the years ending on those dates follows:

 
| ** **                        | ** ** | **2007**                                                              | ** ** | **2006**             | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------|------------|
| ** **                        | ** ** | ** **                                                            | ** ** | **Weighted-**        | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                        | ** ** | ** **                                                            | ** ** | **Average**          | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                        | ** ** | **Shares**                                                            | ** ** | **Exer. Price** | ** ** | **Shares** | ** ** | **Exer. Price** | ** ** |
| ** **                        | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Outstanding at  beginning of year |       | 544                                                                   |       | $                    | 32.21      |   | 718 |   | $ | 35.92 |   |
| Granted                           |       | 33                                                                    |       | 2.02                 |       | 35 |   | 2.33 |   |
| Exercised                         |       | —                                                                |       | —               |       | — |   | — |   |
| Forfeited or  expired             |       | (144                                                                  | )          | 23.43                |       | (209 | ) | 39.93 |   |
|                              |       |                                                                  |       |                 |       |   |   |   |   |
| Outstanding at  end of year       |       | 433                                                                   |       | $                    | 32.82      |   | 544 |   | $ | 32.21 |   |
|                              |       |                                                                  |       |                 |       |   |   |   |   |
| Options  exercisable at year-end  |       | 416                                                                   |       | $                    | 33.92      |   | 507 |   | $ | 34.17 |   |

 

The following table summarizes information about stock optionsoutstanding and exercisable under the Plan at December 31, 2007:

 
| ** **                              | ** **         | **Outstanding**                                                       | ** ** | **Exercisable**                                 | ** ** |
|-----------------------------------------|--------------------|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                              | ** **         | **Number**                                                            | ** ** | **Weighted-Average**                            | ** ** | **Weighted-Average** | ** ** | **Number** | ** ** | **Weighted-** | ** ** |
| **Range of  Exercise Prices** | ** **         | **of  Options**                                                       | ** ** | **Remaining  Contractual Life (yrs)** | ** ** | **Exercise  Price** | ** ** | **of  Options** | ** ** | **Average  Exercise Price** | ** ** |
| ** **                              | ** **         | **(In thousands, except per share amounts)** | ** ** |
| $                                       | 1.99 – 5.72   |                                                                  | 153        |                                            | 5.93       |   | $ |  4.06 |   | 136 |   | $ |  3.85 |   |
| 5.92 – 20.40                       |               | 103                                                                   |       | 4.69                                            |       | 14.77 |   | 103 |   | 14.77 |   |
| 22.68 – 90.20                      |               | 90                                                                    |       | 1.62                                            |       | 38.18 |   | 90 |   | 38.18 |   |
| 92.00 – 92.00                      |               | 51                                                                    |       | 3.08                                            |       | 92.00 |   | 51 |   | 92.00 |   |
| 102.00 – 152.00                    |               | 36                                                                    |       | 3.83                                            |       | 109.39 |   | 36 |   | 109.39 |   |
|                                    |               |                                                                  |       |                                            |       |   |   |   |   |   |   |
| $                                       | 1.99 – 152.00 |                                                                  | 433        |                                            | 4.23       |   | $ | 32.82 |   | 416 |   | $ | 33.92 |   |

 

The aggregate intrinsicvalue of outstanding options in each of the ranges noted in the above table iszero.

 

***EmployeeStock Purchase Plan***

 

We have a compensatoryEmployee Stock Purchase Plan (the “ESPP”), the purpose of which is to attractand retain qualified employees essential to our success, and to provide suchpersons with an incentive to perform in our best interests.  The ESPP allows qualified employees topurchase shares of our common stock on a semi-annual basis, limited to 10% ofpre-tax compensation.  The purchase priceis set at 85% of the lower of the stock price at the beginning or ending of eachpurchase period.  In 2003, our shareholdersapproved an amendment to the ESPP which increased the number of shares ofcommon stock initially authorized for purchase under the ESPP by 62,500 shares,from 56,250 to 118,750 shares of common stock. In addition, the amendment provided that the number of authorized sharesautomatically increases on January 1 of each year until and including January 1,2013 by 1% of the number of shares of common stock outstanding on that date;provided, however, that the total number of shares of common stock availablefor issuance under the ESPP shall not exceed 3% of the number of shares ofcommon stock outstanding on that date. As of December 31, 2007, 157,000 shares of common stock werereserved for issuance under the ESPP.  Inthe fourth quarter of 2005, our Board of Directors suspended further purchasesunder the ESPP indefinitely; consequently, no shares were issued under the ESPPduring 2006 or 2007.

 

33

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***StockBased Compensation Expense Under SFAS 123R***

 

Certain informationregarding our stock-based compensation was as follows:

 
| ** **                                                                                     | ** ** | **Year Ended  December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                     | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Weighted average  grant-date fair value of options granted                                     |       | $                                      | 0.77       |   | $ | 1.58 |   |
| Total intrinsic  value of options exercised                                                    |       | —                                 |       | — |   |
| Share-based  liabilities paid                                                                  |       | —                                 |       | — |   |
| Fair value of  non-vested shares that vested during the period                                 |       | 101,000                                |       | 150,000 |   |
| Stock-based  compensation expense recognized in results of operations                          |       | 64,000                                 |       | 130,000 |   |
| Tax-benefit  recognized in statement of operations                                             |       | —                                 |       | — |   |
| Stock-based  compensation costs capitalized as part of the cost of an asset                    |       | —                                 |       | — |   |
| Cash received  from options exercised and shares purchased under all share-based  arrangements |       | —                                 |       | — |   |
| Tax deduction  realized related to stock options exercised                                     |       | —                                 |       | — |   |
|                                                                                                |            |                                        |            |  |  |  |  |

 

The total compensationcost not yet recognized related to unvested option awards and the weightedaverage period over which such cost is expected to be recognized at December 31,2007 is $ 38,000 and 1.19 years, respectively.

 

We did not recognize atax benefit from stock-based compensation expense because it is believed thatit was more likely than not that the related deferred tax assets, which havebeen reduced by a valuation allowance, will not be realized.

 

Prior to the adoption ofSFAS No. 123R, we presented any tax benefits of deductions resulting fromthe exercise of stock options within operating cash flows in its consolidatedstatement of cash flows. SFAS No. 123R requires tax benefits resultingfrom tax deductions in excess of the compensation cost recognized for thoseoptions (“excess tax benefits”) to be classified and reported as both anoperating cash outflow and a financing cash inflow. The excess tax benefitsthat would otherwise be available to reduce income taxes payable have the effectof increasing the net operating loss carryforwards. Accordingly, because we arenot able to realize these excess tax benefits, such benefits have not beenrecognized in the results of operation or in the consolidated statement of cashflows for 2007 or 2006.

 

The fair value of each option grant was estimated on the date of grantusing the Black-Scholes option-pricing model with the following assumptions forthe years ending December 31:

 
| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |
| Common stock  dividend yield                    |       | 0.0      | %          | 0.0      | %          |
| Risk free  interest rate                        |       | 4.1      | %          | 4.8      | %          |
| Expected  volatility                            |       | 43.3     | %          | 96.9     | %          |
|                                            |       |     |       |     |       |
| Expected life in  years                         |       | 3.8      |       | 4.0      |       |
| Weighted-average  fair value of options granted |       | $        | 0.76       |     | $          | 2.33 |   |
|                                                 |            |          |            |          |            |  |  |

 

***CommonStock Warrants***

 

In August 2006,we entered into a Telecom Information Services Agreement (the “Agreement”) withJingle Networks, Inc. (“Jingle”). In connection with the Agreement, we issued to Jingle two warrants topurchase shares of our common stock.  Thefirst warrant was for the purchase of up to 623,250 shares of common stock atan exercise price of $2.60 per share. The warrant was exercisable under the condition that Jingle meet certainrevenue and payment thresholds through February 28, 2007.  Weconcluded that there was no cost related to issuance of these warrants to anon-employee due to the fact that future services were required to be performedand it was not probable that the revenue targets would be met. Therevenue and payment targets were not met, and accordingly, the first warrantexpired and terminated unexercised effective as of February 28, 2007.

 

The second warrantwas for the purchase of up to 870,075 shares of our common stock; provided,however, that shares represented by the sum of the first and second warrants,if exercised, cannot exceed 19.98% of our total shares outstanding after thewarrants are exercised.  The exerciseprice for the second warrant is $4.55, which was the July 1, 2006 bookvalue of our common stock determined on the basis of our US GAAP financialstatements.  The second warrant will notbe exercisable unless and until certain revenue and payment thresholds areachieved by Jingle during specified time periods as outlined in theAgreement.  The second warrant terminateson July 1, 2009.  It was not likelythat Jingle would be able to meet the revenue and payment thresholds necessaryfor the second warrant to become exercisable. Since Jingle did not meet the revenue targets necessary for the firstwarrants to become exercisable and it was not likely that they would meet the revenuetargets for the second warrants to become exercisable, we have not recognizedany expense amounts in our financial statements related to the value of thefirst or the second warrants.

 

34

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**11.****          OtherIncome and Expense**

 

Included in other incomeand expense are certain items that do not relate directly to current ongoingbusiness activity.  Included in thisclassification for the years ended December 31, 2007 and 2006, is interestincome of $409,000 and $767,000, respectively. Other income in 2006 was offset by a charge of approximately $218,000for penalties and interest related to certain federal and state income taxassessments currently in dispute.  Inaddition, this classification included other miscellaneous non-operating incomeand expenses in 2007 and 2006, none of which were individually significant.

 

**12.****          IncomeTaxes**

 

The components of incometax expense (benefit) for the years ended December 31 are as follows:

 
| ** **                   | ** ** | **2007**                | ** ** | **2006** | ** ** |
|------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                   | ** ** | **(In thousands)** | ** ** |
|                         |       |                    |       |     |       |
| Current:                     |       |                    |       |     |       |
| Federal                      |       | $                       | —     |     | $          | — |   |
| State                        |       | (29                     | )          | 51       |       |
|                         |       | (29                     | )          | 51       |       |
| Deferred:                    |       |                    |       |     |       |
| Federal                      |       | —                  |       | —   |       |
| State                        |       | —                  |       | —   |       |
|                         |       | —                  |       | —   |       |
|                         |       |                    |       |     |       |
| Total tax  expense (benefit) |       | $                       | (29        | )        | $          | 51 |   |

 

Income tax expense(benefit) differs from the amount that would result from applying the U.S.statutory rate to income before taxes.  Areconciliation of this difference is as follows:

 
| ** **                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                        |       |                  |       |   |   |
| Federal  statutory rate                     |       | (35.0                 | )%         | (35.0 | )% |
| State income  taxes, net of federal benefit |       | (6.0                  | )          | (6.2 | ) |
| Federal and  state tax credits              |       | (0.2                  | )          | (0.4 | ) |
| Change in  valuation allowance              |       | 40.4                  |       | 40.5 |   |
| Other                                       |       | 0.6                   |       | 1.4 |   |
|                                        |       |                  |       |   |   |
| Effective tax  rate                         |       | (0.2                  | )%         | 0.3 | % |

 

The temporary differencesand carryforwards that give rise to deferred tax assets and liabilities are asfollows:

 
| ** **                                 | ** ** | **December 31,**   | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(In thousands)** | ** ** |
|                                       |       |                    |       |   |   |
| Deferred tax  assets:                      |       |                    |       |   |   |
| Net operating  loss carryforwards          |       | $                       | 50,125     |   | $ | 44,133 |   |
| Reserves not  currently deductible         |       | 602                     |       | 1,131 |   |
| Deferred rent                              |       | 120                     |       | 182 |   |
| Impairment loss  on long-lived assets      |       | 13,328                  |       | 13,328 |   |
| Tax credit  carryforwards                  |       | 3,859                   |       | 4,331 |   |
| Total deferred  tax asset                  |       | 68,034                  |       | 63,105 |   |
| Less: Valuation  allowance                 |       | (55,916                 | )          | (50,911 | ) |
|                                       |       |                    |       |   |   |
| Net deferred tax  asset                    |       | 12,118                  |       | 12,194 |   |
|                                       |       |                    |       |   |   |
| Deferred tax  liabilities:                 |       |                    |       |   |   |
| Accumulated  depreciation and amortization |       | (12,118                 | )          | (12,194 | ) |
| Total deferred  tax liability              |       | (12,118                 | )          | (12,194 | ) |
|                                       |       |                    |       |   |   |
| Net deferred tax  asset (liability)        |       | $                       | —     |   | $ | — |   |

 

35

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At December 31,2007, we had approximately $116,517,000 and $145,995,000 of federal and statenet operating loss carryforwards, respectively. The state net operating loss carryforward includes a state where we havewithdrawn from business.  These net operatingloss carryforwards expire during the years 2008 to 2027.  As of December 31, 2007, we had unusedfederal and state credit carryforwards of approximately $3,629,000.  These credits will expire during the yearsbeginning 2008 through 2027 and certain state credits may be carried forwardindefinitely.  In addition, we hadalternative credit carryforwards of approximately $230,000, which is availableto reduce future federal regular income taxes, if any, over an indefiniteperiod.  The ultimate realization ofthese deferred tax assets is dependent upon the generation of future taxableincome before these carryforwards expire. Ownership changes as defined by section 382 of the Internal Revenue Codecould limit the amount of net operating loss carryforwards used in any one yearor in the aggregate.

 

We have accrued chargesfor certain prior year federal and state income tax assessments.  These amounts consist of taxes, penalties,and interest, currently under dispute, in the amounts of $1,076,000 and $975,000at December 31, 2007 and 2006, respectively.  These amounts are recorded in accruedliabilities in the accompanying balance sheets.

 

In July 2006, theFASB issued FIN 48 which contains a two step approach to recognizing andmeasuring uncertain tax positions accounted for in accordance with SFAS109.  The first step is to evaluate thetax position for recognition by determining if the weight of available evidenceindicates it is more likely than not that the position will be sustained onaudit, including resolution of related appeals or litigation processes, ifany.  The second step is to measure thetax benefit as the largest amount which is more than 50% likely of beingrealized upon ultimate settlement.

 

We have performed aninitial assessment of the impact of adopting FIN 48, including a review of ournet operating loss carry forwards, and have found that we have two items thatmeet the FIN 48 criteria which had been fully reserved in prior periods. Thefollowing table indicates the changes to our unrecognized tax benefits for theyear ended December 31, 2007.

 
| ** **                                  | ** ** | **December 31,**   | ** ** |
|---------------------------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **2007**                | ** ** |
| ** **                                  | ** ** | **(In thousands)** | ** ** |
| Balance at  January 1, 2007            |       | $                       | 751        |   |
| Additions for  tax positions of prior years |       | —                  |       |
| Subtractions                                |       | —                  |       |
| Balance at  December 31, 2007          |       | $                       | 751        |   |

 

Cumulative interest and penalties of $325,000 applicable tothe above unrecognized tax benefits are accrued to date and are recorded ininterest expense and classified in Other income, net as incurred. For the yearended December 31, 2007, interest and penalties included in Other income, net,totalled $83,000. We do not expect any significant increases or decreases toour unrecognized tax benefits within 12 months of this reporting date. We aresubject to examination by various taxing authorities for open returnsfrom 2001 through 2006

 

**13.****          NetLoss Per Share**

 

Basic net loss per shareis calculated based on the weighted average number of common shares outstandingduring each period.  Diluted net loss pershare is calculated based on these same shares plus potential shares issuableupon assumed exercise of both outstanding common stock options and warrants forconvertible preferred stock, based on the treasury stock method, plus potentialcommon shares issuable upon conversion of convertible preferred stock using the“if- converted” method.  There were noadjustments to net loss for the calculation of both basic and diluted net lossper share for all periods.  For allperiods presented in these financial statements, the calculation ofweighted-average outstanding shares is the same on both a basic and dilutedbasis because inclusion of potential common shares would be anti-dilutive.

 

Following are potentialcommon shares that were excluded from the calculation of net loss per sharebecause their effect would be antidultive:

 
| ** **                           | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(In thousands)**                | ** ** |
| Common stock options                 |       | 433                                    |       | 544 |   |
| Convertible preferred stock warrants |       | 1,966                                  |       | — |   |
| Convertible preferred stock          |       | 5,618                                  |       | — |   |

 

36

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**14.**          **Benefit Plans**

 

We have a deferredcompensation savings plan for the benefit of our eligible employees.  The plan permits certain voluntary employeecontributions to be excluded from employees’ current taxable income under theprovisions of Internal Revenue Code Section 401(k).  Effective November 1, 2007, employeesbecome eligible to participate in and are automatically enrolled in the savingsplan ninety days following the initial date of employment.  Employees must also complete at least 1,000hours of service in any twelve-month period to be eligible forparticipation.  Under the plan, we canmake discretionary contributions to the plan as approved by the board ofdirectors.  Participants’ interest in ourcontributions to the plan vest over a four-year period.  We made contributions of approximately$51,000 and $63,000 during 2007 and 2006 respectively.

 

**15.          Restatement of Previously IssuedFinancial Statements**

 

Subsequent to thefiling of the Quarterly Report on Form 10-Q for the period ended September 30,2007 (the “Third Quarter 10-Q”), as part of management’s analysis of commentsmade by BDO Seidman in BDO Seidman’s review of a draft of an amendment to aregistration statement previously filed by us (Registration File No. 333-144400),we discovered the following errors in our accounting treatment of the FinancingArrangement as discussed in Note 5, in our previously issued UnauditedCondensed Consolidated Balance Sheet as of September 30, 2007 and therelated Unaudited Condensed Consolidated Statements of Operations for the threeand nine month periods ended September 30, 2007 (the “Third QuarterFinancial Statements”):

 

a)     Wedid not correctly classify the securities in our Unaudited CondensedConsolidated Balance Sheet at September 30, 2007.  We erroneously classified the convertiblepreferred stock and related warrants in the Shareholders’ equity section of ourUnaudited Condensed Consolidated Balance Sheet. However, pursuant to Rule 5-02.28 of Securities and ExchangeCommission’s Regulation S-X and as further clarified by the Emerging IssuesTask Force (“EITF”) Issue No. D-98: *Classification andMeasurement of Redeemable Securities*, the convertible preferredstock should be classified as Non-permanent equity due to certain rightsgranted to its holders.  Secondarily, inaccordance with the FASB Staff Position 150-5: *Issuer’sAccounting under FASB Statement No. 150 for Freestanding Warrants andOther Similar Instruments on Shares That Are Redeemable (FSP 150-5)*,the warrants should be reclassified as Long-term liabilities, also due tocertain rights granted to the holders.  As such, we did not re-value the warrants to market value at September 30,2007 as required by SFAS 150: *Accounting for CertainFinancial Instruments Characteristics of both Liabilities and Equity*.  The revaluation amount of $214,000 at September 30,2007 should have been recorded as a charge to Other income, net in theUnaudited Condensed Consolidated Statements of Operations.

 

b)    We did notcorrectly assess the fair market value of the Securities and related “beneficialconversion feature” at the time of issuance. The Black-Sholes method was used in the valuation of the warrants;however errors were made in the utilization of that model which, in addition toincorrectly assessing the fair market value of the warrants, led to anincorrect calculation of the intrinsic value of both the warrants and thebeneficial conversion feature.  Theseintrinsic values are interrelated due to the “relative fair market value”concept for calculating the beneficial conversion feature as prescribed by EITFIssue No. 98-05: *Accounting for ConvertibleSecurities with Beneficial Conversion Features*, and clarified byEITF Issue No. 00-27: *Application of IssueNo.98-5 to Certain Convertible Instruments*. Further, EITF 00-27 wasincorrectly applied to the calculation of the intrinsic value of beneficialconversion feature.  These errorscollectively also affected the fair value calculation of the convertiblepreferred stock.

 

c)     Wedid not accrete the discounts to convertible preferred stock created by thevaluation of the warrants and costs associated with the issuance of theSecurities (the “Issuance Costs”) as required by EITF Issue No. D-98: *Classification and Measurement of Redeemable Securities*.  The convertible preferred stock isconditionally redeemable by us anytime on or after the two-year anniversary ofthe first issuance of Series A Convertible preferred stock. Therefore, thediscounts to the convertible preferred stock should be written-off ratably overthe two-year non-redemption period to Accumulated deficit.  We had previously written-off the full valueof the discount to convertible preferred stock created by the warrants directlyto Accumulated deficit and did not accrete any of the discount to convertiblepreferred stock created by the Issuance Costs. This accretion increases net loss attributable to common shareholdersand should have been recorded as a line-item on the face of the UnauditedCondensed Consolidated Statement of Operations as noted in item d) below.

 

d)    Net loss per common share as presented onthe face of the Unaudited Condensed Consolidated Statement of Operations didnot include the charges against Accumulated deficit for both accrued dividendsand deemed dividends to preferred shareholders and was incorrectly stated.

 

37

----

 

The effect of theabove errors on the Unaudited Condensed Consolidated Financial Statements aspreviously presented in our Form 10-Q for the period ended September 30,2007 was as follows:

 

*(Dollaramounts in thousands except per share amounts)*

* *
| **Line Items on the  Condensed Consolidated Balance Sheet** | ** ** | **Reported as of  September 30,  2007** | ** ** | **As Restated as of  September 30, 2007** | ** ** | **Difference** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                                                | ** ** | **(Unaudited)**                                        | ** ** | **(Unaudited)**                                                    | ** ** | ** **     | ** ** |
| Liabilities:                                                                              |       |                                                   |       |                                                               |       |           |       |
| Preferred stock  warrants                                                                 |       | $                                                      |       |                                                               | $          | 813            |       | $ | 813 |   |
| Redeemable  Preferred Stock:                                                              |       |                                                   |       |                                                               |       |           |       |
| Preferred stock                                                                           |       |                                                   |       | 8,607                                                              |       | 8,607          |       |
| Shareholders’  equity:                                                               |       |                                                   |       |                                                               |       |           |       |
| Preferred stock                                                                           |       | 9,070                                                  |       |                                                               |       | (9,070         | )          |
| Preferred stock  discount and beneficial conversion feature                               |       | 3,472                                                  |       |                                                               |       | (3,472         | )          |
| Common stock                                                                              |       | 120,100                                                |       | 122,215                                                            |       | 2,115          |       |
| Accumulated  deficit                                                                      |       | (114,226                                               | )          | (113,219                                                           | )          | 1,007          |       |
|                                                                                           |            |                                                        |            |                                                                    |            |                |            |  |  |  |

 
| **Line items on the  Condensed Consolidated Statements of Operations** | ** ** | **Reported for the Three  Months Ended  September 30, 2007** | ** ** | **As Restated  for the Three Months  Ended  September 30, 2007** | ** ** | **Difference** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                                                                | ** ** | **(Unaudited)**                                                                            | ** ** | **(Unaudited)**                                                                                | ** ** | ** **     | ** ** |
| Net loss                                                                                                  |       | $                                                                                          | (3,769     | )                                                                                              | $          | (3,983         | )          | $ | (214 | ) |
| Preferred stock dividends                                                                                 |       |                                                                                       |       | (122                                                                                           | )          | (122           | )          |
| Preferred stock deemed dividends                                                                          |       |                                                                                       |       | (2,115                                                                                         | )          | (2,115         | )          |
| Accretion preferred stock                                                                                 |       |                                                                                       |       | (136                                                                                           | )          | (136           | )          |
| Net loss  attributable to common shareholders                                                             |       | $                                                                                          | (3,769     | )                                                                                              | $          | (6,356         | )          | $ | (2,587 | ) |
|                                                                                                      |       |                                                                                       |       |                                                                                           |       |           |       |
| Net loss per  common share:                                                                               |       |                                                                                       |       |                                                                                           |       |           |       |
| Basic                                                                                                     |       | $                                                                                          | (0.60      | )                                                                                              | $          | (1.02          | )          | $ | (0.42 | ) |
| Diluted                                                                                                   |       | $                                                                                          | (0.60      | )                                                                                              | $          | (1.02          | )          | $ | (0.42 | ) |

 
| **Line items on the  Condensed Consolidated Statements of Operations** | ** ** | **Reported for the Nine  Months Ended  September 30, 2007** | ** ** | **As Restated  for the Nine Months  Ended  September 30, 2007** | ** ** | **Difference** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                                                                | ** ** | **(Unaudited)**                                                                           | ** ** | **(Unaudited)**                                                                               | ** ** | ** **     | ** ** |
| Net loss                                                                                                  |       | $                                                                                         | (11,135    | )                                                                                             | $          | (11,349        | )          | $ | (214 | ) |
| Preferred stock dividends                                                                                 |       |                                                                                      |       | (128                                                                                          | )          | (128           | )          |
| Preferred stock deemed dividends                                                                          |       |                                                                                      |       | (2,115                                                                                        | )          | (2,115         | )          |
| Accretion  preferred stock                                                                                |       |                                                                                      |       | (136                                                                                          | )          | (136           | )          |
| Net loss  attributable to common shareholders                                                             |       | $                                                                                         | (11,135    | )                                                                                             | $          | (13,728        | )          | $ | (2,593 | ) |
|                                                                                                      |       |                                                                                      |       |                                                                                          |       |           |       |
| Net loss per common  share:                                                                               |       |                                                                                      |       |                                                                                          |       |           |       |
| Basic                                                                                                     |       | $                                                                                         | (1.79      | )                                                                                             | $          | (2.20          | )          | $ | (0.41 | ) |
| Diluted                                                                                                   |       | $                                                                                         | (1.79      | )                                                                                             | $          | (2.20          | )          | $ | (0.41 | ) |

 

Therewas no material effect on the Unaudited Condensed Consolidated Statement ofCash Flows as a result of these changes because the mark-to-market adjustmentpertaining to the warrants would have been reflected as a non-cash chargewithin our Unaudited Condensed Consolidated Statements of Operations.

 

Accordingly,our management determined on February 20, 2008, in consultation with BDOSeidman, LLP, that due to the errors as described above, our previously issuedUnaudited Condensed Consolidated Financial Statements as at and for the threeand nine months ended September 30, 2007 could no longer be relied uponand was restated to reflect the impact of the errors noted above.

 

38

----

 

**16.          Segment and Enterprise-WideDisclosures**

 

We have two reportablebusiness segments defined by product line:(1) directory assistance services;and (2) data services.  Operatingsegments are defined as components of an enterprise for which separatefinancial information is available and regularly reviewed by senior management.Our operating segments are evidence of the internal structure of ourorganization. Both segments operate in the same industry and in the sameservice facilities.  Both segments deriverevenue from providing directory information data.  Directory assistance services delivers datato its customers via telephone operators. Data Services delivers data to its customers electronically.   The operating facilities, sales managementand chief decision-makers for both operations are managed by the same executiveteam.  Our chief operating decision makeris our Chief Executive Officer. Segment disclosures are presented to theoperating profit level as this is the primary performance measure for which thesegments are evaluated.  The followingtables reconcile certain financial information by segment.

 

Financial information bysegment follows:

 
| ** **             | ** ** | **Year Ended December 31, 2007** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|
| ** **             | ** ** | **(In thousands)**                              | ** ** |
| ** **             | ** ** | **Directory  Assistance**                            | ** ** | **Data Services** | ** ** | **Unallocated  and  Other** | ** ** | **Total** | ** ** |
| Revenues               |       | $                                                    | 16,536     |   | $ | 1,202 |   | $ | 150 |   | $ | 17,888 |   |
| Operating loss         |       | (1,628                                               | )          | (1,027 | ) | (12,217 | ) | (14,873 | ) |
|                   |       |                                                 |       |   |   |   |   |   |   |
| Restructuring  charges |       | 37                                                   |       | 128 |   | 905 |   | 1,070 |   |
|                        |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **             | ** ** | **Year Ended December 31, 2006** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|
| ** **             | ** ** | **(In thousands)**                              | ** ** |
| ** **             | ** ** | **Directory  Assistance**                            | ** ** | **Data Services** | ** ** | **Unallocated  and  Other** | ** ** | **Total** | ** ** |
| Revenues               |       | $                                                    | 22,888     |   | $ | 1,709 |   | $ | 5,742 |   | $ | 30,339 |   |
| Operating loss         |       | (4,996                                               | )          | (1,165 | ) | (13,592 | ) | (19,753 | ) |
|                   |       |                                                 |       |   |   |   |   |   |   |
| Restructuring  charges |       | 4,283                                                |       | 63 |   | 2,264 |   | 6,610 |   |
|                        |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

“Other” representsmiscellaneous income and unallocated selling, general and administrative,depreciation and amortization and restructuring expenses as we do not allocatethese expenses to our segments.  In 2006,“Other” included a one-time customer contract settlement receipt of $5.75million.  In addition, assets are notallocated to our segments, therefore there is no corresponding allocation ofdepreciation or amortization expense because our chief decision maker does notuse this information to allocate resources to the segments.

 

In each of the yearsended December 31, 2007 and 2006, a small number of directory assistancecustomers accounted for the majority of our reported revenues.  In 2007, three customers accounted forapproximately 39%, 26%, and 12% of our total revenues.  In 2006, three customers accounted forapproximately 37%, 25% and 14% of total revenues.

 

**17.          Subsequent Event**

 

***Closingof Directory Assistance Operations***

 

In March 2008, weannounced that, as part of a strategic business review and in furtherance ofour ongoing effort to cut costs and align expenses with reduced revenues, wedecided to exit our facilities-based wholesale directory assistance business.Our strategic review determined that the current economic environment did notprovide the potential to deliver an acceptable long-term return on investmentand that our remaining resources would be better spent pursuing our nascent dataand contact Services businesses and monetizing our patent portfolio.

 

39

----

 

The directory assistancecall centers in Minneapolis, Orlando, Charlotte and Honolulu are slated forclosure in May 2008. We also intend to reduce corporate staff at theBeaverton headquarters. Currently, we expect to complete this plan by the endof May 2008. We estimate a head-count reduction of approximately 700employees in connection with the closure of these call centers and thereduction in force at the Beaverton corporate headquarters. Closure of the directoryassistance call center in Long Island commenced prior to our decision to leavethe Directory Assistance business and is expected to be completed by March 31,2008. Estimated costs associated with the closure of the Long Island callcenter range from $1.3 million to $1.6 million.

 

We anticipate that coststo be incurred in connection with the closure of all of the call centers,including Long Island, and the reduction in corporate staff will range from$3.3 million to $4.0 million, which includes approximately $800,000 to $950,000of employee severance and related benefits, approximately $800,000 to $1.2million related to the impairment of furniture, fixture and equipment, andapproximately $1.6 million to $1.7 million with respect to remaining leaseobligations. We are currently not able to determine the amount of futurecharges to be recorded in connection with contract obligations with our currentdirectory assistance customers and others. These costs are anticipated to resultin cash expenditures of approximately $2.3 million. The fixed asset impairmentsare not expected to result in cash expenditures. We anticipate that costsassociated with severance and asset impairment will be recognized in the firstand second quarters of 2008, and that certain cash payments associated withcontract termination and lease related costs may be paid during such quartersand in later periods.

 

The above estimated costsand charges are preliminary and may vary materially based on various factors,including the timing and success of our customers’ migration to otherproviders, the resale market for furniture, fixtures and equipment, and changesin management’s assumptions and projections.

 

***RelatedParty Transaction***

 

Consistent with the decisionto exit the directory assistance business as noted above, beginning in January 2008,we engaged with one customer in the contact services business.  Our Chief Financial Officer is a significantshareholder of that company.  Alltransactions and negotiations with this customer are at arms length.

 

40

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| **ITEM 9.** | ** ** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE.** |
|-------------|------------|--------------------------------------------------------------------------------------------|

 

None.

 
| **ITEM 9A.** | ** ** | **CONTROLS AND PROCEDURES.** |
|--------------|------------|------------------------------|

 

***(a) Evaluation of Disclosure Controls and Procedures***

 

Our management evaluated,with the participation and under the supervision of our Chief Executive Officerand Chief Financial Officer, the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this Annual Report on Form 10-K.Based on this evaluation, our Chief Executive Officer and our Chief FinancialOfficer concluded that our disclosure controls and procedures are effective toensure that information we are required to disclose in reports that we file orsubmit under the Securities Exchange Act of 1934 is accumulated andcommunicated to our management, including our Chief Executive Officer and ourChief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure and that such information is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

 

***b) Management’s Report on Internal Control Over FinancialReporting***

 

Management’s Report onInternal Control Over Financial Reporting is set forth in Item 8 of thisAnnual Report on Form 10-K.

 
| **ITEM 9B.** | ** ** | **OTHER INFORMATION.** |
|--------------|------------|------------------------|

 

None

 

# **PART III**

# ** **

| **ITEM 10.** | ** ** | **DIRECTORS,  EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.** |
|--------------|------------|---------------------------------------------------------------|

 

The information requiredby Item 10 is incorporated by reference to the Proxy Statement for our 2008Annual Meeting under the captions “Management,” “Nominees and Directors” and “CorporateGovernance” to be filed with the Securities and Exchange Commission within 120days of our fiscal year end.

 

*Compliancewith Section 16(a) of the Exchange Act.*Theinformation required by Item 10 relating to compliance with Section 16(a) ofthe Securities Exchange Act of 1934 is incorporated by reference to the ProxyStatement for our 2008 Annual Meeting under the caption “Section 16(a) BeneficialOwnership Reporting Compliance” to be filed with the Securities and ExchangeCommission within 120 days of our fiscal year end.

 

*Code of Ethics.*Wehave adopted a “Code of Business Conduct and Ethics” applicable to ourdirectors, officers and employees and a “Code of Ethics” applicable to ourChief Executive Officer and our senior financial officers.  Both our Code of Business Conduct and Ethicsand our Code of Ethics are available in the Investor Relations section of ourwebsite (www.metro1.com/corporate-governance.html) or by requesting a free copyby writing us at Metro One Telecommunications, Inc., 11200 Murray SchollsPlace, Beaverton, OR 97007, attention Investor Relations.  We intend to satisfy the disclosurerequirements regarding any amendment to, or waiver from, a provision of ourCode of Business Conduct and Ethics or Code of Ethics by disclosing suchmatters in the Investor Relations section of our website.

 
| **ITEM 11.** | ** ** | **EXECUTIVE COMPENSATION.** |
|--------------|------------|-----------------------------|

** **

The information requiredby Item 11 is incorporated by reference to the Proxy Statement for our 2008Annual Meeting under the caption “Executive Compensation,” to be filed with theSecurities and Exchange Commission within 120 days of our fiscal year end.

 
| **ITEM 12.** | ** ** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  AND MANAGEMENT AND OTHER STOCKHOLDER MATTERS.** |
|--------------|------------|----------------------------------------------------------------------------------------------------|

** **

The information requiredby Item 12 is incorporated by reference to the Proxy Statement for our 2008Annual Meeting under the captions “Security Ownership of Certain BeneficialOwners and Management and Other Stockholder Matters” and “Securities Authorizedfor Issuance Under Equity Compensation Plans,” to be filed with the Securitiesand Exchange Commission within 120 days of our fiscal year end.

 

41

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| **ITEM 13.** | ** ** | **CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  AND DIRECTOR INDEPENDENCE.** |
|--------------|------------|--------------------------------------------------------------------------------|

 

The information requiredby Item 13 is incorporated by reference to the Proxy Statement for our 2008Annual Meeting under the caption “Management - Employment Related Matters,” tobe filed with the Securities and Exchange Commission within 120 days of ourfiscal year end.

 
| **ITEM 14.** | ** ** | **PRINCIPAL ACCOUNTANT FEES AND SERVICES.** |
|--------------|------------|---------------------------------------------|

 

The information requiredby Item 14 is incorporated by reference to the Proxy Statement for our 2008Annual Meeting under the caption “Principal Auditor Fees and Services,” to befiled with the Securities and Exchange Commission within 120 days of our fiscalyear end.

 

**PART IV**

 
| **ITEM 15.** | ** ** | **EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.** |
|--------------|------------|-------------------------------------------------|

 
| **(a)(1)** |       | Consolidated  Financial Statements                                                                                                                     |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                   |
| Pg. 19     |       | Management’s  Report on Internal Control Over Financial Reporting                                                                                 |
|       |       |                                                                                                                                                   |
| Pg. 20     |       | Report of BDO  Seidman LLP, independent registered public accounting firm                                                                              |
|       |       |                                                                                                                                                   |
| Pg. 21     |       | Consolidated  Statements of Operations for each of the years ended December 31, 2007  and 2006                                                    |
|       |       |                                                                                                                                                   |
| Pg. 22     |       | Consolidated  Balance Sheets at December 31, 2007 and 2006                                                                                        |
|       |       |                                                                                                                                                   |
| Pg. 23     |       | Consolidated  Statements of Shareholders’ Equity for each of the years ended  December 31, 2007 and 2006                                     |
|       |       |                                                                                                                                                   |
| Pg. 24     |       | Consolidated  Statements of Cash Flows for each of the years ended December 31, 2007  and 2006                                                    |
|       |       |                                                                                                                                                   |
| Pg. 25     |       | Notes to  Consolidated Financial Statements                                                                                                            |
|       |       |                                                                                                                                                   |
| **(a)(3)** | ** ** | **Exhibits**                                                                                                                                           |
|       |       |                                                                                                                                                   |
| 3.1        |       | Third Restated  Articles of Incorporation of Metro One Telecommunications, Inc. (“the  Company”) (1)                                    |
|       |       |                                                                                                                                                   |
| 3.2        |       | Amendment to  Third Restated Articles of Incorporation of the Company (1)                                                                              |
|       |       |                                                                                                                                                   |
| 3.3        |       | Amendment to  Third Restated Articles of Incorporation of the Company (2)                                                                              |
|       |       |                                                                                                                                                   |
| 3.4        |       | Amendment to  Third Restated Articles of Incorporation of the Company (17)                                                                             |
|       |       |                                                                                                                                                   |
| 3.5        |       | Amended and  Restated Bylaws of the Company (1)                                                                                                        |
|       |       |                                                                                                                                                   |
| 3.6        |       | Amendment to  Amended and Restated Bylaws of the Company (17)                                                                                          |
|       |       |                                                                                                                                                   |
| 3.7        |       | Second Amendment  to Amended and Restated Bylaws of the Company (18)                                                                                   |
|       |       |                                                                                                                                                   |
| 4.1        |       | Common Stock  Warrant issued to Jingle Networks, Inc. (3)                                                                                         |
|       |       |                                                                                                                                                   |
| 4.2        |       | Common Stock  Warrant issued to Jingle Networks, Inc. (3)                                                                                         |
|       |       |                                                                                                                                                   |
| 4.3        |       | Form of  Stock Purchase Warrant to Purchase Shares of Series A Preferred  Convertible Stock issued to Investors in Preferred Stock Sale (17) |
|       |       |                                                                                                                                                   |
| 4.4        |       | Form of  Senior Secured Convertible Revolver Bridge Note issued to Investors in  Preferred Stock Sale (17)                                        |
|       |       |                                                                                                                                                   |
| 10.1       |       | Lease Agreement  between Murray Scholls, LLC, Gramor Development Northwest, Inc. and the  Company (4)                                             |
|       |       |                                                                                                                                                   |
| 10.2       |       | 2004 Stock  Incentive Plan (5)*                                                                                                                        |
|       |       |                                                                                                                                                   |
| 10.3       |       | 2006 Stock  Incentive Plan (6)*                                                                                                                        |

 

42

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| 10.4   |   | Form of  Stock Option Agreements and Exercise Notice under 2004 Stock Incentive Plan  (7)*                                                                                                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                               |
| 10.5   |   | Form of  Restricted Stock Purchase Agreement under 2004 Stock Incentive Plan (7)*                                                                                                             |
|   |   |                                                                                                                                                                                               |
| 10.6   |   | 1999 Employee  Stock Purchase Plan, as amended (6)*                                                                                                                                                |
|   |   |                                                                                                                                                                                               |
| 10.7   |   | 1994 Stock  Incentive Plan, as amended (8)*                                                                                                                                                        |
|   |   |                                                                                                                                                                                               |
| 10.11  |   | Metro One  Telecommunications, Inc. Retention Plan and form of Retention Agreement  thereunder (12)*                                                                                          |
|   |   |                                                                                                                                                                                               |
| 10.12  |   | Form of  Indemnity Agreement between the Company and its directors and officers (13)                                                                                                          |
|   |   |                                                                                                                                                                                               |
| 10.13  |   | Master Services  Agreement for Directory Assistance Services, by and between the Company and  Nextel Operations, Inc., dated as of January 1, 2005 (14)                                  |
|   |   |                                                                                                                                                                                               |
| 10.14  |   | Settlement  Agreement and Disentanglement Transition Plan, by and between the Company and  Nextel Operations, Inc. dated as of February 10, 2006 (15)                                    |
|   |   |                                                                                                                                                                                               |
| 10.15  |   | Telecom  Information Services Agreement, by and between the Company and Jingle  Networks, Inc., dated as of August 2, 2006 (16)                                                          |
|   |   |                                                                                                                                                                                               |
| 10.16  |   | Registration  Rights Agreement, by and between the Company and Jingle Networks, Inc.,  dated as of August 2, 2006 (3)                                                                    |
|   |   |                                                                                                                                                                                               |
| 10.17  |   | Registration  Rights Agreement dated as of the 5th day of June, 2007, by and among the  Company and certain holders its Series A Convertible Preferred Stock  (17)                            |
|   |   |                                                                                                                                                                                               |
| 23.1   |   | Consent of BDO  Seidman LLP, independent registered public accounting firm                                                                                                                         |
|   |   |                                                                                                                                                                                               |
| 31.1   |   | Certification of  Principal Executive Officer pursuant to Securities and Exchange Commission  Rule 13a-14(a)                                                                                  |
|   |   |                                                                                                                                                                                               |
| 31.2   |   | Certification of  Principal Financial Officer pursuant to Securities and Exchange Commission  Rule 13a-14(a)                                                                                  |
|   |   |                                                                                                                                                                                               |
| 32.1   |   | Certification of  Principal Executive Officer and Principal Financial Officer Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act Of 2002 |

 

----

| *****  | Management  contract or compensatory plan                                                                                                                                  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                       |
| (1)    | Incorporated herein by  reference to the Company’s Annual Report on Form 10-K dated March 15,  2004.                                                        |
|   |                                                                                                                                                                       |
| (2)    | Incorporated herein by  reference from Annex A to the Company’s Definitive Proxy Statement on  Schedule 14-A dated May 1, 2006.                                  |
|   |                                                                                                                                                                       |
| (3)    | Incorporated herein by  reference to the Company’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 2006.                                 |
|   |                                                                                                                                                                       |
| (4)    | Incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the year ended  December 31, 1998.                                        |
|   |                                                                                                                                                                       |
| (5)    | Incorporated herein by  reference from Annex C to the Registrant’s Definitive Proxy Statement on Schedule  14-A dated May 1, 2006.                               |
|   |                                                                                                                                                                       |
| (6)    | Incorporated herein by  reference from Appendix A to the Registrant’s Definitive Proxy Statement on  Schedule 14-A dated April 26, 2004.                         |
|   |                                                                                                                                                                       |
| (7)    | Incorporated herein by  reference to the Company’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 2004.                                 |
|   |                                                                                                                                                                       |
| (8)    | Incorporated herein by  reference to the Company’s Form S-8 dated February 12, 2002 and to  the Company’s Form S-8 dated September 10, 2002. |
|   |                                                                                                                                                                       |
| (9)    | Incorporated herein by  reference to the Company’s Current Report on Form 8-K dated December 6,  2005.                                                      |

 

43

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| (10)   | Incorporated herein by  reference to the Company’s Current Report on Form 8-K dated November 29,  2005.                                                                                                     |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                       |
| (11)   | Incorporated herein by  reference to the Company’s Quarterly Report on Form 10-Q for the quarter  ended June 30, 2006.                                                                                      |
|   |                                                                                                                                                                                                                       |
| (12)   | Incorporated herein by  reference to the Company’s Current Report on Form 8-K dated December 28,  2005.                                                                                                     |
|   |                                                                                                                                                                                                                       |
| (13)   | Incorporated herein by  reference to the Company’s Current Report on Form 8-K dated February 8,  2005.                                                                                                      |
|   |                                                                                                                                                                                                                       |
| (14)   | Incorporated herein by  reference to the Company’s Quarterly Report on Form 10-Q for the quarter  ended March 31, 2005.   Confidential treatment requested as to certain portions of this  exhibit.    |
|   |                                                                                                                                                                                                                       |
| (15)   | Incorporated herein by  reference to the Company’s Quarterly Report on Form 10-Q for the quarter  ended March 31, 2006.                                                                                     |
|   |                                                                                                                                                                                                                       |
| (16)   | Incorporated herein by  reference to the Company’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 2006.  Confidential  treatment requested as to certain portions of this exhibit. |
|   |                                                                                                                                                                                                                       |
| (17)   | Incorporated herein by  reference to the Company’s Current Report on Form 8-K dated June 1,  2007.                                                                                                          |
|   |                                                                                                                                                                                                                       |
| (18)   | Incorporated herein by  reference to the Company’s Current Report on Form 8-K dated December 20,  2007.                                                                                                     |

 

44

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SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Exchange Act, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|                                                    | Metro One  Telecommunications, Inc. |
|---------------------------------------------------------|------------------------------------------|
|                                                    |                                     |   |
|                                                    |                                     |   |
|                                                    | By:                                      | /s/ James F.  Hensel |
|                                                    |                                     | James F. Hensel |
|                                                    |                                     | Chief Executive  Officer |
|                                                    |                                     |   |
| Date:     March 31,  2008 |                                     |   |

 

**POWER OF ATTORNEY**

 

KNOWALL PERSONS BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints James F. Hensel and Kenneth D. Peterson, Jr,jointly and severally, his or her attorneys-in-fact, each with the power ofsubstitution, for him or her in any and all capacities, to sign any amendmentsto this Report on Form 10-K, and to file the same, with exhibits theretoand other documents in connection therewith with the Securities and ExchangeCommission, hereby ratifying and confirming all that each of saidattorneys-in-fact, or his or her substitute or substitutes may do or cause tobe done by virtue hereof.

 

Pursuantto the requirements of the Exchange Act, this report has been signed below bythe following persons on behalf of the registrant in the capacities and on thedate indicated:

 
| **Signature**                     | ** ** | **Title**                             | ** ** | **Date**             |
|-----------------------------------|------------|---------------------------------------|------------|----------------------|
|                              |       |                                  |       |                 |
| /s/ James F.  Hensel              |       | Chief Executive  Officer and Director |       | March 31,  2008 |
| James F. Hensel                   |       | (Principal  Executive Officer)        |       |                 |
|                              |       |                                  |       |                 |
| /s/ William K.  Hergenhan         |       | Senior Vice  President,               |       | March 31,  2008 |
| William K.  Hergenhan             |       | Chief Financial  Officer              |       |                 |
|                              |       | (Principal  Financial and             |       |                 |
|                              |       | Accounting  Officer)                  |       |                 |
|                              |       |                                  |       |                 |
| /s/ Kenneth D.  Peterson, Jr |       | Chairman of the  Board of Directors   |       | March 31,  2008 |
| Kenneth D.  Peterson, Jr     |       |                                  |       |                 |
|                              |       |                                  |       |                 |
| /s/ Jonathan A.  Ater             |       | Director                              |       | March 31,  2008 |
| Jonathan A. Ater                  |       |                                  |       |                 |
|                              |       |                                  |       |                 |
| /s/ Richard B.  Keller II         |       | Director                              |       | March 31,  2008 |
| Richard B.  Keller II             |       |                                  |       |                 |
|                              |       |                                  |       |                 |
| /s/ Elchanan  (Nani) Maoz         |       | Director                              |       | March 31,  2008 |
| Elchanan (Nani)  Maoz             |       |                                  |       |                 |
|                              |       |                                  |       |                 |
| /s/ Mary H.  Oldshue              |       | Director                              |       | March 31,  2008 |
| Mary H. Oldshue                   |       |                                  |       |                 |

 

45

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