<PAGE>   1




                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB


               [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1996
                                       or
               [ ] ANNUAL REPORT UNDER SECTION 13 OR 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            (I.R.S. Employer Identification No.)
  incorporation or organization)


      8405 S.W. Nimbus Avenue                        Beaverton, OR 97008
                    (Address of principal executive offices)

        Registrant's telephone number, including area code: 503-643-9500

          Securities registered pursuant to Section 12(b) of the Act:
                                      NONE

           Securities registered pursuant to Section 12(g) of the Act:
                           COMMON STOCK, NO PAR VALUE
                                (Title of Class)

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

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]

          Revenues for its most recent fiscal year.  $17,833,975.

         The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which stock was sold, or the average bid
and asked prices of such stock, as of a specified date within the past 60 days.
$59,459,144.

         The number of shares outstanding of the Registrant's common stock, as
of March 15, 1997, was 10,783,303.

                       DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 1997 Annual Meeting are
incorporated by reference into Part III of this Report.


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                       METRO ONE TELECOMMUNICATIONS, INC.
                         1996 FORM 10-KSB ANNUAL REPORT
                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                                     Page No.
                                     PART I

<S>               <C>                                                                                <C>
ITEM 1            Business                                                                               3
ITEM 2            Properties                                                                             9
ITEM 3            Legal Proceedings                                                                      9
ITEM 4            Submission of  Matters to a Vote
                  of Security Holders                                                                   10
                                     PART II

ITEM 5            Market for Common Equity and
                  Related Stockholder Matters                                                           11
ITEM 6            Management's Discussion and Analysis
                  of Financial Condition and Results of Operations                                      11

ITEM 7            Financial Statements                                                                  18
ITEM 8            Changes In and Disagreements With
                  Accountants on Accounting and
                  Financial Disclosure                                                                  18

                                    PART III

ITEM 9            Directors and Executive Officers                                                      18
ITEM 10           Executive Compensation                                                                18
ITEM 11           Security Ownership of Certain Beneficial
                  Owners and Management                                                                 18
ITEM 12           Certain Relationships and Related
                  Transactions                                                                          18
ITEM 13           Exhibits and Reports on Form 8-K                                                      18

                  Signatures                                                                            20
</TABLE>


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                                     PART I


ITEM 1.        BUSINESS.

         Metro One Telecommunications, Inc. (the "Company" or "Metro One") is a
leading independent developer and provider of Enhanced Directory Assistance
("EDA") for the wireless telecommunications industry. The Company contracts with
wireless telecommunications carriers to provide enhanced directory assistance to
a carrier's subscribers. In 1989, the Company opened its first call center and
began testing and offering EDA services. In 1991, the Company entered into its
first contract to provide EDA services to a cellular carrier's subscribers on a
charge-per-call basis. The Company presently operates call centers in the
Baltimore/Washington D.C., Chicago, Denver, Detroit, Miami, Minneapolis,
Philadelphia, Phoenix, St. Louis, San Diego, Seattle and Portland, Oregon
metropolitan areas. In 1996, the Company handled approximately 30 million
requests for directory assistance on behalf of carriers.

         The Company's EDA provides callers with easy-to-use directory
assistance. The Company's operators provide EDA with a high level of efficient,
personalized service. The Company's EDA includes several features in addition to
those provided by traditional directory assistance, including call completion,
categorical search and local event information. Call completion allows a caller
to be directly connected with the number requested, thus completing the call
without the need for redialing. The Company's StarBack feature enables a
subscriber to return to an operator at any time during a call. The Company is
developing additional EDA features including a broader array of connectivity
features and increased content. The Company believes that its EDA offers the
wireless consumer a feature-rich, user-friendly alternative to traditional
directory assistance.

         In addition to addressing the needs of the wireless subscriber, the
Company believes that its EDA offers wireless carriers the opportunity to
differentiate their service by providing a high quality, value-added product to
subscribers, thereby assisting carriers in meeting heightened competition in the
telecommunications industry. The Company's array of connectivity features and
informational content, which can be offered to subscribers in various
configurations, allow the wireless carrier to distinguish its services from
competitors and establish a separate identity in the marketplace. The Company
believes that its EDA also increases carriers' revenues through increased call
volumes and billable air time.

         The Company was incorporated in 1989 under the name Metro One Direct
Information Services, Inc. under the laws of the State of Oregon. The Company
changed its name to Metro One Telecommunications, Inc. in 1995. The Company has
its principal executive offices at 8405 S.W. Nimbus Avenue, Beaverton, Oregon
97008.


INDUSTRY BACKGROUND

         Wireless telecommunications has been among the fastest growing segments
of the telecommunications industry during the 1990s. One industry source,
Northern Business Information, predicts annual revenues in the wireless
telecommunications industry to increase from less than $10 billion in 1990 to
$50 billion by 1999. This growth stems largely from technological advances that
provide customers with affordable, high quality mobile services. According to
the Cellular Telecommunications Industry Association ("CTIA"), the number of
wireless subscribers in the United States at year-end 1996 was approximately 44
million. While this figure represents primarily cellular subscribers, other
types of wireless communications technologies, such as Personnel Communication
Services ("PCS") and specialized mobile radio ("SMR"), are beginning to compete
with cellular and are also expected to enjoy rapid expansion. For example, the
number of PCS subscribers is projected to exceed 20 million by the year 2000.

         Telecommunications carriers face increasing competitive pressures
arising from the deregulation of the domestic telecommunications industry.
Because of this increasingly competitive environment, local, regional and
national telecommunications carriers confront intense pressure to differentiate
their products and establish brand loyalty. These pressures are particularly
acute for wireless carriers who seek to increase market penetration of their
services and increase revenues while confronting competition from rival carriers
and new technologies. As the quality of wireless services improves and achieves
relative parity with competing services, wireless providers must differentiate
themselves by incorporating value-



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added features into their services. Directory assistance is one such feature
that wireless carriers can offer to differentiate their services allowing them
to compete more effectively and increase usage and subscriber satisfaction.

         Wireless subscribers, at the same time, need convenient and practical
directory assistance in which they are not hampered by the limited functionality
of automated operators or required to write down or memorize phone numbers.
Wireless subscribers benefit from an enhanced directory assistance that can
deliver features beyond mere phone listings, such as call connectivity and
helpful information such as categorical searches, local events and movie
listings. In turn, carriers benefit from increased subscriber loyalty and the
revenues derived from more frequent usage.


THE DOMESTIC DIRECTORY ASSISTANCE MARKET

         The Company believes that over 10 billion directory assistance calls
are made annually by consumers and businesses in the United States. The majority
of these directory assistance calls are handled for landline telephone users by
the Regional Bell Operating Companies ("RBOCs") from their incumbent positions
as the local telephone carriers. The Company believes, however, that wireless
directory assistance represents a significant and fast-growing segment of the
market due to the expected continued growth in the wireless market and the
natural attractiveness of delivering directory assistance for wireless users.

         The wireless telecommunications market is dominated by the cellular and
PCS affiliates of the established carriers as well as a few large independents.
The Federal Communications Commission ("FCC") initially granted cellular
licenses to only two systems (one for non-wireline carriers and one for wireline
carriers) in every metropolitan statistical and rural service area. The largest
U.S. cellular carriers include AT&T Wireless Services, Inc., GTE Mobilnet, the
cellular affiliates of the RBOCs, such as Ameritech Cellular, and several
independents, including AirTouch Communications Inc. (which is in the process of
acquiring US West NewVector Group, Inc.) and 360 Communications Company. In
early 1997, the FCC completed the auction of six PCS licenses in each market
area to potential PCS providers. The largest PCS providers, based on population
covered, include Sprint PCS, NextWave Telecom, AT&T Wireless Services, PrimeCo
Personal Communications L.P., Omnipoint Communications and Pacific Bell Mobile
Services.

         Directory assistance services for the cellular carriers were initially
provided exclusively by the local RBOCs. However, as carriers began to face a
more competitive marketplace and have been forced to seek ways to differentiate
and improve their service, they have increasingly sought to outsource services
like directory assistance to focus on their core competencies. Meanwhile, new
providers of emerging technologies, such as PCS, also desire to outsource their
non-core operations, like directory assistance, and focus on ways to acquire and
retain new subscribers. Metro One believes it is uniquely positioned to provide
the type of feature rich, easy-to-use and personalized enhanced directory
assistance the carriers desire. The Company's operating competencies, derived
from the establishment and operation of twelve call centers, allow it to provide
carriers with a reliable, high-quality, local directory assistance product. At
the same time, the Company's national call center network enables carriers which
operate in multiple markets to offer a consistent EDA, which promotes greater
system-wide marketing and brand identification.

         The entire telecommunications industry, including the landline
telecommunications market, is currently undergoing various regulatory,
competitive and technological changes which the Company believes may create new
customers and affect existing customers of the Company. The Company continues to
monitor the ongoing changes in the marketplace and consider which developments
provide the most favorable opportunities for the Company to pursue.


METRO ONE'S STRATEGY

         Metro One's mission is to be the leading provider of operator-assisted
enhanced directory assistance and information services. The key elements of
Metro One's strategy for fulfilling that mission are:

         Continuously offer value-added products and features. Metro One
endeavors to define a new standard for directory assistance by delivering
directory assistance solutions which meet the particular needs of wireless
telecommunications consumers. Through continuous expansion of its features,
enrichment of its database and enhancement of its search


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capabilities, Metro One believes it can attract and retain carriers and set an
ever increasing expectation for value-added enhanced directory assistance.

         Expand into new geographic markets. Metro One expects to continue to
expand its national network of call centers into new geographic markets served
by existing carrier customers, which increasingly demand consistent service
across their national networks. Metro One believes its operational competencies
and extensive experience developing and maintaining its existing call center
network will help the Company to penetrate these new geographic markets
successfully.

         Leverage existing infrastructure. Metro One intends to exploit its
national call center network to provide service to additional wireless carriers
and subscribers from existing call centers. By leveraging its established call
center network, Metro One expects to expand call volumes particularly by
providing EDA to subscribers who can now be served more readily as a result of
the deregulation of the telecommunications industry.

         Achieve greater operating efficiencies. Metro One is developing and
implementing software enhancements and adding new hardware to its EDA systems
that are intended to increase the productivity of its operators. Coupled with
improved personnel training programs and operator monitoring capabilities, these
enhancements are expected to permit the Company to deliver its EDA to carrier
subscribers more efficiently while increasing call center profitability.

         Pursue opportunities to provide additional operator-assisted services.
Metro One intends to expand its product offerings to include information
services, such as direction and concierge services, that complement its enhanced
directory assistance. The development and implementation of these services are
intended to generate incremental revenue for the Company while raising consumer
expectations for operator assisted information services.


CUSTOMERS AND MARKETS

         The Company provides its EDA to five of the nation's eight largest
cellular carriers in a portion of their service areas and to both the largest
PCS carrier (in terms of population covered) and the first PCS carrier to
establish domestic PCS service. The Company has located call centers in 12 of
the top 25 cellular markets (market size based on estimated subscribers). The
Company services approximately 27 markets from these 12 call centers. In
addition, the Company is either offering, or expects to soon offer, its EDA
services in the majority of the top 40 markets, including New York and Los
Angeles, the two largest markets. The Company believes that these top 40 major
metropolitan areas represent its greatest opportunities for future growth.
Wireless usage in these markets has attained sufficient levels to provide
profitable call volumes, while competition among carriers for these subscribers
increases carrier need for features that can differentiate their services. The
Company strives to expand relationships with existing carrier customers and to
establish relationships with new carrier customers.

         The Company provides substantially all of its EDA services under 12
separate contracts that have terms that originally ranged from one to five
years. Two of these contracts expire at the end of 1997 while eight expire
during 1998. Under the EDA contracts, the carrier generally agrees to route all
local directory assistance calls to the Company. However, these contracts
generally allow the Company to offer EDA services to competing carriers. The
Company contractually agrees to staff its EDA operations centers 24 hours a day,
seven days a week, 365 days a year, with a sufficient number of operators to
perform the contracted services within specified performance requirements.

         The Company offers its services on behalf of the carrier under a brand
name selected by that carrier. For example, the Company presently offers its EDA
to AT&T Wireless subscribers in various markets as "AT&T Connect." The carrier
is generally responsible for all aspects of marketing, including advertising and
related costs. Although each carrier establishes its own fee structure with its
subscribers, Metro One charges carriers for its service on a per call basis and
the carrier is obligated for the charges regardless of whether it is paid by the
subscriber. During 1996, the Company's per-call charges to its carrier customers
averaged approximately $0.60.

         The Company typically enters into a separate contract with a carrier
for each geographic market to be served by the Company. The Company is a party
to a single contract with Ameritech Cellular, however, providing for the Company
to deliver enhanced directory assistance to Ameritech Cellular's subscribers in
Chicago, Milwaukee, St. Louis, and Detroit. The


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agreement provides for the Company to supply enhanced directory assistance to
each of those markets for a term of three years commencing on the date enhanced
directory assistance is made commercially available to subscribers in the
market. The additional terms of the agreement do not differ materially from the
Company's general EDA contracts. Under this contract, Ameritech Cellular
accounted for approximately $4.7 million of revenue during 1996.

         The Company is also a party to a single contract with Sprint Spectrum
L.P., doing business as Sprint PCS. Under the terms of the multi-year agreement,
the Company will provide its local and nationwide EDA for each Sprint Spectrum
market and potentially for each Sprint Spectrum affiliate market. As of March
1997, the Company was providing its EDA services from existing call centers for
the 17 markets where Sprint or its affiliates have launched their PCS service.

         In 1996, eight customers accounted for the majority of the Company's
$17.8 million in revenues. The Company's three largest customers, US West
NewVector, Ameritech Cellular and Bell Atlantic NYNEX Mobile, accounted for
approximately 28, 26, and 22 percent of revenues, respectively, in 1996. In
1995, seven customers accounted for the majority of the Company's $13.1 million
in revenues. The Company's three largest customers, US West NewVector, Ameritech
Cellular and Bell Atlantic NYNEX Mobile, accounted for approximately 29, 23, and
20 percent of revenues, respectively, in 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
the TOMCOM partnership which includes AirTouch, US West NewVector, and Bell
Atlantic NYNEX Mobile.


PRINCIPAL PRODUCT AND PRODUCT FEATURES

         Enhanced Directory Assistance. Metro One delivers its EDA using a
customized array of hardware and software and the Company's database and search
engines. The Company receives incoming calls by means of contractually assigned
directory assistance numbers, typically 411 or 555-1212. Calls are answered by
the Company's operators, identifying the EDA service using the carrier's brand
name. Upon receiving information requests from subscribers, Company operators
search the Company's local database utilizing various search engines. The
Company's EDA system allows the operator to connect the caller to a party and/or
supply the telephone number, address, or other information, including local
events or businesses of a certain type within a specific locality. The fee for
this service is fixed by the carrier, and typically ranges from $0.50 to $0.75
plus airtime charges. The Company's system compiles billing information that is,
in some cases, furnished to the carrier for subscriber billing and collection.

         Connectivity features. The Company's EDA incorporates connectivity
features, which are engineered to address specific needs of mobile users, at no
additional charge to carriers. The Company's call completion feature directly
connects a subscriber to a requested business or residence without the
requirement of additional dialing. This feature is particularly useful to the
mobile consumer because it eliminates the need to write down or memorize a phone
number. Metro One's StarBack feature allows a caller to return immediately to an
operator simply by pressing the (*) key once on the caller's telephone. This
feature allows a caller immediate access to an operator if a call is unanswered
or if the number is busy, permitting the caller to request alternate
connections.

         In addition, the Company is in the process of introducing two new
connectivity features which will further differentiate its EDA from traditional
directory assistance. These two features are AutoBack -- the ability to
automatically return a caller to an operator if a busy signal is detected and
NumberBack -- the ability to obtain a recording of the last phone number
requested by a caller. AutoBack and NumberBack are commercially available in one
market and are expected to be introduced in all of the Company's markets during
1997. Two other features, also expected to be introduced in 1997, are
MessageBack -- the ability to deliver a caller's message to the called party at
a later time if connection is not initially established and CallBack -- the
ability to connect the called party to the calling party at a later time.

         Content features. The Company's database and search engine development
activities have focused on the creation of valuable features which distinguish
the Company's EDA from traditional directory assistance. The Company's database
system is derived from a variety of sources, including data licensed from RBOCs,
independent telephone companies and other commercial sources. The Company
supplements this information with localized information, such as information
relating to local events and amenities, which allows the Company to customize a
local database to include specialized information at the request of a carrier
customer. The Company believes that these features are of particular value to
wireless subscribers who often seek information while in transit.




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         National database access and connectivity. The Company currently
utilizes several national directory assistance databases which allow callers to
request business, residential and government numbers from anywhere in the U.S.
In areas where a carrier's billing systems permit appropriate tracking of toll
calls, the Company is able to offer the ability to connect calls from a local
call center to anywhere in the U.S.

         New features and products. The Company plans to develop additional
features which complement the Company's current array of connectivity and
content features while providing additional utility and value to the wireless
subscriber. The Company believes that the continued development of new features
is an important component of its strategy to define a new standard for directory
assistance and to thereby widen customer acceptance of and demand for enhanced
directory assistance. The Company also intends to expand its product offerings
to include operator-assisted information services that complement its EDA.


OPERATIONS

         Call centers. The Company presently maintains call centers in the
Baltimore/Washington D.C., Chicago, Denver, Detroit, Miami, Minneapolis,
Philadelphia, Phoenix, St. Louis, San Diego, Seattle and Portland, Oregon
metropolitan areas. Call center premises are leased by the Company and range in
size from approximately 3,000 to 11,000 square feet. In its call center site
selection process, the Company works with carriers to identify locations which
provide easy access to T1 and T3 transmission facilities. In addition, the
Company seeks to obtain locations that are readily accessible to its workforce.
Call centers typically are configured using modular work stations, so that each
operator has a station for their terminal and related database materials.
Because the Company's call centers are operational 24 hours a day, work stations
may be used by three or more operators during a business day.

         Database, database management system and search engines. The Company
develops a principal database for each call center, obtaining data from a
variety of sources including RBOCs, independent telephone companies and other
commercial sources. The Company's local database is augmented by access to
supplemental databases on a subscription basis. The Company also utilizes
national directory assistance databases licensed by the Company from commercial
sources. The recent upgrade of the Company's call center network stations allows
operators to efficiently query both their local database and the national
directory assistance database. The Company has developed a database management
system that it uses to maintain and update directory listings in its database.

         The Company has developed search engine systems to access information
within its databases. The Company also licenses portions of its systems from
various vendors. The Company is upgrading its database management system and
search engines to increase the speed of the information access and to broaden
the categorical search capabilities of its operators. These software
enhancements are currently being introduced in several call centers and are
expected to be introduced into the rest of the Company's national call center
network throughout 1997. The Company believes that these tools will improve EDA
search times, resulting in faster call processing.

         EDA system. Metro One's EDA system incorporates programmable switching
equipment, host computers, voice response units and database servers. The
Company contracts with value-added resellers to assist in programming its
switches and host computer systems. This software enhances its call handling and
billing capabilities and provides the basis for the Company's connectivity
features.

         Quality assurance. Particularly because the Company's EDA is provided
to subscribers on a branded basis, the Company believes that the quality and
reliability of its EDA services are important considerations in a carrier's
decision to offer the Company's EDA. The Company provides carriers with several
EDA options related to configuration and features. Once a new call center is
operational, the Company and carrier subject the center to testing before
service is initiated. In addition to supplying billing information to carriers,
the Company monitors call center performance for compliance with contract
performance standards and reports this information to carriers on a regular
basis. The Company has centralized its employee training which allows it to
achieve more uniform performance throughout its call center network. Metro One
solicits performance evaluations from its customers on a quarterly basis. The
Company's systems maintenance and support personnel are accessible to customers
on a 24-hour basis.




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MARKETING

         The Company markets directly to telecommunications carriers. Sales and
technical support personnel are based at the Company's corporate headquarters in
Beaverton, Oregon. In addition, the Company's regional managers, who oversee the
Company's call center network, are also a key element in the maintenance and
development of carrier relationships.

         The Company's major marketing programs focus on product awareness
principally through trade shows, marketing materials, including brochures and
videotape presentations, and direct contacts with telecommunications carriers.
There are several major industry conferences that are important to the Company's
marketing program. The Company maintains communications with its existing
carrier customers through its quality assurance and customer service programs,
which afford the Company the opportunity to receive information regarding
evolving carrier needs. The Company also maintains an active calling program to
identify and meet with prospective carrier customers; both existing carriers and
new carriers in emerging technologies.


COMPETITION

         The enhanced directory assistance market is characterized by rapidly
changing market forces, technological advancements and increasing competition
from large carrier-affiliated companies and small, independent companies. The
Company's principal competitors include RBOC-owned or -affiliated carriers or
non-RBOC affiliated carriers, including GTE. In addition to traditional
directory assistance, many of these competitors offer a directory assistance
call completion feature. Although the Company believes that none of these
competitors presently offers a form of enhanced directory assistance that
incorporates all the connectivity and content features of the Company's EDA,
these competitors have substantially greater financial, technical and marketing
resources than the Company and may be able to do so in the future. The Company
also faces competition in various markets from independent companies seeking to
offer forms of enhanced directory assistance.

         The Company believes that the principal competitive factors in the
enhanced directory assistance market are quality of product, available features,
technological innovation, experience, responsiveness to customers, and price.
Historically, the Company has sought to distinguish itself from competitors
based on the quality of its product, the development of useful features and its
experience derived from successfully establishing a national network of call
centers. Although the Company has not experienced widespread competitive
pressures with respect to the pricing of its product, there can be no assurance
that the Company will not experience price or margin pressures in the future.
The Company believes, however, that its future growth will depend on its ability
to maintain and improve the quality of its product, and to develop and
successfully introduce new connectivity content and features.


INTELLECTUAL PROPERTY

         The Company regards certain aspects of its products and their features
and processes as proprietary and relies on a combination of trademark, patent
and trade secrets laws and confidentiality procedures to protect its proprietary
rights. The Company has obtained service mark registrations in the United States
for several of its product feature names, such as "StarBack." The Company's
policy has been to enter into confidentiality agreements with all employees and
limit access to its documentation and other information related to its
intellectual property. The Company believes that its product development and
marketing capabilities have been of greater importance to the Company's business
than legal intellectual property protection.


GOVERNMENT REGULATION

         The Company's business depends upon relationships with companies that
are regulated by the FCC or state PUCs. Such regulation applies to all
communications common carriers, such as AT&T, RBOCs and other long distance and
local


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exchange carriers. Enhanced service companies such as the Company may be subject
to various levels of regulation or are completely unregulated on a
state-by-state basis.


EMPLOYEES

         As of March 15, 1997, the Company had approximately 575 employees. None
of the Company's employees are subject to a collective bargaining agreement.
Management of the Company considers its relationship with its employees to be
good.


ITEM 2.        PROPERTIES.

         The Company leases its principal executive and administrative offices
at 8405 S.W. Nimbus Avenue, Beaverton, Oregon, comprising approximately 15,400
square feet, for a remaining term of five years with a renewal option. The
Company also leases office facilities for its EDA operations in the markets it
serves. There are approximately 15 facility leases in effect at March 15, 1997
with remaining terms ranging from one to six years.

         The Company believes that its facilities are suitable and adequate for
its present operational requirements and that it is not dependent upon any
individually leased premises.


ITEM 3.        LEGAL PROCEEDINGS.

         In May 1993, as a means of rapidly responding to a market opportunity
in Arizona with US West NewVector, the Company entered into a Leasing and
Business Transfer Agreement (the "Leasing Agreement") with Metro Direct
Information Services of Phoenix ("Arizona Direct"), an unaffiliated third party
and former licensee of the Company's initial value-added EDA product. The
Leasing Agreement provided financing for the Company of substantially all
required equipment and furniture in its Arizona operations center and is
similar, in some respects, to a joint venture agreement. Equipment with the
approximate value of $200,000 was financed and obtained by the Company under the
Leasing Agreement, which amount was not repaid by the Company. The Leasing
Agreement provided for a formula-based profit sharing arrangement between the
Company and Arizona Direct, which was to become effective after the Company had
recouped all start-up costs from the Arizona operation. At the earliest
appropriate time, at the Company's discretion, the Company was obligated to
request that its rights under the US West NewVector contract for Arizona be
transferred to Arizona Direct. If such a transfer had occurred, the profit
sharing arrangement was to be replaced by a royalty arrangement under which the
Company would have received a royalty for each cellular call handled by Arizona
Direct. If the transfer had been denied or otherwise did not occur, the
formula-based profit sharing arrangement was to govern the business relationship
between the Company and Arizona Direct until the transfer or the end of the US
West NewVector agreement. During 1993 and 1994, the Company and Arizona Direct
were unable to come to an agreement with respect to the amounts of equipment
lease financing that had been provided to the Company by Arizona Direct. In
addition, disputes arose regarding whether the Company had recouped start-up
costs for the Arizona operation as of May 1994. In June, 1994, Arizona Direct
commenced an action seeking rescission of the Leasing Agreement. In December,
1994, the Company notified Arizona Direct that it believed Arizona Direct was in
default of its obligations under the Leasing Agreement. The Company declared the
Leasing Agreement terminated. Arizona Direct gave the Company notice of its
belief that the Company had breached the Leasing Agreement as well. The Company
denied those allegations. In connection with the Leasing Agreement, the Company
and several of its officers were named as defendants in a complaint filed in
U.S. District Court for the District of Arizona in June 1994 by Arizona Direct
(and the purported principal shareholders of Arizona Direct). The Company
counterclaimed for breach of the Leasing Agreement and for tortious interference
with the Leasing Agreement against Arizona Direct's principal shareholders. In
October 1995, Arizona Direct filed an action against the Company in the U.S.
District Court for the District of Oregon seeking, among other things, damages
for alleged breach of the Leasing Agreement.

         In February 1997, the Company reached final agreement with Arizona
Direct and its principal shareholders to settle the two lawsuits. Under the
terms of the settlement agreement, the Company paid to Arizona Direct the amount
of $450,000


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and issued to such parties 50,000 unregistered shares of the Company's Common
Stock, representing consideration for the equipment financed by Arizona Direct,
a covenant not-to-compete by Arizona Direct and its principal shareholders for a
term of three years, certain covenants in relation to the common stock to be
issued, and settlement and compromise of the litigation. The parties exchanged
mutual releases of claims and payments by the Company were made without
admission of liability.

         On May 20, 1996, Richard and John Budinich, two of the Company's
shareholders, filed a civil action in the Superior Court of the State of
Washington for King County in which the plaintiffs alleged that the Company
violated securities laws of the State of Washington by selling to the plaintiffs
44,532 shares of the Common Stock of the Company in 1993. In February 1997, the
Company reached final agreement with Plaintiffs with respect to their civil
action. Under the terms of the settlement agreement, the litigation was
dismissed with mutual releases of claims without any admission of liability or
monetary payments.


ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         On June 5, 1996, at the Annual Meeting of the Company's Shareholders,
the shareholders approved each of the proposals set forth in the Company's Proxy
Statement dated April 19, 1996, briefly described below:

         (i)   The shareholders were requested to elect the following
               individuals to the Board of Directors:

<TABLE>
<CAPTION>
                         NOMINEE                            FOR                           WITHHELD
                         -------                            ---                           --------
<S>                                                      <C>                              <C>
              Patrick M. Cox                             6,509,382                         7,763
              A. Jean de Grandpre                        6,514,287                         2,858
              G. Raymond Doucet                          6,514,287                         2,858
              William D. Rutherford                      6,514,287                         2,858
              Timothy A. Timmins                         6,512,858                         4,287
</TABLE>

               All nominees were elected to the Board of Directors.

          (ii) The shareholders were asked to approve the selection of Deloitte
               & Touche LLP as the Company's independent auditors. The proposal
               was approved by the shareholders, as 6,512,145 votes were cast
               for the proposal, 5,000 votes were against the proposal, 0 votes
               abstained and 0 votes were broker non-votes.



                                       10
<PAGE>   11
                                     PART II


ITEM  5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         On August 23, 1996, the Company's Common Stock commenced trading on the
Nasdaq National Market tier of The Nasdaq Stock Market under the symbol "MTON."
The high and low sales prices as reported on the Nasdaq National Market for the
period from August 23, 1996 to September 30, 1996 and the fourth fiscal quarter
of 1996 were as follows:

<TABLE>
<CAPTION>
       1996                                                 High                      Low
       ----                                                 ----                      ---
<S>                                                         <C>                       <C>
       August 23, 1996 to September 30, 1996                $16 -1/4                  $9
       Quarter ended December 31, 1996                       14 -1/2                   6 -3/4
</TABLE>

         The approximate number of shareholders of record as of March 15, 1997
was 430. The Company believes it has approximately 2,537 shareholders including
an estimate of shareholders with shares held in street name.

         The Company has never declared or paid cash dividends on its Common
Stock. The Company intends to retain earnings from operations for use in the
operation and expansion of its business and does not anticipate paying cash
dividends with respect to its Common Stock in the foreseeable future. The
Company's existing line of credit agreement prohibits the payment of cash
dividends.


ITEM 6.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS

         All statements and trend analyses contained in this item and elsewhere
in this report on Form 10-KSB relative to the future constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are subject to the business and
economic risks faced by the Company and the Company's actual results of
operations may differ materially from those contained in the forward looking
statements. For a discussion of such risks, see "Issues and Uncertainties."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.

         Results of operations for the periods discussed below should not be
considered indicative of the results to be expected in any future period and
fluctuations in operating results may also result in fluctuations in the market
price of the Company's Common Stock. The Company's quarterly and annual
operating results have in the past and may in the future vary significantly
depending on factors such as increased competition and expiration of Enhanced
Directory Assistance ("EDA") contracts, the rapidly changing telecommunications
market, changes in pricing policies by the Company or its competitors, lengthy
sales cycles, lack of market acceptance or delays in the introduction of new
versions of the Company's product or features, the timing of the initiation of
wireless services in new market areas by telecommunications customers, general
economic conditions, and the other factors discussed under the heading "Risk
Factors" in the Company's Registration Statement on Form S-1 (File No.
333-05183) filed with the Securities and Exchange Commission, which section is
hereby incorporated by reference herein.


OVERVIEW

         The Company is a leading independent provider of Enhanced Directory
Assistance ("EDA") for the wireless telecommunications industry.

         The Company provides EDA under contracts with original terms ranging
from one to five years. Under the EDA contracts, carriers generally agree to
route all local directory assistance calls to the Company, bill their
subscribers for EDA


                                       11
<PAGE>   12
calls and market the service. These contracts generally permit the Company to
offer its EDA services to competing carriers in the same market. Metro One
provides EDA to a carrier's subscribers under a brand name designated by the
carrier, such as "AT&T Connect." Although each carrier establishes its own EDA
fee structure for its subscribers, Metro One charges carriers directly for its
service on a per call basis and the carrier is obligated for the charges
regardless of whether it is paid by its subscriber. Generally, these per call
charges remain fixed for the term of the contract.

         The Company currently has 12 significant EDA contracts with seven
different carriers to provide EDA in 27 metropolitan markets from 12 call
centers. The Company expects to continue to expand its share of the wireless
telecommunications directory assistance market by adding customer carriers to
the currently existing national network of call centers and by expanding this
network into new geographic markets to serve new and existing carrier customers.
The Company presently anticipates that it will open several new call centers by
the end of 1997. Based on the Company's historical experience and technical
upgrade plans, establishing a call center typically costs $700,000 to $800,000,
exclusive of initial operating losses. There can be no assurance, however, that
costs associated with establishment of new call centers will be consistent with
costs experienced by the Company on a historical basis.

         In the first quarter of 1996, the Company's contract with AirTouch
Cellular in the San Diego market expired. During 1995, this contract accounted
for approximately seven percent of the Company's revenues. Although the Company
participated in a competitive bidding process, the Company was unable to secure
a new contract on terms and conditions that were acceptable to the Company.
During the negotiations, the carrier sought rates below prior contracted rates
and an exclusivity commitment in markets served by the carrier.

         AirTouch Cellular has combined cellular operations with US West
NewVector and has also formed a partnership called TOMCOM, L.P., with Bell
Atlantic NYNEX Mobile to pursue joint marketing strategies. While the
implications of the expiration of the AirTouch Cellular EDA contract for the San
Diego market are unclear, the Company believes this decision may serve as a
precedent for AirTouch Cellular and the other TOMCOM participants as they
establish or consider the renewal of EDA contracts in other markets in the
future. Although one EDA agreement with a TOMCOM member has been extended for a
period of six months subsequent to the expiration of the contract in San Diego,
there can be no assurance that the Company will renew its contracts with US West
NewVector or any other TOMCOM participant or that the Company will have the
opportunity to obtain new contracts with any of these carriers in the future.
One of the Company's contracts with a TOMCOM participant is up for renewal in
1997, with five others up for renewal in 1998. Contracts with TOMCOM
participants accounted for 56 percent and 54 percent of the Company's revenues
in 1996 and 1995, respectively.

         In January 1997, the Company discontinued service to GTE Mobilnet in
the San Diego market. During 1996 this contract accounted for approximately five
percent of the Company's revenues. GTE Mobilnet, previously operating under the
terms of a contract between the Company and US West NewVector, which contract
was to have been assigned to GTE Mobilnet as part of a market swap between the
two carriers, transferred service to a GTE operator services entity.

         The San Diego call center is currently serving two Personal
Communications Service ("PCS") carrier customers rolling out service in
California and Nevada. One of these carrier customers is served under a trial
agreement.

         In the fourth quarter of 1996, the Company signed a multi-year contract
with Sprint PCS to provide EDA services to Sprint PCS customers. In conjunction
with the scheduled launch for services in new markets by Sprint PCS, the Company
expects to open new call centers over the next 18 months in such major
metropolitan areas as New York, Boston, Dallas and San Francisco.

         The Company's initial public offering was declared effective August 22,
1996. The number of shares sold to the public in the offering, including the
exercise of the underwriters' over-allotment option, was 2,760,000. The Company
offered and issued 1,675,000 shares of Common Stock and selling shareholders
sold 1,085,000 shares of Common Stock. The net proceeds to the Company were
approximately $12,514,921 from the offering and the exercise of the
underwriters' over-allotment option and $1,052,632 from the exercise of warrants
by selling shareholders.





                                       12
<PAGE>   13


RESULTS OF OPERATIONS

         The following table sets forth for the periods indicated selected items
of the Company's statements of operations as a percentage of its revenues.

<TABLE>
<CAPTION>
                                              Years Ended December 31,
                                          ------------------------------
                                          1996         1995         1994
                                          ----         ----         ----

<S>                                      <C>          <C>           <C>
Revenues                                 100.0%       100.0%        100.0%
Direct operating costs                    46.7         54.7          94.9
General and administrative costs          42.7         45.9          84.5
Operating profit (loss)                   10.6          (.6)        (79.4)
Interest and loan fees                     3.2%        10.5%         16.7%

New call centers opened                    1            1             6
Call centers in operation                 12           11            10
</TABLE>

1996 COMPARED TO 1995

         Revenues increased 36.4% to $17.8 million from $13.1 million. Revenues
from existing call centers grew 25.4% and accounted for $3.3 million of this
increase. This net increase was due exclusively to increases in call volumes at
all call centers except San Diego, which experienced a decrease in call volume
primarily due to the completion of a contract with AirTouch in the first quarter
of 1996. The call center is expected to experience a decrease in call volumes
for 1997 due to the termination of service to GTE Mobilnet in January 1997.
Revenues from one new call center, opened in the fourth quarter of 1995,
accounted for $1.5 million of the increased revenues.

         Direct operating costs consist of call center personnel and data costs.
These costs increased 16.4% to $8.3 million from $7.2 million. The increase in
direct operating costs was due primarily to the cost of operating an additional
call center in 1996. As a percentage of revenues, direct operating costs
decreased to 46.7% from 54.7%. This decline primarily resulted from higher call
volumes and the associated operating efficiencies due to improved personnel
utilization and the introduction of new technology designed to enhance
productivity. However, due to the continuing build-out of the Company's national
call center network and introduction of its EDA service into new markets, the
Company anticipates direct operating costs to increase from 1996 levels as a
percentage of revenue. The Company expects to open several new call centers and
enter into new markets during 1997. The costs associated with the start-up of a
new call center increase direct operating costs as a percentage of revenue for a
period of time, as the call center prepares to launch service and, once open,
prior to efficient utilization of personnel and data. In conjunction with the
introduction of service in a new market, regardless of whether a new call center
is opened, the Company acquires additional data sources, often in advance of
carrier customer service. Accordingly, for a period of time, the Company may
experience increased data costs without a corresponding increase in revenue.

         General and administrative costs increased 26.9% to $7.6 million from
$6.0 million. This increase in costs was due primarily to the support of
increased operational activity overall and costs associated with the operation
of an additional call center during 1996. As a percentage of revenues, general
and administrative costs declined to 42.7% from 45.6%. This decline resulted
primarily from the achievement of substantially higher revenues in 1996.
However, the Company anticipates general and administrative costs will also
increase from 1996 levels as a percentage of revenue, as the Company continues
to build-out its national call center network. The costs associated with the
start-up of a new call center increase general and administrative costs as a
percentage of revenue for a period of time, prior to an increase in call volume.
Depreciation and amortization increased by 32.7% to $1,322,497 from $996,834 due
primarily to equipment upgrades for existing call centers.

         Other expense for the year ended December 31, 1996 was $108,868, and
consisted primarily of estimated litigation settlement expenses of $280,323 and
asset valuation losses of $151,094 related to equipment taken out of service
during the year, offset by interest income of approximately $287,542. Other
income for the year ended December 31, 1995 was


                                       13
<PAGE>   14
$114,137, and consisted primarily of interest income of $47,918, approximately
$98,900 of income resulting from the settlement of a vendor claim, offset by
estimated litigation settlement expenses of approximately $24,000.

         Interest expense and loan fees declined 58.5% to $568,085 from
$1,371,936. This decline was attributable solely to the reduction in monthly
average debt outstanding to $2.9 million from $8.9 million.

         Income tax expense for the year ended December 31, 1996 was $41,123,
for an effective tax rate of approximately 3.4%. This rate differs from the
combined federal and state statutory rate of approximately 38% due to the use of
net operating loss carryforwards. The Company did not provide for income taxes
in 1995 and 1994 due to net operating losses for those years.


1995 COMPARED TO 1994

         Revenues increased 158.8% to $13.1 million from $5.1 million. Revenues
from the six call centers opened during 1994 grew to $8.2 million from $1.8
million, accounting for $6.4 million of this increase. Revenues from the four
call centers opened prior to 1994 grew 48.0% and accounted for $1.5 million of
this increase. Revenues from the one call center opened during 1995 accounted
for $0.1 million of revenues for 1995. The revenue growth at existing call
centers was due exclusively to increases in call volumes at those centers.

         Direct operating costs increased 49.3% to $7.2 million from $4.8
million. This increase in direct operating costs was primarily due to the
greater number of call centers in operation for a full year in 1995 as compared
to 1994. As a percentage of revenues, direct operating costs declined to 54.7%
from 94.9%. This decline resulted primarily from increased call volumes
generating higher revenues, while costs increased less rapidly due to operating
efficiencies arising from improved personnel utilization and the introduction of
new technology.

         General and administrative costs increased 40.6% to $6.0 million from
$4.3 million. This increase in general and administrative costs was due
primarily to higher expenses associated with the operation for the full year in
1995 of additional call centers opened during 1994. As a percentage of revenues,
general and administrative costs declined to 45.9% from 84.5%. This decline
resulted primarily from the achievement of substantially higher revenues in 1995
as compared with the prior year without a commensurate increase in general and
administrative costs. Depreciation and amortization increased by 34.3% to
$996,834 from $742,135 due primarily to the acquisition of new equipment for new
call centers.

         Net interest expense increased 63.1% to $1,371,936 from $841,407. This
increase was attributable to the increase of average debt outstanding to
$5,816,615 from $3,816,078, resulting primarily from the Company's completion of
an offering of its 8% Convertible Secured Notes during 1995 and interest paid in
connection with the Company's 1995 rescission offering.

         The Company recognized $384,071 of expenses related to the conversion
of its 8% Convertible Secured Notes during 1995. No similar expenses were
recognized during the prior year.

         Other income for the year ended December 31, 1995 was $114,137, and
consisted primarily of interest income of $47,918, approximately $98,900 of
income resulting from the settlement of a vendor claim, offset by estimated
litigation settlement expenses of approximately $24,000. Other expense for the
year ended December 31, 1994 was $182,884, and consisted primarily of estimated
litigation settlement expenses of $200,000, offset by interest income of
$56,055, and a refund of moving expenses of approximately $10,948.


LIQUIDITY AND CAPITAL RESOURCES

         The completion of the initial public offering of common stock in August
1996 and the exercise of the underwriters' over-allotment option in September
1996 resulted in net proceeds to the Company of $12.5 million. At December 31,
1996, the Company's liquidity ratios were substantially improved due to the
proceeds of the offering. Working capital increased to


                                       14
<PAGE>   15
$15.0 million from $151,000 at December 31, 1996 and 1995, respectively. The
Company's current ratio increased to 7.3:1 from 1.0:1 at December 31, 1996 and
1995, respectively.

         The Company has a $3.0 million secured operating line of credit with a
commercial bank. The line of credit expires in 1999. Availability under the line
of credit is subject to borrowing base requirements and compliance with loan
covenants. Under the terms of the agreement, outstanding borrowings bear
interest at the prime rate plus 0.25 percent and all assets of the Company are
pledged to the bank as collateral. The agreement contains minimum net worth and
working capital requirements as well as certain other restrictive covenants and
prohibits the payment of cash dividends by the Company. As of December 31, 1996,
the Company was eligible to borrow $2.2 million under the line of credit and had
no borrowing against this line of credit. The Company also has a credit facility
under which the Company may borrow up to $1.0 million to finance purchases of
capital equipment. Borrowing bears interest at the prime rate plus 0.50 percent
and is secured by the purchased equipment. As of December 31, 1996, the Company
had no borrowing against this line of credit. The Company believes that current
cash and cash equivalents, cash flows from operations and the unused line of
credit are sufficient to meet current and anticipated future capital
requirements through 1997.

         The Company's cash and cash equivalents are recorded at cost which
approximates their fair market value. As of December 31, 1996, the Company had
$14.1 million in cash and cash equivalents compared to $1.1 million at December
31, 1995, an increase of approximately $13.0 million resulting primarily from
the initial public offering in the third quarter of 1996.

         Cash Flow from Operations. Net cash from operations for the twelve
months ended December 31, 1996 was $2.9 million, resulting primarily from the
operating and net income for that period. Most existing call centers operated
profitably and contributed to cash flow from operations during the twelve months
ended December 31, 1996.

         Net cash used by operations was $2.3 million and $4.4 million in 1995
and 1994, respectively. In 1994 the Company expanded its operations into six new
markets, which required the use of cash to fund startup costs for new call
centers. The reduction in use of cash by operations in 1995 was primarily due to
the Company's efforts to reduce costs and increase efficiency through more
effective personnel utilization and technology enhancements, which allowed
faster call processing without compromising quality of service, to the opening
of only one new call center, and the growth in revenues from existing call
centers in that year. Although currently the Company continues its focus on
efficient operations, quality of service remains a high priority and, if
necessary, the efficiencies of scheduling will be adjusted in order to maintain
the desired quality, which could have an adverse effect on cash flow from
operations and liquidity.

         Cash Flow from Investing Activities. Cash used in investing activities
was $3.4 million for 1996 and was related primarily to capital expenditures for
system redundancy capabilities and equipment upgrades for certain locations. In
the twelve months ended December 31, 1996, additional capital equipment for the
same purposes was acquired through lease financing in the amount of $0.7
million.

         Net cash provided by or (used in) investing activities was $100,616 and
($914,974) in 1995 and 1994, respectively. The Company's call center expansion
in 1994 required the use of proceeds for capital equipment. In 1995 and 1994
capital equipment acquired through lease financing was $1.1 million and $1.9
million, respectively.

         Cash Flow from Financing Activities. Net cash provided by financing
activities for the twelve months ended December 31, 1996 was $13.5 million
resulting primarily from the proceeds of the Company's initial public offering
of $12.5 million and the exercise throughout the year of warrants to purchase
818,756 shares of common stock resulting in net cash proceeds to the Company of
$2.6 million.

         Net cash provided by financing activities was $2.9 million and $5.3
million in 1995 and 1994, respectively.

         In 1995, the Company issued $3,860,000 in principal amount of its 10%
Subordinated Notes to certain private investors to refinance similar notes
maturing in 1995, resulting in net cash proceeds to the Company of $250,000. In
1995, the Company also issued $3,050,000 in principal amount of its 8%
Convertible Secured Notes to certain private investors, resulting in net cash
proceeds to the Company of $3,050,000. During 1995, warrants for the purchase of
327,412 shares of the Company's Common Stock were exercised, resulting in net
cash proceeds to the Company of $1,088,080. In 1995, the


                                       15
<PAGE>   16
Company also repurchased 135,414 shares of its Common Stock pursuant to a
rescission offer, resulting in the use of $738,660 in cash for shares of common
stock and earned interest.

         In 1994, the issuance of debt and equity resulted in the following net
cash proceeds to the Company: (i) the 1994 10% Subordinated Notes provided
$3,610,000 in net cash proceeds; (ii) the initial offering of the Company's 8%
Convertible Secured Notes resulted in $1,950,000 in net cash proceeds; and (iii)
warrants and options to purchase shares of common stock were exercised resulting
in proceeds to the Company of $338,089.

         Future Capital Needs and Resources. The primary uses of capital are
expected to be the expansion of existing call centers, funding of start-up
operating losses for newly opened call centers, principal and interest on
indebtedness, and the purchase of equipment and development of technology for
the improvement of existing and new call centers.

         Under the terms of its contract with Sprint PCS, the Company may be
required to open up to six new call centers, in major metropolitan areas, in
1997 and 1998, depending on various milestones; the most important of which is
the attainment by Sprint PCS of minimum call volumes in that particular market.
The Company is also required, in conjunction with the Sprint PCS contract, to
develop and maintain an out-of-band signaling system for each of its call
centers. The Company anticipates that its capital expenditures, including those
expenditures related to Sprint PCS, will be up to approximately $9.0 million
through the end of 1997, resulting primarily from the projected expansion and
planned improvements. The Company believes its existing cash and cash
equivalents, credit facilities and cash from operations will be sufficient to
fund its operations through the end of fiscal 1997.

         Effect of Inflation. The effect of inflation was not a material factor
affecting the Company's business during the twelve months ended December 31,
1996.


ISSUES AND UNCERTAINTIES

         Metro One does not provide forecasts of future financial performance.
While Metro One's management is optimistic about the Company's long-term
prospects, the following issues and uncertainties, among others, should be
considered in evaluating its outlook.

         Need for Expansion. Although the Company has a number of contracts for
delivery of its EDA services, there is no assurance that the Company will be
successful in expanding its services to a sufficient number of new customers or
markets to achieve substantial and sustainable profitability or that it will be
able to sustain past growth rates.

         Concentration of Business; Limited Customer Base. Although the Company
seeks to increase the number of its EDA contracts with wireless carriers, the
nature and ownership and/or operational control of the major wireless licensees
limits the Company's potential customers and expansion opportunities.
Furthermore, ten entities dominate the cellular market. Three of these dominant
carriers represented approximately 76 percent, 72 percent and 81 percent of the
Company's revenue in 1996, 1995 and 1994, respectively. Any failure of the
Company to maintain a satisfactory relationship with any of these significant
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.

         Expiration of EDA Agreements/Lengthy Sales Cycles. The Company has
twelve significant EDA contracts with seven different carriers. Of these
contracts, two come up for renewal in 1997, eight come up for renewal in 1998,
and two come up for renewal in 2000. Efforts to renew existing and enter into
new contracts may face lengthy sales cycles and increased competitive, pricing
and service pressures.

         Rapidly Changing Telecommunications Market. The telecommunications
environment is characterized by rapid change and uncertainty due to merger,
acquisition, alliances and introduction of new carrier licensees into the
wireless market. This may result in competitive situations which could
unfavorably impact the Company, such as the withdrawal of a customer from a
market that the Company serves or increased negotiation leverage for carriers in
contract discussions for EDA services.




                                       16
<PAGE>   17
         Competition. The Company intends to compete to attract and retain
customers principally on the basis of services and features of its EDA, and its
emphasis on quality and customer care. The Company's ability to compete
successfully will also depend, in part, on its ability to anticipate and respond
to various competitive factors affecting the industry, including new services
that may be introduced, changes in customer preferences, economic conditions and
discount pricing strategies by competitors, all of which could adversely affect
the Company's business, financial condition and results of operations.

         Prices. Prices the Company can obtain for its services are subject to
the changing telecommunications market, the relative leverage of the negotiating
parties and the overall competitive landscape. There can be no assurance that as
existing contracts are renewed, if they are renewed, or as new contracts are
entered into, that the contracts will not provide for lower prices than the
Company currently experiences. This could have an adverse impact on the
business, financial condition and results of operations of the Company.

         Technology. Telecommunications and the related directory assistance
market are currently characterized by rapid technological change, frequent
introductions of new and enhanced products and service, and changing consumer
demands. The Company's success will be dependent, in part, upon its ability to
anticipate changes in technology and industry standards and to successfully
develop and introduce new and improved EDA and other telecommunications
services, which may require substantial expenditures. There is no assurance that
the Company will be able to do so, that it will have adequate financial
resources to undertake such development, or that it will not encounter technical
or other difficulties that could delay the introduction of its services or
enhancements thereof.

         Reliance on Third Party Vendors. The Company relies on key vendors to
supply programming and engineering services and to license technology. Although
there are a limited number of such providers, the Company believes that other
providers could provide for the Company's needs on comparable terms. Abrupt
changes in the arrangements could, however, cause a disruption in operations or
a delay in development efforts, either of which could adversely affect the
Company's business, financial condition and results of operation.

         Quality, Cost and Availability of Data. The Company's operations are
dependent upon its access to names, telephone numbers and other information
supplied to callers directly or used in providing call completion. Such data
vary widely across geographic regions as to availability, cost, quality and
usefulness for the Company's purposes. Ultimately, the satisfaction of the
Company's carrier customers is dependent upon the quality of service being
provided to the carrier's subscribers. Although the Company believes that it
obtains its data in a manner that allows it to provide quality service to its
customers, there is no assurance that the Company will have access to sufficient
and quality data or that the Company can obtain and update data in a manner and
at prices that allow the Company to successfully and economically maintain or
improve current service levels.

         Potential for Unionization. The telecommunications industry,
particularly with respect to larger telecommunications companies, is
characterized by widespread union membership among its operators and other
workers. Although the Company believes that its relations with its employees are
good, no assurance can be given that unionization will not occur in the future.
The occurrence of such an event could likely have a material adverse effect on
the Company's business, financial condition and results of operations.

         Intellectual Property. To a limited extent, the Company relies upon a
combination of trade secret, patent and other intellectual property law,
non-disclosure agreements and other protective measures to preserve its rights
pertaining to its EDA, but there is no assurance that the Company can
meaningfully protect its intellectual property. Further, the Company is not
aware of any pending or threatened claims that affect any of the Company's
intellectual property rights. If any infringement claim is asserted against the
Company, the Company may seek to obtain a license of the other party's
intellectual property rights. There is no assurance that a license would be
available on reasonable terms or at all. Litigation with respect to patents or
other intellectual property matters could result in substantial costs and
diversion of management and other resources and could have a material adverse
effect on the Company's business, financial condition and results of operations.




                                       17
<PAGE>   18

ITEM 7.        FINANCIAL STATEMENTS.

         See pages F-1 through F-15.


ITEM 8.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
               AND FINANCIAL DISCLOSURE.

         None.



                                    PART III


ITEM 9.        DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
               COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

         The information required by Item 9 is incorporated by reference to the
Company's Proxy Statement for its 1997 Annual Meeting under the caption of
"Management."


ITEM 10.       EXECUTIVE COMPENSATION.

         The information required by Item 10 is incorporated by reference to the
Company's Proxy Statement for its 1997 Annual Meeting under the caption of
"Executive Compensation."


ITEM 11.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information required by Item 11 is incorporated by reference to the
Company's Proxy Statement for its 1997 Annual Meeting under the caption of
"Principal Shareholders."


ITEM 12.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by Item 12 is incorporated by reference to the
Company's Proxy Statement for its 1997 Annual Meeting under the caption of
"Certain Transactions."


ITEM 13.       EXHIBITS AND REPORTS ON FORM 10-K

(a) EXHIBITS

1.0      Form of Underwriting Agreement (1)

3.1      Second Restated Articles of Incorporation of Metro One
         Telecommunications, Inc. (3)

3.2      Amended and Restated Bylaws of Metro One Telecommunications, Inc. (1)

4.0      Form of Common Stock Certificate of Metro One Telecommunications,
         Inc. (1)




                                       18
<PAGE>   19
5.0   Opinion of Ater Wynne Hewitt Dodson & Skerritt, LLP as to the legality of
      the securities being registered (1)

10.1  Form of Enhanced Directory Assistance Agreement (2)

10.2  Enhanced Directory Assistance Agreement between Ameritech Mobile
      Communications, Inc. and the Company dated June 16, 1994 (3) (4)

10.3  1994 Stock Incentive Plan (3)

10.31 Amendment to 1994 Stock Incentive Plan

10.4  Consulting Agreement with G. Raymond Doucet (2)

10.41 Consulting Agreement with G. Raymond Doucet, dated December 1, 1996

10.5  Loan and Security Agreement between Silicon Valley Bank and the Company
      dated March 15, 1996 (3)

10.6  1995 Employment Agreement with Timothy A. Timmins (3)

10.7  1995 Employment Agreement with Patrick M. Cox (3)

10.8  Lease Agreement between and among Petula Associates, Ltd., Koll Creekside
      Associates and the Company (1)

23.1  Consent of Deloitte & Touche LLP, independent certified public
      accountants.

23.2  Consent of Price Waterhouse, independent certified public accountants.

------------------

(1)   Previously filed as an Exhibit to the Registrant's Registration Statement
      on Form S-1 (No. 333-05183.

(2)   Filed as an Exhibit to the Company's Registration Statement on Form SB-2
      (No. 33-88926-LA) and incorporated herein by reference.

(3)   Filed as an Exhibit to the Company's Annual Report on Form 10-KSB (No.
      0-27024) and incorporated herein by reference.

(4)   Certain portions of Exhibit 10.2 are the subject of a request for
      confidential treatment and have been omitted from the exhibit and have
      been filed separately with the Commission.


(b) REPORTS FILED ON FORM 8-K

         In the last quarter of 1996, the Registrant filed the following current
reports on Form 8-K:

<TABLE>
<CAPTION>
       Date of Report                     Items Reported
       --------------                     --------------
<S>                                       <C>
       November 27, 1996                  Discontinuance of Service to GTE Mobilnet
</TABLE>



                                       19
<PAGE>   20

                                    SIGNATURE


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


                                    Metro One Telecommunications, Inc.



                                    By:    /s/ Timothy A. Timmins
                                           -------------------------------------
                                           Timothy A. Timmins
                                           President and Chief Executive Officer


Date: March 21, 1997


         Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the date indicated:

<TABLE>
<CAPTION>
Signature                                            Title                                       Date
---------                                            -----                                       ----


<S>                                                  <C>                                         <C>
/s/ Timothy A. Timmins                               President, Chief Executive                  March 21, 1997
----------------------------                         Officer and Director
Timothy A. Timmins


/s/ Stebbins B. Chandor, Jr.                         Senior Vice President and                   March 21, 1997
----------------------------                         Chief Financial Officer
Stebbins B. Chandor, Jr.


/s/ Karen L. Johnson                                 Vice President and Controller,              March 21, 1997
----------------------------                         Prinicipal Accounting Officer
Karen L. Johnson


/s/ A. Jean de Grandpre                              Chairman of the Board of Directors          March 21, 1997
----------------------------
A. Jean de Grandpre


/s/ G. Raymond Doucet                                Director                                    March 21, 1997
----------------------------
G. Raymond Doucet


/s/ William D. Rutherford                            Director                                    March 21, 1997
----------------------------
William D. Rutherford


----------------------------                         Director
James M. Usdan
</TABLE>



                                       20
<PAGE>   21
INDEPENDENT AUDITORS REPORT
--------------------------------------------------------------------------------


To The Board of Directors and Stockholders of
Metro One Telecommunications, Inc.
Portland, Oregon


We have audited the accompanying balance sheets of Metro One Telecommunications,
Inc. as of December 31, 1996 and 1995 and the related statements of operations,
shareholders' equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of the Company for the year ended December
31, 1994 were audited by other auditors whose report, dated February 6, 1995,
expressed an unqualified opinion on those statements and included an explanatory
paragraph describing that the financial statements had been prepared assuming
that the Company would continue as a going concern.

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

In our opinion, such financial statements present fairly, in all respects, the
financial position of the Company at December 31, 1996 and 1995 and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.




DELOITTE & TOUCHE LLP
Portland, Oregon
February 26, 1997


                                      F-1
<PAGE>   22
                        REPORT OF INDEPENDENT ACCOUNTANTS

February 6, 1995

To the Board of Directors and Shareholders of
Metro One Telecommunications, Inc.

In our opinion, the accompanying statements of operations, of common stock
subject to rescission and shareholders' equity (deficit), and of cash flows
present fairly all material respects, the results of operations and cash flows
of Metro One Telecommunications, Inc. (formerly Metro One Direct Information
Services, Inc.) for the year ended December 31, 1994, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a text basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
financial statements of Metro One Telecommunications, Inc. for any period
subsequent to December 31, 1994.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from operations and, at December 31, 1994, has an accumulated deficit of
$14,713,210. In addition, as more fully discussed in Note 11 to the financial
statements, the Company has filed with certain securities regulators
registration statements pertaining to a planned rescission offering for certain
purchasers' equity securities because Company management cannot draw a
conclusion with certainty that all applicable state and federal security laws
were compiled with in all material respects in connection with the issuance of
such securities. Such factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in the accompanying financial statements. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.


PRICE WATERHOUSE LLP
Portland, Oregon




                                      F-2
<PAGE>   23


METRO ONE TELECOMMUNICATIONS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,
                                               ----------------------------------------------------
                                                   1996                1995                1994
                                               ------------        ------------        ------------

<S>                                            <C>                 <C>                 <C>
Revenues                                       $ 17,833,975        $ 13,074,206        $  5,050,202
                                               ------------        ------------        ------------

Costs and expenses:
    Direct operating                              8,334,014           7,156,855           4,793,416
    General and administrative                    7,615,397           5,999,548           4,267,585
                                               ------------        ------------        ------------
                                                 15,949,411          13,156,403           9,061,001
                                               ------------        ------------        ------------

Income (loss) from operations                     1,884,564             (82,197)         (4,010,799)

Other income (expense)                             (108,868)            114,137            (182,884)
Debt conversion expense                                  --            (384,071)                 --
Interest and loan fees                             (568,085)         (1,371,936)           (841,407)
                                               ------------        ------------        ------------

Income (loss) before income taxes                 1,207,611          (1,724,067)         (5,035,090)
Income tax expense                                   41,123                  --                  --
                                               ------------        ------------        ------------
Net income (loss)                              $  1,166,488        $ (1,724,067)       $ (5,035,090)
                                               ============        ============        ============

Weighted average number of common
and common equivalent shares outstanding          9,395,862           5,562,959           5,039,272

Income (loss) per share                        $        .12        $       (.31)       $      (1.00)
                                               ============        ============        ============

</TABLE>

        The accompanying notes are an integral part of these statements.

                                       F-3
<PAGE>   24

METRO ONE TELECOMMUNICATIONS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                         --------------------------------
                                                                             1996                1995
                                                                         ------------        ------------

ASSETS

<S>                                                                      <C>                 <C>
Current assets:
    Cash and cash equivalents                                            $ 14,136,574        $  1,148,822
    Accounts receivable                                                     2,722,544           2,617,465
    Current portion notes receivable from officers/shareholders                 3,309               2,900
    Prepaid costs and other current assets                                    533,768             357,197
                                                                         ------------        ------------

        Total current assets                                               17,396,195           4,126,384

 Furniture, fixtures and equipment, net                                     6,759,759           4,187,554
 Notes receivable from officers/shareholders, less current portion             22,229              25,858
 Other assets                                                                 351,162             376,682
                                                                         ------------        ------------

                                                                         $ 24,529,345        $  8,716,478
                                                                         ============        ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Current portion of capital lease obligations                         $    736,941        $    769,892
    Current portion of long-term debt                                              --           2,045,897
    Accounts payable                                                          353,479             258,135
    Accrued liabilities                                                       741,357             483,872
    Accrued payroll and related costs                                         548,712             418,042
                                                                         ------------        ------------

        Total current liabilities                                           2,380,489           3,975,838

Capital lease obligations, less current portion                             1,168,204           1,366,205
Long-term debt, less current portion                                               --             100,000
                                                                         ------------        ------------

                                                                            3,548,693           5,442,043
                                                                         ------------        ------------

Commitments and contingencies (Note 11)                                            --                  --


SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 10,000,000 shares
    authorized, no shares issued or outstanding                                    --                  --
Common stock, no par value; 490,000,000 shares
    authorized, 10,692,887 and 7,936,804 shares,
    respectively, issued and outstanding                                   36,251,440          19,711,711
Accumulated deficit                                                       (15,270,788)        (16,437,276)
                                                                         ------------        ------------

Net shareholders' equity                                                   20,980,652           3,274,435
                                                                         ------------        ------------

                                                                         $ 24,529,345        $  8,716,478
                                                                         ============        ============
</TABLE>


        The accompanying notes are an integral part of these statements.

                                       F-4
<PAGE>   25
 METRO ONE TELECOMMUNICATIONS, INC.

STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                           COMMON STOCK                SHAREHOLDERS'  EQUITY (DEFICIT)
                                                   SUBJECT TO POTENTIAL RESCISSION              COMMON STOCK
                                                    --------------------------          --------------------------
                                                        SHARES      AMOUNT                 SHARES        AMOUNT
                                                    -----------  -------------          -----------   ------------

<S>                                                 <C>          <C>                    <C>           <C>
Balances at December 31, 1993                         4,992,488  $   11,976,102                   -              -

Stock options/warrants exercised, net                   218,383        338,089                    -              -
Net loss                                                      -              -                    -              -
                                                    -----------  -------------          -----------   ------------

Balances at December 31, 1994                         5,210,871     12,314,191                    -              -

Common stock purchased in rescission offering          (135,414)      (613,760)                   -              -
Reclassified upon completion of rescission offering  (5,075,457)   (11,700,431)           5,075,457   $ 11,700,431
Stock options/warrants exercised                              -              -              327,412      1,088,080
Stock issued for services                                     -              -                5,714         13,200
Conversion of long-term debt to common stock                  -              -            2,528,221      6,910,000
Net loss                                                      -              -                    -              -
                                                    -----------  -------------      -   -----------   ------------

Balances at December 31, 1995                                 -  $           -            7,936,804     19,711,711
                                                    ===========  =============

Common stock issued in public offering                                                    1,675,000     12,514,921
Stock options/warrants exercised, net                                                       818,756      2,624,808
Conversion of long-term debt to common stock                                                262,327      1,400,000
Net income                                                                                        -              -
                                                                                      -------------   ------------
Balances at December 31, 1996                                                            10,692,887   $ 36,251,440
                                                                                      =============   ============

</TABLE>



<TABLE>
<CAPTION>
                                                          SHAREHOLDERS'  EQUITY (DEFICIT)
                                                        ---------------------------------
                                                         (ACCUMULATED     NET SHAREHOLDERS'
                                                           DEFICIT)       EQUITY (DEFICIT)
                                                        -------------     ---------------


<S>                                                    <C>                <C>
Balances at December 31, 1993                          $   (9,678,119)    $    (9,678,119)

Stock options/warrants exercised, net                               -                   -
Net loss                                                   (5,035,090)         (5,035,090)
                                                        -------------     ---------------

Balances at December 31, 1994                             (14,713,209)        (14,713,209)

Common stock purchased in rescission offering                       -                   -
Reclassified upon completion of rescission offering                 -          11,700,431
Stock options/warrants exercised                                    -           1,088,080
Stock issued for services                                           -              13,200
Conversion of long-term debt to common stock                        -           6,910,000
Net loss                                                   (1,724,067)         (1,724,067)
                                                        -------------     ---------------

Balances at December 31, 1995                             (16,437,276)          3,274,435


Common stock issued in public offering                                         12,514,921
Stock options/warrants exercised, net                                           2,624,808
Conversion of long-term debt to common stock                                    1,400,000
Net income                                                  1,166,488           1,166,488
                                                       --------------     ---------------
Balances at December 31, 1996                          $( 15,270,788)     $    20,980,652
                                                       ==============     ============-==
</TABLE>



        The accompanying notes are an integral part of these statements.

                                       F-5
<PAGE>   26
METRO ONE TELECOMMUNICATIONS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 YEARS ENDED DECEMBER 31,
                                                                     ------------------------------------------------
                                                                         1996              1995              1994
                                                                     ------------       -----------       -----------

Cash flows from operating activities:
<S>                                                                  <C>                <C>               <C>
    Net income (loss)                                                $  1,166,488       $(1,724,067)      $(5,035,090)
    Adjustments to reconcile net income (loss) to net cash
      provided by (used in) operating activities:
        Depreciation and amortization                                   1,322,497           996,834           742,135
        Loss on disposal of fixed assets                                  151,094             8,533            51,574
        Deferred income taxes                                             (33,000)             --                --
        Gain on settlement of disputed payable                            (17,673)          (98,918)             --
        Reduction of notes receivable and related interest                  3,100             4,400              --
        Services paid with debt and equity instruments                       --              13,200           150,000
        Debt conversion expense                                              --             255,780              --
    Changes in certain assets and liabilities:
        Accounts receivable                                              (105,079)       (1,259,540)         (921,528)
        Prepaid expenses and other assets                                (118,817)         (393,707)         (173,754)
        Accounts payable, accrued liabilities and payroll costs           540,320           (57,550)          782,960
                                                                     ------------       -----------       -----------

           Net cash provided by (used in) operating activities          2,908,930        (2,255,035)       (4,403,703)
                                                                     ------------       -----------       -----------

Cash flows from investing activities:
    Capital expenditures                                               (3,408,399)          (74,422)         (955,963)
    Issuance of notes receivable                                             --                --            (150,000)
    Collections on notes receivable from shareholders                       3,219             3,398           175,806
    Collections on notes receivable                                          --             171,640            15,183
                                                                     ------------       -----------       -----------

           Net cash provided by (used in) investing activities         (3,405,180)          100,616          (914,974)
                                                                     ------------       -----------       -----------

Cash flows from financing activities:
    Proceeds from issuance of bank debt                                 1,121,236              --             470,000
    Repayment of bank debt                                             (1,121,236)             --            (470,000)
    Repayment of capital lease obligations                               (909,830)         (721,387)         (234,254)
    Repayment of debt                                                    (745,897)         (309,883)         (185,239)
    Proceeds from issuance of long-term debt                                 --           3,550,000         5,410,000
    Proceeds from issuance of common stock and exercise
      of warrants and stock options                                     2,624,808         1,088,080           338,089
    Proceeds from initial public offering of common
      stock, net of expenses                                           12,514,921              --                --
    Common stock purchased in rescission offering                            --            (613,760)             --
                                                                     ------------       -----------       -----------

           Net cash provided by financing activities                   13,484,002         2,993,050         5,328,596
                                                                     ------------       -----------       -----------

Net increase in cash and cash equivalents                              12,987,752           838,631             9,919

Cash and cash equivalents, beginning of year                            1,148,822           310,191           300,272
                                                                     ------------       -----------       -----------

Cash and cash equivalents, end of year                               $ 14,136,574       $ 1,148,822       $   310,191
                                                                     ============       ===========       ===========
</TABLE>


        The accompanying notes are an integral part of these statements.

                                       F-6
<PAGE>   27
METRO ONE TELECOMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS


1.   SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS. The Company provides enhanced directory assistance
services to telecommunications carriers and their customers. Revenues are
derived principally through fees charged to telecommunications carriers. The
Company has call centers located throughout the United States in or near
metropolitan areas, such as Chicago; Baltimore; San Diego; Seattle; Miami;
Detroit; Denver; and others.

CASH AND CASH EQUIVALENTS. Cash and cash equivalents includes cash deposits in
banks and highly liquid investments maturing within approximately 9o days of
purchase.

REVENUE RECOGNITION. Under existing contracts with telecommunications carriers,
the Company records as revenue charges for the number of calls processed.
Revenue is recognized as services are provided.

MAJOR CUSTOMERS. In 1996, twelve customers accounted for substantially all
revenue reported and accounts receivable balances at December 31. The Company's
three largest customers accounted for approximately 28%, 26%, and 22%,
respectively, of revenue in 1996. In 1995, twelve customers accounted for
substantially all revenue reported and comprised the entire accounts receivable
balance at December 31. In 1994, six customers accounted for substantially all
revenue reported and comprised the entire accounts receivable balance at
December 31, 1994. Historically, the Company has not incurred significant losses
related to its accounts receivable.

FURNITURE, FIXTURES AND EQUIPMENT. Furniture, fixtures and equipment are stated
at cost and are depreciated over their estimated useful lives of three to seven
years using the straight-line method. Leasehold improvements are amortized over
the lesser of the remaining lease term or the useful life. Expenses for repairs
and maintenance are expensed as incurred, and renewals and betterments are
capitalized. When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are eliminated from the accounts and the resulting
gains or losses are reflected in the statement of operations.

PER SHARE AMOUNTS. The per share amounts are based on the weighted average
number of common and dilutive common equivalent shares assumed to be outstanding
during the period of computation.

PATENTS AND TRADEMARKS. Patents pending and trademarks are carried at cost less
accumulated amortization. Costs are amortized over the estimated useful lives
of the related assets of five to ten years. In the event that facts and
circumstances indicate that the cost of patents or trademarks may be impaired,
an evaluation of recoverability would be performed and the asset's carrying
amount would be reduced to market value or discounted cash flow value.

FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of cash and cash
equivalents, accounts receivable and payable, and accrued liabilities
approximate fair value due to the short-term maturities of these assets and
liabilities. The Company's notes receivable and payable bear interest rates that
approximate current market rates; thus, the recorded value of these notes is
considered to be at fair value.

USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principals requires management to make estimates
and assumptions that effect reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the fiscal year. Actual results could differ from those
estimates.

RECLASSIFICATION. Certain balances in the 1994 and 1995 financial statements
have been reclassified to conform with 1996 presentations. Such
reclassifications had no effect on results of operations or accumulated earnings
(deficit).


                                      F-7
<PAGE>   28
METRO ONE TELECOMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

2.   FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment by major classification are summarized as
follows:

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                  ------------------------------------------------------------------------------------------------
                                                     1996                                               1995
                                  ---------------------------------------------      ---------------------------------------------
                                     LEASED          OWNED            TOTAL            LEASED            OWNED            TOTAL
                                  -----------      -----------      -----------      -----------      -----------      -----------

<S>                               <C>              <C>              <C>              <C>              <C>              <C>
Equipment                         $ 2,868,057      $ 5,522,411      $ 8,390,468      $ 2,461,270      $ 2,720,034      $ 5,181,304
Furniture and fixtures                168,994          993,456        1,162,450          594,186          373,470          967,656
Leasehold improvements                   --            138,988          138,988             --            110,958          110,958
                                  -----------      -----------      -----------      -----------      -----------      -----------
                                    3,037,051        6,654,855        9,691,906        3,055,456        3,204,462        6,259,918
Less accumulated depreciation
    and amortization                 (905,195)      (2,026,952)      (2,932,147)        (614,803)      (1,457,561)      (2,072,364)
                                  -----------      -----------      -----------      -----------      -----------      -----------

                                  $ 2,131,856      $ 4,627,903      $ 6,759,759      $ 2,440,653      $ 1,746,901      $ 4,187,554
                                  ===========      ===========      ===========      ===========      ===========      ===========
</TABLE>


3.   NOTES RECEIVABLE FROM OFFICERS/SHAREHOLDERS

Notes receivable from officers/shareholders are summarized as follows:

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                      -------------------
                                                                        1996       1995
                                                                      -------     -------
<S>                                                                   <C>         <C>
Unsecured notes receivable including interest at 7.89%
    per annum                                                         $25,538     $28,758

Less current portion                                                    3,309       2,900

                                                                      -------     -------

Notes receivable from officers/shareholders, less current portion     $22,229     $25,858
                                                                      =======     =======
</TABLE>


4.   LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                                -------------------------
                                                                                   1996           1995
                                                                                ----------     ----------
<S>                                                                             <C>            <C>
10% Subordinated Notes, unsecured,  interest payable monthly, due July 1996
    through January 1997                                                        $     --       $1,950,000

Unsecured notes, payable in monthly installments of $33,415, due
through June 1996, including interest at 8%                                           --          195,897
                                                                                ----------     ----------

                                                                                      --        2,145,897
Less current portion                                                                  --        2,045,897
                                                                                ----------     ----------

Long-term debt, less current portion                                            $     --       $  100,000
                                                                                ==========     ==========
</TABLE>



                                      F-8
<PAGE>   29

METRO ONE TELECOMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

10% SUBORDINATED NOTES. In 1995, the Company issued $3,860,000 of new 10%
subordinated notes with warrants (the "1995 Subordinated Notes"), the proceeds
of which were primarily used to refinance $3,610,000 in subordinated notes
("1994 Subordinated Notes"). The 1995 Subordinated Notes had maturities of no
less than 18 months and bore interest at 10% per annum payable monthly. These
1995 Subordinated Notes could be paid before maturity at the option of the
Company, with no penalty. In the event of an initial public offering, the then
outstanding 1995 Subordinated Notes were convertible, at the option of the
holder, into common stock at a price equal to 80% of the initial public offering
price.

Issued with each note was a warrant for the purchase of that number of shares of
the Company's common stock equal to the principal amount of the note divided by
$8.75. The exercise prices of the warrants related to the 1994 Subordinated
Notes and the 1995 Subordinated Notes are $5.25 and $2.31, respectively, and the
warrants are exercisable at any time on or before three years from the date of
issuance.

In 1995 and 1996, the Company extended an offer to holders of 1995 Subordinated
Notes to convert their notes to common stock of the Company at $5.25 per share.
Principal in the amounts of $1,910,000 and $1,300,000 were converted into
363,819 and 247,621 shares of the Company's common stock in 1995 and 1996,
respectively. In the third quarter of 1996, principal in the amount of $100,000
was converted into 14,706 shares on the Company's common stock at a price equal
to 80% of the initial public offering price, pursuant to the terms of the
Subordinated Note Agreement. In 1995 and 1996, principal in the amount of
$250,000 and $550,000, respectively, was repaid in accordance with the terms of
the Subordinated Note Agreement.


5.  LINE OF CREDIT

At December 31, 1996, the Company had in place a $3,000,000 Secured Operating
Line of Credit with a commercial bank. Under the terms of the agreement,
outstanding borrowings bear interest at prime rate plus 1.25 percent and all
assets of the Company are pledged as collateral. The agreement contains minimum
net worth and working capital requirements as well as certain other restrictive
covenants, as defined by the agreement, and prohibits the payment of cash
dividends. At December 31, 1996, the Company has no borrowings against this line
of credit.

In the first quarter of 1997, the Company amended its credit facility with its
commercial bank, to reduce the borrowing rate to prime plus 0.25 percent and to
extend the line of credit for two years. The other terms of the agreement remain
substantially the same.


6.    LEASE OBLIGATIONS

The Company leases office, operating facilities and equipment under operating
leases with unexpired terms of one to six years. Rental expense for operating
leases was approximately $942,000, $780,000 and $528,000 for 1996, 1995 and
1994, respectively.



                                      F-9
<PAGE>   30
METRO ONE TELECOMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS



Minimum annual rentals for the five years subsequent to 1996 and in the
aggregate thereafter are as follows:

<TABLE>
<CAPTION>
           YEAR ENDING
          DECEMBER 31,                                     CAPITAL LEASES     OPERATING LEASES
       ------------------                                 -----------------  -----------------
<S>                                                       <C>                <C>
              1997                                        $    1,048,783     $     1,009,918
              1998                                               789,008             889,742
              1999                                               506,338             800,075
              2000                                                97,489             722,750
              2001                                                17,475             385,750
           Thereafter                                                  -             129,116
                                                          --------------     ---------------

       Total minimum lease payments                            2,459,093     $     3,937,351
                                                                             ===============
       Less interest portion at rates
           of 10.2% to 25%                                       553,948
       Present value of net minimum                       --------------
           lease payments, capital leases                      1,905,145
       Less portion due within one year                          736,941
                                                          --------------
                                                          $    1,168,204
                                                          ==============
</TABLE>


7.   SHAREHOLDERS' EQUITY (DEFICIT)

COMMON STOCK. In 1995, the Company's Board of Directors and shareholders
approved a .2857-for-one (approximately a one-for-three and one-half) reverse
split of the Company's common stock. All share and per share amounts have been
restated to retroactively reflect the reverse stock split.

PREFERRED STOCK. In 1995, the Board of Directors and the shareholders approved
an amendment to the Restated Articles of Incorporation to increase the number of
authorized shares of preferred stock, without par value, from 10,000 to
10,000,000.

COMMON STOCK OPTIONS AND WARRANTS. The Company has a Stock Incentive Plan (the
"Plan"), approved by the shareholders, which provides for the award of incentive
stock options to key employees and the award of non-qualified stock options,
stock sales and grants to employees, outside directors, independent contractors
and consultants. As of December 31, 1996, 1,428,500 shares of common stock are
reserved for issuance under the Plan. It is intended that the Plan will be used
principally to attract and retain key employees of the Company.

The option price per share of an incentive stock option may not be less than the
fair market value of a share of common stock as of the date such option is
granted. The option price per share of a non-qualified stock option may be at
any price established by the Board of Directors or a committee thereof
established for purposes of administering the plan. Options become exercisable
at the times and subject to the conditions prescribed by the Board of Directors.
Generally, options vest over a period of four years and the term of each option
may not exceed ten years. Payment for shares purchased pursuant to options may
be made in cash or by delivery of shares of common stock having a market value
equal to the exercise price of the option.

In October 1995, the Financial Accounting Standards Board issued FAS No. 123,
"Accounting for Stock-Based Compensation," which encouraged, but did not
require, that stock-based compensation cost be recognized and measured by the
fair value of the equity instrument awarded. The Company did not change its
method of accounting for its stock-based compensation plans and will continue to
apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for these plans.
Accordingly, no compensation cost has been recognized for these plans in the
financial statements. If compensation cost on stock options granted in 1996 and
1995 under this plan had been determined based on the fair value of the options
granted as of the grant date in a method consistent with that described in FAS
No. 123, the Company's net income (loss)




                                      F-10
<PAGE>   31

METRO ONE TELECOMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

and earnings (loss) per share would have been changed to the pro forma amounts
indicated below for the years ended December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                               1996                        1995
                                                               ----                        ----

<S>                                                        <C>                       <C>
Net income (loss), as reported                             $1,166,488                ($1,724,067)
Earnings (loss) per share, as reported                           0.12                      (0.31)

Net income (loss), pro forma                                  944,333                 (1,847,175)
Earnings (loss) per share, pro forma                             0.10                      (0.33)
</TABLE>


The pro forma amounts may not be indicative of the effects on reported net
income for future periods due to the effect of options vesting over a period of
years and the awarding of stock compensation in future years.

The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1996 and 1995, respectively: dividend yield of 0 for both years;
risk-free interest rates of 6.3 and 6.2 percent; expected volatility of 46.5
percent for both years and expected lives of 4.0 for both years.

A summary of the status of the Company's stock option plan as of December 31,
1996 and 1995 and changes during the years ending on those dates is presented
below. The plan was initiated in 1995, therefore no activity occurred in 1994.


<TABLE>
<CAPTION>
                                                             1996                          1995
                                                  -------------------------      -----------------------
                                                                 Weighted-                    Weighted-
                                                                  Average                      Average
                                                    Shares      Exercise Price    Shares     Exercise Price
                                                  -----------    ----------      ----------   ----------
<S>                                               <C>            <C>             <C>          <C>
Outstanding  at
   beginning of year                               1,103,029     $     8.05              0    $     0
Granted                                              189,138          11.48      1,312,377          8.05
Exercised                                                  0           0.00              0          0.00
Forfeited                                               (691)          8.05       (209,348)         8.05
                                                  -----------    ----------      ----------   ----------

Outstanding at
   end of year                                     1,291,476     $     8.55      1,103,029    $     8.05
                                                  ==========     ==========      =========    ==========

Options exercisable at year-end                      949,704                       756,750
Weighted-average fair value of
   options granted during the year                 $    5.09                      $   0.24
</TABLE>


The following table summarizes information about stock options outstanding and
exercisable under the Company Plan at December 31, 1996:


<TABLE>
<CAPTION>
                                        Outstanding                               Exercisable
                      --------------------------------------------------   -----------------------------
                        Number     Weighted-Average                         Number
    Range of              of          Remaining         Weighted-Average      of        Weighted-Average
  Exercise Prices       Options  Contractual Life (yrs)   Exercise Price    Options     Exercise Price
-----------------     --------------------------------------------------   -----------------------------
<S>                   <C>                <C>                <C>             <C>              <C>
$  8.05 -  8.88        1,171,335         8.62               $   8.06         934,079         $    8.05
  13.38 - 13.38          120,141         9.79                  13.38          15,625             13.38
---------------       ----------         ----               --------        --------         ---------
$  8.05 - 13.38        1,291,476         8.73               $   8.55         949,704         $    8.14
===============       ==========         ====               ========        ========         =========
</TABLE>



                                      F-11
<PAGE>   32

METRO ONE TELECOMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

7.   SHAREHOLDERS' EQUITY (DEFICIT)  (CONTINUED)

Stock option and warrant activity in total is summarized as follows:

<TABLE>
<CAPTION>
                                                                   NUMBER OF SHARES    PRICE RANGE
                                                                   ----------------    -----------

<S>                                                                <C>             <C>
                  Balance at December 31, 1993                           810,383   $   0.04 - 8.05

                  Granted                                                561,116       5.25 - 8.05
                  Cancelled/Expired                                            -                 -
                  Exercised                                             (218,383)      0.04 - 1.75
                                                                    ------------   ---------------

                  Balance at December 31, 1994                         1,153,116       1.75 - 8.05

                  Granted                                              1,756,361              8.05
                  Cancelled/Expired                                     (209,348)             8.05
                  Exercised                                             (327,412)      1.75 - 5.25
                                                                    ------------   ---------------

                  Balance at December 31, 1995                         2,372,717       1.75 - 8.05

                  Granted                                                189,138      8.05 - 13.38
                  Cancelled/Expired                                         (691)             8.05
                  Exercised                                             (831,178)      1.75 - 5.25
                                                                    ------------   ---------------

                  Balance at December 31, 1996                         1,729,986   $  1.75 - 13.38
                                                                    ============   ===============
</TABLE>


8.   RELATED PARTIES

During 1994, 1995 and 1996, the Company entered into various capital lease
arrangements for furniture, fixtures and equipment with a company owned by a
shareholder (non-officer/director) of the Company. Minimum capital lease
obligations to this related party totalled $971,014, $1,024,380 and $1,017,759
at December 31, 1996, 1995 and 1994, respectively.


9.   OTHER INCOME (EXPENSE)

Included in other income (expense) are certain items which do not relate
directly to current ongoing business activity. Included in this classification
for the year ended December 31, 1996 are estimated litigation settlement
expenses of $280,323; loss on asset dispositions of $151,094; and interest
income of $287,542. For the year ended December 31, 1995, other income consisted
primarily of interest income of $47,918; litigation settlement expense of
$24,000; and gain of approximately $98,904, resulting from settlement of a
dispute with a vendor. For the year ended December 31, 1994, other expense
consisted primarily of interest income of $56,055 and litigation settlement
expenses of $200,000.



                                      F-12
<PAGE>   33

METRO ONE TELECOMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

10.  INCOME TAXES

The components of income tax expense for the years ended December 31 are as
follows:

<TABLE>
<CAPTION>
                                   DECEMBER 31,
                      -------------------------------------
                        1996            1995        1994
                      --------      ----------     --------

<S>                   <C>           <C>            <C>
Current:
      Federal         $ 33,000      $     --       $   --
      State             41,123            --           --
                      --------      ----------     --------
                        74,123            --           --
                      --------      ----------     --------
Deferred:
      Federal          (33,000)
      State               --              --           --
                      --------      ----------     --------
                       (33,000)           --           --
                      --------      ----------     --------

Total tax expense     $ 41,123            --           --
                      ========      ==========     ========
</TABLE>


During the years ended December 31, 1995 and 1994, the Company experienced net
operating losses and did not recognize income tax expense.

At December 31, the significant components of deferred tax assets and
liabilities are as follows:

<TABLE>
<CAPTION>
                                                       DECEMBER 31,
                                       ---------------------------------------------
                                          1996              1995            1994
                                       -----------      -----------      -----------
<S>                                    <C>              <C>              <C>
Tax depreciation in excess of book     $   632,327      $   456,353      $   280,999
                                       -----------      -----------      -----------

Net operating loss carryforwards       $ 6,103,493      $ 6,492,802      $ 6,178,885
Expenses not currently deductible          223,759          142,566           56,706
Tax credit carryforwards                    48,626            7,221             --
                                       -----------      -----------      -----------
Gross deferred tax assets                6,375,878        6,642,589        6,235,591
Less valuation allowance                (5,710,551)      (6,186,236)      (5,954,592)
                                       -----------      -----------      -----------

Deferred tax assets                        665,327          456,353          280,999
                                       -----------      -----------      -----------

Net deferred tax asset                 $    33,000      $      --        $      --
                                       ===========      ===========      ===========
</TABLE>


During 1996, the Company reduced its deferred tax valuation allowance to reflect
deferred tax assets used to reduce current year income taxes. The Company will
continue to review the valuation allowance on a quarterly basis and make
adjustments as appropriate.

At December 31, 1996, the Company had approximately $15.6 million of net
operating loss carryforwards expiring during the years 2005 to 2010. Ownership
changes as defined by section 382 of the Internal Revenue Code could limit the
amount of net operating loss carryforwards used in any one year.


                                      F-13
<PAGE>   34
METRO ONE TELECOMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS


10.  INCOME TAXES (CONTINUED)

The following is a reconciliation from the expected statutory federal income tax
expense to the Company's actual income tax expense for the years ended December
31:

<TABLE>
<CAPTION>
                                                   DECEMBER 31,
                                   -----------------------------------------
                                      1996            1995            1994
                                   ---------      -----------      ---------
<S>                                <C>            <C>              <C>
Expected income tax expense at
      federal statutory rate       $ 422,662      $        --      $      --
State income tax expense              60,782               --             --
Change in valuation allowance       (475,685)              --             --
Other                                 33,364               --             --
                                   ---------      -----------      ---------

Provision for income taxes         $  41,123      $        --      $      --
                                   =========      ===========      =========
</TABLE>


At December 31, 1996, the Company had alternative minimum tax net operating loss
carryforwards approximating $13.8 million and expiring during the years 2005 to
2010.


11.  POTENTIAL RESCISSION LIABILITY

In 1995, the Company filed a registration statement with the Securities and
Exchange Commission and certain state securities regulators for a rescission
offering whereby it offered to certain holders of its common stock the right to
rescind their purchase of shares of the Company's common stock and to receive,
in exchange for the common stock relinquished to the Company, a payment equal to
the purchase price of such securities plus interest from the date of purchase at
the applicable statutory rate of the state in which they reside.

The rescission offer closed in July 1995. As a result of the rescission offer,
the sales of 135,414 shares of common stock were rescinded and such shares were
purchased by the Company for approximately $738,660, including interest of
approximately $124,900. Management believes that there is no material liability
to the Company from rescission claims.


12.  BENEFIT PLANS

During 1992, the Company established a deferred compensation savings plan for
the benefit of its eligible employees. The plan permits certain voluntary
employee contributions to be excluded from the employees' current taxable income
under the provisions of Internal Revenue Code Section 401(k). Upon reaching the
age of twenty-one, each employee becomes eligible to participate in the savings
plan six months following the initial date of employment. The employee must also
complete 1,000 hours of service in any twelve-month period. Under the plan, the
Company can make discretionary contributions to the plan as approved by the
Board of Directors.

Participants' interest in Company contributions to the plan vest over a
four-year period. The Company made contributions of approximately $11,065 during
1996. No contributions were made by the Company in 1995 and 1994.



                                      F-14
<PAGE>   35
METRO ONE TELECOMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

13.  STATEMENT OF CASH FLOWS

Supplemental disclosure of Cash Flow information:

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                 ---------------------------------------------------------
                                                        1996                1995                1994
                                                 ------------------  ------------------  -----------------

<S>                                              <C>                 <C>                 <C>
Equipment acquired by capital lease              $          678,877  $        1,066,249  $       1,929,810
Conversion of debt into common stock                      1,400,000           6,910,000                  -
Cash paid for interest expense                              571,699           1,477,860            468,155
Cash paid for income taxes                                   44,123                   -                  -
</TABLE>




                                      F-15