** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**Form 10-K**

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

**SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended December 31, 2006**

**or**

**o****TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE**

#### **SECURITIESEXCHANGE ACT OF 1934**

**For the transition period from             to**

**Commission File Number 0-27024**

**METRO ONE TELECOMMUNICATIONS, INC.**

(Exact name of registrant as specified in its charter)

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

 

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

(Address of principalexecutive offices)

Registrant’s telephonenumber, including area code:   **503-643-9500**

Securities registeredpursuant to Section 12(b) of the Act:

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

 

Securities registered pursuant to Section12(g) of the Act:     **NONE**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes  o    No  x

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

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes  x    No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated  filer o |   | Accelerated  filer o |   | Non-accelerated  filer x |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes  o    No  x

The aggregate market value of the voting andnon-voting common equity held by non-affiliates, based on the closing price ofthe common stock as reported by the Nasdaq National Market on June 30, 2006 was$15,094,695.

The number of sharesoutstanding of the registrant’s common stock as of March 20, 2007 was6,233,326.

**DOCUMENTS INCORPORATED BYREFERENCE**

Portions of the registrant’s Proxy Statement for its2007 Annual Meeting, to be filed with the Securities and Exchange Commissionwithin 120 days of the registrant’s fiscal year end, are incorporated byreference into Part III of this Report.

 

 

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**METRO ONE TELECOMMUNICATIONS, INC.**

**FORM 10-K ANNUAL REPORT**

**TABLE OF CONTENTS**
| **PART I**   |
|--------------|
|         |   | Forward Looking Statements |   | 3 |   |
|         |   |   |   |   |   |
| Item 1  |   | Business |   | 3 |   |
|         |   |   |   |   |   |
| Item 1A |   | Risk  Factors |   | 8 |   |
|         |   |   |   |   |   |
| Item 1B |   | Unresolved Staff Comments |   | 13 |   |
|         |   |   |   |   |   |
| Item 2  |   | Properties |   | 13 |   |
|         |   |   |   |   |   |
| Item 3  |   | Legal  Proceedings |   | 13 |   |
|         |   |   |   |   |   |
| Item 4  |   | Submission of Matters to a Vote of Security Holders |   | 13 |   |
|         |   |   |   |   |   |
| **PART II**  |
| Item 5  |   | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   | 14 |   |
|         |   |   |   |   |   |
| Item 6  |   | Selected Financial Data |   | 15 |   |
|         |   |   |   |   |   |
| Item 7  |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   | 16 |   |
|         |   |   |   |   |   |
| Item 7A |   | Quantitative and Qualitative Disclosures about Market  Risk |   | 22 |   |
|         |   |   |   |   |   |
| Item 8  |   | Financial Statements and Supplementary Data |   | 22 |   |
|         |   |   |   |   |   |
| Item 9  |   | Changes In and Disagreements with Accountants on  Accounting and Financial Disclosure |   | 23 |   |
|         |   |   |   |   |   |
| Item 9A |   | Controls and Procedures |   | 23 |   |
|         |   |   |   |   |   |
| Item 9B |   | Other  Information |   | 23 |   |
|         |   |   |   |   |   |
| **PART III** |
| Item 10 |   | Directors, Executive Officers, and Corporate  Governance |   | 23 |   |
|         |   |   |   |   |   |
| Item 11 |   | Executive Compensation |   | 23 |   |
|         |   |   |   |   |   |
| Item 12 |   | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters |   | 23 |   |
|         |   |   |   |   |   |
| Item 13 |   | Certain Relationships and Related Transactions and  Director Independence |   | 23 |   |
|         |   |   |   |   |   |
| Item 14 |   | Principal Accountant Fees and Services |   | 23 |   |
|         |   |   |   |   |   |
| **PART IV**  |
| Item 15 |   | Exhibits and Financial Statement Schedules |   | 24 |   |
|         |   |   |   |   |   |
|         |   | Signatures |   | 26 |   |

 

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

# **PART I**

***IMPORTANT INFORMATION REGARDINGFORWARD LOOKING STATEMENTS***

*All statements and trend analyses contained in thisannual report on Form 10-K relative to the future constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  These forward-lookingstatements may, but do not necessarily, include words such as “believes,” “expects,”“anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,”“continue” or similar expressions. Forward-looking statements are not guarantees.  They involve known and unknown business andeconomic risks, uncertainties and other factors that may cause our actualresults, performance or achievements to be materially different from any futureresults, performance or achievements expressed or implied by suchforward-looking statements.  These risks,uncertainties and other factors include those discussed under Item 1A RiskFactors.  Readers are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date hereof. We undertake no obligation to publicly release anyrevisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.*

**ITEM 1.****                  BUSINESS.**

We are a provider of Enhanced Directory Assistance®and other information services delivered through live operators and byelectronic means.  We contract primarilywith wireless carriers, Voice over Internet Protocol (“VoIP”) providers, cablecompanies, Competitive Local Exchange Carriers (“CLEC”), free directoryassistance providers, prepaid carriers, and payphone operators to provide ourservices to their subscribers and users. Our proprietary Enhanced Directory Assistance platform providescomprehensive directory assistance listings and other informational content andservices.  Other non-directory assistanceservices and content include access to personal contacts and calendars,reservation services, movie listings and a variety of other uniqueservices.  Our special return-to-operatorfeatures, StarBack® and AutoBack®, make the telephone easier to use and areoffered exclusively by Metro One.  All ofour services are provided by operators located only in the United States, orelectronically.  Many of our features oraspects thereof are the subject of patents or pending patent applications.Revenues are derived principally through fees charged to telecommunicationscarriers and other customers.

In addition to voice-based services, we also provideEnhanced Directory Assistance services in electronic format.  These services are provided to customers whoelectronically issue directory assistance queries and use the returnedinformation to complete and correct their own data records.  We currently provide electronic directoryassistance services in a number of delivery formats to meet customer needs includingautomated file processing and real-time individual look ups.  We contract with a broad range of companiesthat require electronic directory assistance including companies in theservice, marketing, and financial sectors. Our Data Services business represents an emerging business based oninfrastructure originally developed to support our voice-based call centerbusiness.

We have been in business since 1989 when we begandeveloping and testing provision of information services over thetelephone.  In 1991, we entered into ourfirst contract with a wireless carrier to provide our services to that carrier’ssubscribers on a charge-per-call basis. Our customers include several wireless and other telecommunicationscarriers such as Cablevision, Jingle Networks (a provider of directoryassistance services at no charge to the customer), SunCom, and XOCommunications.  We have expanded ourcustomer base to include enterprise data services, specialized operatorservices, and information services to corporations with offices in the UnitedStates and Canada.  We have also expandedinto the landline telecommunications market and provide our services toregional CLECs and VoIP providers.

Competition in the telecommunications industry, and inthe directory assistance market in which we participate, continues to beintense.  Carriers are looking to lowertheir costs of providing directory assistance and other services through, amongother ways, outsourcing to low cost domestic or overseas operators andutilizing automation to reduce costs.  Inresponse to these and other issues, in May 2003, we launched Infone, a servicethat provided enhanced directory and personal assistant services directly toconsumers.  The initial launch of Infonewas accompanied by a significant nationwide marketing and promotioncampaign.  Revenues from Infone were notsignificant in relation to total revenues since its inception.  Because of our inability to attract asignificant number of subscribers to this service, it was discontinued in December2005.

In the last four years, several of our largestcustomers have transferred their calls away from us for a variety of reasons,primarily in order to obtain lower prices and/or as a result of consolidationin the wireless industry.  As a result ofthe loss of these customers and the associated revenues and operating losses,since the second quarter of 2005 we have taken significant actions torestructure our operations to lower our cost structure.  In addition, we have refocused our efforts onthe wholesale directory assistance and data services markets to pursueadditional revenue sources in the voice-based and electronic delivery-baseddirectory assistance and information services markets.

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### **TelecommunicationsIndustry**

The U.S. telecommunications industry has generally been characterizedby strong growth and increased competition due to new technologies, a morefavorable regulatory environment and, for carriers, an increasinglysophisticated and demanding subscriber. Telecommunications carriers face increasing competitive pressures todifferentiate their products and establish brand loyalty.  Costs to acquire new subscribers can besignificant, therefore carriers are emphasizing pricing and plan elements to attractand retain customers. In addition, carriers are increasingly offering local,long distance, wireless, cable and Internet services bundled into one packagein order to appeal to a wider market. Competitive pressures are particularly acute for wireless and newerlandline carriers, such as CLECs and VoIP providers.  The industry has also experienced aconsiderable amount of consolidation and investment in new technologies as wellas increasing competitive pressure from alternative providers, including cablecompanies, VoIP providers, Mobile Virtual Network Operators (“MVNO”) andothers.

*Wireless Telecommunications.*TheU.S. wireless telecommunications market has experienced dramatic growth overthe last decade.  This growth has beendue largely to technological advances that give callers affordable,high-quality mobile services.  Accordingto industry analysts, the number of wireless phones in use in the United Statesis expected to be more than 300 million by the end of 2010.  A relatively small number of carriersdominate the wireless telecommunications market.  In terms of estimated number of subscribers,the largest U.S. wireless carriers include Cingular Wireless, Verizon Wireless,Sprint Nextel and T-Mobile.

Competition in the industry continues to be intense with severalcarriers typically competing for wireless subscribers in most major U.S.markets.  With slowing subscriber growthand downward pressure on average revenue per user (“ARPU”), carriers areseeking to differentiate themselves from their competitors.  While pricing pressures are fierce, carriersalso focus on value-added services and features as a means of differentiatingthemselves.  As subscriber and ARPUgrowth slow, there has been significant consolidation in the industry asevidenced by the 2005 merger of Nextel Communications and Sprint PCS and the2004 combination of Cingular Wireless and AT&T Wireless.

*Landline Telecommunications.*Likethe wireless market, the landline telecommunications market is dominated by arelatively small number of major carriers. Carriers providing local service include the regional Bell operatingcompanies, such as SBC Communications, independent telephone companies, such asALLTEL Communications, and CLECs, such as Cox Communications or IntegraTelecom. Many of these carriers and others, as well as many discount companies,also provide long distance services.  Inaddition, cable companies are offering packaged services including local andlong distance telephone services.

Local and long distance carriers competing in each other’s markets, aswell as against newer and smaller independent carriers, have added tocompetition in the landline market.  Withderegulation, the entry of new landline competitors and the increasingaffordability of wireless services, subscribers who were historically bound tolocal carriers as a matter of geography are now increasingly able to choosetheir carriers.  This includes theopportunity to select a CLEC.  Thesecompanies compete with incumbent local carriers to provide a variety ofservices, including local, long distance and Internet and other dataservices.  As a result, the landlinetelecommunications market is becoming subscriber-based and carriers must findways to differentiate their services to attract and retain subscribers.  In addition, to maintain operational focus,CLECs often outsource non-core operations, including directory assistanceservices.  While many incumbent carriersprovide directory assistance services on an outsourced basis, the competitivelocal exchange carriers may prefer to outsource their directory assistanceneeds to independent companies rather than use the services of theircompetitors.

### **DirectoryAssistance Market**

The U.S. directory assistance industry generated over 6 billioninformation requests in 2006 primarily from three distinct platforms: wireline,wireless, and VoIP telephone lines.  Freedirectory assistance services are emerging as a fourth platform generating over130 million calls in 2006.

Call volumes generated by the wireless directory assistance market inthe United States grew to approximately 2.3 billion calls by the end of 2006,according to industry sources.  Wirelesssubscribers tend to be heavy users of directory assistance services.  Growth in the wireless directory assistancemarket is driven by factors such as growth in the wireless subscriber base,rising wireless penetration, increasing subscriber mobility, increasing andimproving offerings from free directory assistance providers, and the offeringof quality directory assistance services by wireless carriers.

The landline directory assistance market today islarger than the wireless directory assistance market.  According to industry sources, landlinedirectory assistance calls reached approximately 4.2 billion calls in 2006.  Growth in the landline directory servicesmarket is driven by a number of factors, including the growing informationneeds of subscribers and the offering by landline carriers of call completionservices.

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Freedirectory assistance services are bringing the internet concept of paid search tothe telephone.  These services are freeto the consumer, making their money from contextually relevant advertisementsthat run ahead of requested listing information.  While some “cannibalism” is occurring as freeservice providers are taking call volumes from existing “charge per-call”providers, it appears that free directory assistance providers are actuallygrowing the volume of directory assistance calls through an increase in theaverage number of calls per user.  Thenature and extent of disruption of the directory assistance market because ofthese no-charge directory assistance services is still not totally clear.

Unlike other aspects of telecommunications services,directory assistance has seen rising retail prices in the last severalyears.  For example, in June 2001 therange of retail prices charged for a directory assistance call among the majorwireless carriers was $0.75 to $1.29, with a majority of large carriers at$0.99 per call.  In January 2007, thissame range was $1.25 to $1.79. During this same timeframe, prices for manyother telecommunications services have trended downward.

### **Customers**

Our principal business currently involves providing Enhanced DirectoryAssistance and information services primarily to wireless carriers, VoIP providers,cable companies, CLECs, free directory assistance providers, prepaid carriers,pay phone operators, and other providers, including those offering theirservices at no charge to end users, in all or a portion of their service areas.  Our major directory assistance customersinclude Cablevision, Jingle Networks, SunCom, and XO Communications.  In addition, we provide our services tocertain CLECs in the landline telecommunications market. Customers thataccounted for more than 10% of our revenues during the periods indicated are asfollows:

|                             | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| **Customer**                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                        |       |                                        |       |   |   |   |   |
| Nextel  Communications      |       | 37                                          | %          | 76 | % | 56 | % |
| Cablevision                 |       | 25                                          | %          | 6 | % | 1 | % |
| Jingle Networks             |       | 14                                          | %          | — |   | — |   |
| AT&T Wireless  Services |       | —                                      |       | — |   | 28 | % |

 

In October 2005, Nextel notified us that it would be terminating theServices Agreement between us, effective in January 2006.  We continued to handle Nextel calls through anegotiated transition period which was substantially completed by March 31,2006.

Ourcontract with AT&T Wireless expired on December 1, 2003, and because wewere unable to reach an economic arrangement acceptable to both parties, thecontract was not renewed.  We agreed tocontinue to provide service to AT&T Wireless customers through a transitionperiod beginning in March 2004.  Thetransition was substantially completed by July 31, 2004.

We offer our services to a carrier’s subscribers under a brand nameselected by the carrier.  The carrierestablishes its own fee structure with its subscribers.  Subscribers typically pay the carrier’s feesranging from $1.25 to $1.79 plus airtime charges for our services.  We charge carriers directly and, at present,bear no subscriber collection risk.  Wecharge our customers on a per call basis. Competitive pressures have caused ouraverage revenue per call to decrease in the recent past.

### We currentlyprovide our voice-based services to several customers.  The terms of our contracts with thesecustomers are generally similar, with variations in the geographic market to beserved, the services and features we are to provide the customers’ subscribersand the term.  None of these contractsprecludes us from providing services to others.

### We haveexpanded our customer base to include data services, specialized operatorservices, and directory assistance services to corporations with offices in theUnited States and Canada.

### **CallCenters and Network**

We operate six call centers in the United States. Our call centers arelocated in or near larger metropolitan areas. We believe that the U.S.-based, local nature of our call centers andoperators permits us to offer more accurate and valuable services than would beavailable through call centers located outside the United States.  We typically operate our call centers 24hours a day, seven days a week, 365 days a year.

We have adjusted,and may further adjust, our call center personnel, the number of call centerswe operate, and network capacities in order to address changes in volumedemands caused by the termination of carrier contracts.  During 2006 and 2005 we reduced our headcountby over 2,000 employees and consolidated the operations of 25 call centers intoour remaining six call centers.  Capacityneeds can vary significantly as a result of changes in volume from existingcustomers or the addition of new customers, changes in usage within existingmarkets served, changes in our carrier customers and/or the 

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number of callsthey route to us or alternative strategies to attract additional calls.  We continue to pursue additional significantbusiness, and our call center system and network are readily scalable toaccommodate such opportunities.

Our systems, covering all of our call centers, are monitored andsupported on a 24-hour per day basis from our network operations center locatedat our corporate headquarters.  Oursystems are redundant in order to avoid downtime from natural disasters orother adverse events.  These arrangementsallow us to meet or exceed strict service level standards.

While pricing has been the most important factor in a customer’sdecision to use our services, we believe quality and reliability are alsoimportant considerations for the customers. To ensure high quality and consistency, we emphasize training,monitoring and customer support.  Wemaintain a national training force with training personnel in each call center.Our operators undergo extensive training and testing on search techniques,etiquette and local information, including landmarks, major thoroughfares andgeography.  We continually monitor, testand evaluate call center performance. Call center personnel are incentivized based on measured qualityperformance.  We also monitor our callcenters for compliance with contract performance standards and report this informationto the carriers on a regular basis.

We have deployedVoIP capability to route voice traffic over a data network.  VoIP not only provides excellent quality ofservice but substantially reduces transport cost from the traditional callrouting over the Public Service Telephone Network.  Dynamic call routing and VoIP technologiesprovide us with the ability to quickly route calls from call center to callcenter, both improving our cost structure and efficiency, and protecting ourservice levels.

Our digital telecommunications network allows us the flexibility toserve customers who continue to use Multi Frequency Voice Circuits and thosewho have chosen to employ System Signaling 7 (“SS7”) in their operations.  SS7 supports a vast range of services accessiblefrom a variety of user terminals, including basic phones and more complexmultimedia devices.  Originally developedfor Intelligent Networks simply to connect calls using out-of-band signals, SS7is now driving major Advanced Intelligent Network network-based applicationservices such as remote voicemail retrieval, calling-card services and 1-800access.

### **OurServices and Features**

We use a customized array of hardware and software, along withproprietary database search engines, to provide our Enhanced DirectoryAssistance.  We receive incoming calls bymeans of assigned telephone numbers, which, in most cases are “411,” “555-1212,”“00”.  In addition, callers can reach ourservices using 800 numbers such as “1-800-FREE-411” or “1-800-411-SAVE”.  Our operators answer incoming calls andidentify the service using the customer’s brand name. Upon receivinginformation requests from callers, operators search applicable databases usingour proprietary search tools.  In mostcases, the operator then connects the caller to the called party or suppliesthe caller with the requested information. We offer a variety of information services such as:

·                  Directorylistings information, which may be retrieved by methods that include reverseand category searches;

·                  Movie, localevent, and venue information;

·                  TeleConcierge®services, including hotel and restaurant information and reservations;

·                  Turn-by-turndriving instructions; and

·                  Weatherconditions and roadside assistance.

Our Enhanced Directory Assistance services also incorporateconnectivity features that make the telephone more useful and easier to use.These connectivity features include the following:

·                  Call completion —allows a caller to be directly connected to the number requested without theneed to redial;

·                  StarBack® —allows the caller to return to a live operator simply by pressing a key, suchas the star [*] key, or by otherwise issuing a command at any time during acall;

·                  AutoBack® —automatically returns the caller to a live operator or provides other optionsupon a busy signal, “ring-no-answer” or other common situations withoutpressing a single key;

·                  NumberBack® —sends the caller the called number simply by pressing the number [#] key; and

·                  QuickSend®  — a short messaging service allowing ouroperators to send customized alphanumeric messages on behalf of a caller.

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### **DatabaseSystems and Content**

We believe the quality of our services is directlyrelated to the scope, quantity and quality of the information content in ourdatabase systems.  The majority of theinformation that we acquire, develop, and maintain is telephone listingsdata.  To ensure high quality andaccuracy, we obtain this data from multiple sources, including certain of theregional Bell operating companies, independent telephone companies and othercommercial sources.  This data isenhanced by our direct data collection efforts and a principal database oflocal information is developed for each call center or region.

Our proprietary operator interface software allowsoperators to efficiently and simultaneously search and reverse-search multipledatabases.  Our search engine has beenoptimized for directory assistance services and large national databases,providing sub-second search times even in complex searches.  We use proprietary database managementsystems to maintain and update our directory listings.  We continually acquire additional contentfrom a variety of sources or acquire access to content that will, in manycases, build on these listings data to make them more useful.

### **Marketingand Sales**

We market to telecommunications carriers, businesses,governmental units, and other enterprises. The marketing process involves a considerable amount of time andattention by our sales staff and senior management.  Call center managers also play a key role inmaintaining and developing wholesale customer relationships.  We occasionally assist our carrier customersin the promotion of our services.  We intendto continue to participate in marketing services in conjunction with carrierprograms.

We communicate on a regular basis with our existingcarrier customers through our quality assurance and customer serviceprograms.  We have developed proprietaryprograms that allow us and our customers to monitor the quality of our performanceand the volume and duration of directory assistance and information requests ona real-time basis.  These programs alsogive us an opportunity to learn more about our carriers’ evolving needs.

Management’s plans include aggressively pursuing newbusiness opportunities in both the voice and data services sectors of ourbusiness in the near term.  As part ofour strategy, we have developed sector-specific sales groups to pursue suchopportunities.

### **Technology**

Our ability to provide Enhanced Directory Assistanceis dependent to a great extent on our proprietary technology.  Our proprietary software applications enhanceour call handling and delivery capabilities and provide the basis for ourconnectivity features.  We have developedsearch engines to quickly access information from our databases.  We continue to upgrade our operator interfacesoftware, database management systems and search engines to increase theefficiency and broaden the search capability of our operators.

Our call processing systems incorporate programmableswitching equipment, host computers, voice response units, and databaseservers.  Our technology is powered bycustomized software.  We are alsomonitoring technological advances in the methods of delivery of information anddata and are working to ensure that our systems are compatible with, and we cantake advantage of, such developments.

### **IntellectualProperty**

We rely on a combination of trademark, patent andtrade secrets laws and confidentiality procedures to protect our intellectualproperty rights.  We have 44 U.S. patentsissued and two foreign patents issued, including several relating to ourStarBack technology, our information services platform and others associatedwith applications for call handling and delivery of information and otherservices.  We have approximately 80applications pending for additional U.S. and foreign patents.  We also have U.S. and foreign registeredtrademarks for, among others, “Metro One,” “StarBack,” “AutoBack” and numerousother applications pending for U.S. trademark registrations.

### **Competition**

The directory assistance and information servicesmarkets are characterized by rapidly changing market forces, technologicaladvancements and increasing competition from large carrier-affiliated companiesand other independent companies.  Ourprincipal competitors include regional Bell operating companies and otherindependent providers.  Telephonecarriers, both landline and wireless, provide directory assistance both in andoutside their own operating regions. Although we believe that none of these competitors offers a form ofdirectory assistance that incorporates all features of our service products,they may have substantially greater financial, technical and marketingresources than we do and may be able to offer features similar to ours.  We also face competition from independentcompanies seeking to offer forms of directory assistance and other informationservices.  Included among these are firmsthat offer full or partial automation (with little or no involvement by a 

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live operator), firms offering low cost directoryassistance provided by overseas operators and firms offering information,directories and/or search engines via Internet-enabled devices.

We believe the principal competitive factors in thedirectory assistance market are price, quality, technological innovation,experience and responsiveness to customers. Historically, we have sought to distinguish ourselves from ourcompetitors based on the quality of our services, the development of usefulfeatures, the breadth of the content provided and our extensive nationalnetwork of call centers.  In recentyears, wireless carriers appear to have become more focused on reducing costs,even if such reduction results in diminished services and quality.  In addition, other sources of directoryassistance, such as automation and those provided by offshore call centers andthe Internet provide low cost forms of competitive services.  In response, we have reduced our call centernetwork and other costs of service delivery in order to compete effectively.

### **GovernmentRegulation**

While in the past, our principal business as awholesale supplier of enhanced directory assistance and information servicesfor telecommunications common carriers has not been directly regulated, theoffering of those services to the public by our customers is regulated byvarious federal and state regulatory authorities.  The Federal Communications Commission (“FCC”)has jurisdiction over all U.S. telecommunications common carriers to the extentthey provide interstate or international communications services and originateor terminate such services via telecommunications networks.

Other aspects of ourservices may be subject to state or federal regulation, such as regulationsrelating to the confidentiality of data and communications, copyright issues,and taxation of services.  We cannotpredict the actions that federal, state, and local regulators may take or whatimpact such actions would have on our business.

### **Employees**

As of December 31, 2006, we had approximately 700employees, approximately 20% of whom were employed on a part-time basis.  Most of our employees are operators, and thenumber of full-time and part-time operators varies from time to time reflectingfluctuations in the volume of calls. None of our employees are subject to a collective bargainingagreement.  We consider relations withour employees to be satisfactory.

We invest significant resources in the recruitment,training and retention of qualified operators. Our organizational structure provides opportunities and encouragestalented individuals to take on roles of increasing responsibility.  We also invest considerable resources inpersonnel motivation, including providing incentive plans for our operators,management and corporate staff.

### **AvailableInformation**

We file annual, quarterly and current reports, proxystatements and other information with the Securities and Exchange Commission(the “SEC”). You many read and copy any document we file with the SEC at theSEC’s public reference room at 100 F Street, NE, Washington,DC 20549. Please call the SEC at 1-800-SEC-0330 for information on thepublic reference room. The SEC maintains an internet site that contains annual,quarterly and current reports, proxy and information statements and otherinformation that public companies (including us) file electronically with theSEC. Our electronic SEC filings are available to the public at the SEC’sinternat site, *www.sec.gov*.

We invite you to visit our website at www.metro1.comto access free-of-charge our annual report on Form 10-K, our quarterly reportson Form 10-Q, our current reports on Form 8-K and any amendments to thosereports, which we make available as soon as reasonably practicable after weelectronically file such materials with or furnish such materials to the SEC.  The information on our website should not beconsidered part of this filing.

**ITEM 1A.****               RISKFACTORS**

The risks described below should be carefullyconsidered.  These risks are not the onlyones that we may face.  Additional issuesand uncertainties that we are unaware of, or that we currently deem immaterial,also may become important factors that affect us.  If any of the following risks occur, ourbusiness, financial condition, results of operations or cash flows could bematerially and adversely affected.

*We have a history of losses and negative cash flowson a quarterly and annual basis, and may experience additional losses fromoperations, which raises doubt about our ability to continue as a goingconcern.*

We have experienced net losses in each of thequarterly and annual periods since the first quarter of 2003.  In the years ended December 31, 2006 and2005, we incurred losses of $19.2 million and $39.8 million, respectively.  At December 31, 2006, we had working capitalof approximately $13.3 million.  Toachieve profitability, we will need to generate additional revenue and continueto decrease our expenditures.  We cangive no assurance that we will achieve sufficient revenue or reduceexpenditures to be profitable on a quarterly or annual basis in thefuture.  These factors, among others,raise doubt about our ability to continue as a going concern.  Even if we do ultimately achieveprofitability, we may not be able to sustain profitability on a quarterly orannual basis.

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*We will likely need additional capital in thefuture, and it may not be available on acceptable terms, or at all.*

Our unrestricted cash balances at December 31, 2006were approximately $12.0 million.  Thesecash balances will likely not be sufficient to fund operating and otherexpenses for the next twelve months or until we reach profitability.  We can give no assurance that our costreduction initiatives will yield the results we anticipate or that we willgenerate sufficient cash flows from the sales of our services.  As a result, we will likely need to secureadditional financing to execute our business plan.  We cannot be certain that additionalfinancing will be available on terms favorable to us or at all.  The terms of available financing may placelimits on our financial and operating flexibility.  If adequate financing is not available onacceptable terms, we may be forced to sell assets or further reduceexpenditures, or both, and we may not be able to pursue all of our businessobjectives.  An inability to secureadditional funding could force us to liquidate our business or otherwiseseriously harm our business, results of operations and financial condition.

*We need to expand call volume, increase ourefficiencies and substantially lower the cost of delivery of our services inorder to be successful.*

In order to successfully execute our businessstrategies, we need to increase the volume of calls we service.  We intend to increase call volume by seekingadditional customers, including landline carrier customers, as well as seekingadditional business from our existing customers and by offering our services toother types of customers.  Because of increasingcompetitive pressures and declining per call pricing, we need to substantiallyreduce the cost of delivery of our directory assistance services in order tocompete with automated services, offshore contractors, and other low-costproviders.  If we are unable to expandour wireless business or attract significant landline business revenues on acost effective basis or at all, or if we are unable to substantially reduce thecost of delivering our services, we may be unable to achieve and maintainprofitability.

*We have been restructuring our business to focus onproviding directory assistance and information services on a wholesalebasis.  Even after giving effect to thisrestructuring, we will likely not have sufficient cash to execute on our currentbusiness plan.*

We have taken steps torestructure certain aspects of our business, including closing call centers,reducing our work force, discontinuing our Infone service, and renegotiatingexisting agreements with customers.  Wemay be forced to take additional steps to lower our costs.  However, restructuring (for example severingemployees and terminating leases) takes resources and time to implement.  There can be no assurance that we will besuccessful in lowering our costs further or otherwise implementing therestructuring.  There can also be noassurance that following any restructuring we will have sufficient cashreserves to achieve profitability. Furthermore, any restructuring could have a material adverseimpact on our ability to execute on our business plan.

*We have contracts with a limited number of carriercustomers. If we fail to extend these contracts or sign new ones, or if thesecontracts are terminated prior to their expiration, our business could beadversely affected.*

A limited number of customers account for a large percentageof our continuing revenues.  Some of ourother contracts are non-exclusive, contain performance and other standards, andcall volume may be transferred to alternative providers within the terms of theagreements.  If we fail to extend orreplace our contracts, or other contracts are terminated prior to theirexpiration, our business could be adversely affected.  Although we seek to increase the number ofour customers, opportunities to obtain customers with large call volumes arelimited because a small number of companies dominate the telecommunicationsmarket.  This limits the potentialcarrier customer base and our expansion opportunities through carrierrelationships.

*We have a long sales cycle which may cause delaysthat adversely affect our revenue growth and operating results.*

A customer’s decision to contract for our directoryassistance and information services involves a significant commitment oftechnical and other resources.  As aresult, we have a long sales cycle for both new contracts and contractextensions, particularly with large customers. The selling process involves demonstrating the value-added benefits ofoutsourcing directory assistance and using our services rather than those ofour competitors.  Additionally, theeffectiveness of our marketing to other types of customers, includingbusinesses, governmental units or callers attracted through other means oraffiliations, is difficult to predict at any given point in time, given a widevariety of potential business circumstances. Any delays due to lengthy sales cycles could significantly affect ourrevenue growth and operating results.

*Our inability to achieve desired pricing levelscould adversely affect our ability to return to profitability.*

We are subject to competitive pressures with respectto pricing that have affected our operations and profitability and couldadversely affect our ability to return to profitability.  Generally, our pricing levels have declinedand, in the future, may continue to decline in response to competition in theindustry.  The prices that we charge ourcarrier customers are subject to 

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the terms of our contracts.  The changing telecommunications market, therelative leverage of the negotiating parties and the overall competitivelandscape can significantly impact contract pricing negotiations.  In addition, other sources of directoryassistance, such as automation and those provided by offshore call centers andthe Internet provide low cost forms of competitive services.  We charge our carrier customers on a per callbasis, with prices varying in some cases based on call volume.  If we continue to reduce our prices without acorresponding increase in call volume, there could be an adverse impact on ourability to achieve and maintain profitability.

*Alternative methods for delivery of directoryassistance and information services could reduce the demand for our services.*

Our revenues continue to come primarily from providingEnhanced Directory Assistance and information services to telephone users.  However, information can be transmitted inother ways, including more intelligent communications devices and othertechnologies and protocols, and over the Internet.  For example, as the Internet continues todevelop and becomes easier to use and access, technologies may be developedthat decrease or eliminate the demand for telephone-based or voice-baseddirectory or information services. Widespread acceptance of existing and developing technologies andprotocols, such as voice recognition and wireless application protocol, couldadversely affect our business.  Our callvolume could decline if telephone users change their usage habits and rely onthe Internet or other alternatives as their primary source for information.

*We face substantial competition from a number ofother companies.*

Many of our competitors in the directory assistancemarket, including the regional Bell operating companies, have far greaterresources and better name recognition. The regional Bell operating companies also may have the advantage ofbeing the local telephone carrier in their area of operation.  Some of these companies are or may bedeveloping their own versions of directory assistance services.  We also face competition from a number ofother independent directory assistance providers.  Individual competitors may also seek toprovide low cost domestic or offshore service or to provide automation ofdirectory assistance services.  If we areunable to compete successfully, it could have an adverse effect on ourbusiness, financial condition, results of operations or cash flows.  Our ability to compete successfully depends,in part, on our ability to anticipate and appropriately respond to manyfactors, including pricing decisions by carriers, decisions by carriers toforce consumers to accept lower-quality information services products, theintroduction of new services and products by our competitors, changes insubscriber preferences, changes in economic conditions and discount pricingstrategies by our competitors.

*The rapidly changing telecommunications marketcould unfavorably affect us.*

The telecommunications market is subject to rapidchange and uncertainty that may result in competitive situations which couldunfavorably affect us.  These changes anduncertainties are due to, among other factors, the following:

·                  Mergers,acquisitions and alliances among carriers and among our competitors, which canresult in fewer carriers in the marketplace, lost carrier customers, increasednegotiating leverage for newly affiliated carriers and more effectivecompetitors;

·                  Changes in theregulatory environment, which may affect us directly, by affecting our abilityto access and update listings data at a reasonable cost, or indirectly, byrestricting our carrier customers’ ability to operate or provide a competitiveservice;

·                  Increasingavailability of alternative methods for delivery of directory assistance andother information services, including the Internet;

·                  Evolvingindustry standards, including frequent technological changes and new productintroductions; and

·                  Changes inretail prices offered to consumers for our services or for services perceivedto be substitutes for ours, in whole or in part.

*Our quarterly and annual operating results may varysignificantly in part due to factors outside our control.*

In the future, as in the past, our quarterly andannual operating results may vary significantly as a result of a number offactors.  We cannot control many of thesefactors, which include, among others:

·                  Changes in thetelecommunications market, including the addition or withdrawal of carriersfrom the market, changes in technology and increased competition from existingand new competitors;

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·                  The timing and expense of our callcenter network expansion or contraction, including changing staffing andinfrastructure expenses related to anticipated call volume changes;

·                  The addition orexpiration of contracts with carrier customers;

·                  Changes in ouror our competitors’, customers’ or suppliers’ pricing policies;

·                  Lengthy salescycles for new and extended contracts;

·                  The timing ofthe commencement of our services under new or existing contracts with ourcarrier customers, which depends in part on the customers’ ability to adapttheir networks and billing systems to allow them to transfer calls to us;

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

·                  General economicconditions.

For these reasons, investors should not rely onperiod-to-period comparisons of our financial results as an indication of anyfuture results.  Our future operatingresults could fall below the expectations of securities industry analysts orinvestors. Any such shortfall could result in a decline in the market price ofour common stock.  Fluctuations in ouroperating results would likely increase the volatility of our common stockprice.

*Our operating results are significantly affected byour ability to accurately estimate the amount and timing of call volume, whichis often subject to factors outside of our control.*

Our operating results are significantly affected bycosts incurred for expanding or contracting staffing and infrastructure.  We incur significant staffing and general andadministrative costs in contracting or expanding operations, as necessary, andin anticipation of additional or reduced call volume under our customercontracts.  If such call volume does notdepart or arrive as scheduled, in the amount anticipated, or at all, our operatingresults can be adversely affected.  Thiscould increase our operating expenses without a corresponding increase inrevenues.

*Regulations affecting our customers and suppliersand future regulations to which we may be subject may adversely affect ourbusiness.*

While in the past, our principal business as awholesale supplier of Enhanced Directory Assistance and information servicesfor telecommunications common carriers has not been directly regulated, theoffering of those services to the public by our customers is regulated byvarious federal and state regulatory authorities.  The Federal Communications Commission (“FCC”)has jurisdiction over all U.S. telecommunications common carriers to the extentthey provide interstate or international communications services, including, inour case, the use of our local networks to originate or terminate suchservices.  The application of the FCC’scurrent and/or future policies could have a material adverse effect on ourbusiness, operating results and financial condition.

Other aspects of our services may be subject to state or federal regulation, such as regulations relating to the confidentiality of data and communications, copyright issues, and taxation of services.  We cannot predict the actions that federal, state, and local regulators may take or what impact such actions would have on our business.

*If we are unable to anticipate changes intechnology and industry standards and to develop new services and features, wemay not succeed.*

Our success depends, in part, on our ability toanticipate changes in technology and industry standards and to develop andintroduce new services and features that are accepted by the marketplace andcost effective for us to provide as a part of our overall serviceofferings.  The development of newservices and features can be very expensive. Further, given rapid technological changes, frequent introduction of newproducts, services and features, and changing consumer demands thatcharacterize our industry, it can be difficult to correctly anticipate futurechanges in technology and industry standards. If we fail to develop newservices and features, encounter difficulties that delay the introduction ofsuch services and features, or incorrectly anticipate future changes anddevelop services and features that are not accepted by the marketplace or arenot cost effective for us to provide as a part of our overall serviceofferings, we may not succeed at our business.

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*Systems failures, delays and other problems couldharm our reputation and business, cause us to lose customers and expose us tocustomer liability.*

Our success also depends on our ability to providereliable services. Our operations could be interrupted by significant damage toor failure of our network, our connections to third parties, our computer hardwareor software or our customers’ or suppliers’ computer hardware or software.  Any such significant damage or failure coulddisrupt the operations of our network and the provision of our services andresult in the loss of current and potential customers.  In addition, if call volume increases, we mayneed to expand and/or upgrade our technology and network hardware and softwarein order to provide services.  Capacitylimits on our technology and network hardware and software may make itdifficult for us to expand and upgrade our systems in a timely and economicalmanner.

*If we areunable to obtain or adequately update directory or information content at aneconomical cost, we may be unable to provide current levels of service orimprove our service.*

Our operations depend on our access to the names,telephone numbers and other information that we supply directly to callers orwe use in providing our services.  Theavailability, cost, quality and usefulness of such data varies widely acrossgeographic regions.  If we are unable toobtain or update directory or information content at an economical cost, we maybe unable to provide current levels of service, improve our Enhanced DirectoryAssistance service, or provide new services and features.  Ultimately, the satisfaction of callers andour carrier customers, and our ability to renew and extend our current customercontracts and enter into new customer contracts, depends on the quality ofservices we provide.  The quality of ourservices is directly related to the quality of our listings data and otherinformation content.

*As we rely on a limited number of suppliers, anabrupt loss of any key supplier could adversely affect our business operationsor delay our development efforts.*

We rely on some key suppliers to provide us withprogramming and engineering services and to license us their technology.  An abrupt loss of any current key suppliercould cause a disruption in our operations or a delay in our development effortsand could adversely affect our business operations.

*If we are unable to continue to attract and retainqualified senior management, sales and technical personnel and call centeroperators, or our call center staff is unionized, our operations could beadversely affected.*

Our success depends to a significant extent on theefforts and abilities of our senior management, sales and technical personneland call center operators.  The loss ofthe services of our senior management and technical personnel could have amaterial adverse effect on our business and our ability to meet our strategicobjectives. In addition, increasing our revenues is critical to oursuccess.  If we are unable to attract andretain qualified and productive sales personnel, we may not be able to increaseour revenues which would have an adverse effect on our plans and ourbusiness.  We also depend on thecontinued service of our call center operators, who we hire from the availablelabor pool.  The ability to attract andretain qualified senior management, sales and technical personnel, operatorsand other skilled employees is extremely important to the operation of ourbusiness.  If we are unable to attractand retain qualified individuals, or we are required to pay significantlyhigher wages and other benefits to such individuals, or if our call centerstaff is unionized, it could adversely affect our business operations.  We find it more difficult to recruit andretain qualified individuals during periods of low unemployment and, therefore,may be subject to increasing pressure to offer higher wages and other benefitsduring such periods. In our call center hiring, we may also feel the effects ofthe telecommunications industry in general, which has widespread unionmembership among its operators and other workers.

*If we are unable to use and protect ourintellectual property, we may be unable to provide some of our EnhancedDirectory Assistance and information services or profitably operate ourbusiness.*

We regard aspects of our Enhanced DirectoryAssistance, and their features and processes, to be proprietary.  If we are unable to use and protect ourintellectual property, we may be unable to provide some of our EnhancedDirectory Assistance and/or our personal assistant services or profitablyoperate our business.  To a limitedextent, we rely on a combination of trade secret, patent and other intellectualproperty law, nondisclosure agreements and other protective measures to protectour intellectual property.  However,these measures may be difficult and costly to meaningfully enforce. Inaddition, attempts to enforce our intellectual property rights may bring intoquestion the validity of these rights. Litigation with respect to patents or other intellectual property rightscan result in substantial costs and diversion of management attention and otherresources.

*Our common stock may be delisted from the NasdaqCapital Market if we are unable to maintain compliance with Nasdaq CapitalMarket continued listing requirements.*

Our common stock listing was transferred from the NasdaqNational Market to the Nasdaq Capital Market (formerly the Nasdaq SmallCapMarket) on February 22, 2006 because we had been unable to regain compliancewith the $1.00 minimum 

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bid price requirement for continued listing on theNasdaq National Market.  In July, 2006 weeffected a one-for-four reverse stock split and regained compliance with theNasdaq listing requirements.  However, ifwe are unable to meet continued listing requirements of the Nasdaq CapitalMarket, we may delisted in the future. If our common stock were to be delisted from the Nasdaq Capital Market,trading of our common stock could be conducted in the over-the-counter marketon an electronic bulletin board established for unlisted securities such as thePink Sheets or the OTC Bulletin Board. As a result, the market liquidity of our common stock could be reducedand an investor would find it more difficult to dispose of, or obtain accuratequotations for the price of, our common stock.

*Our common stock price is volatile.*

The market price of our common stock has experiencedvolatility and is likely to continue to experience significant fluctuations inresponse to a number of factors.  Thesefactors include, among others, those that affect our quarterly and annualoperating results and the following:

·                  Announcements ofextensions, expirations or changes in our contracts and the effects on our callcenters and infrastructure of such activities;

·                  Announcementsrelating to material events concerning our customers;

·                  Actual oranticipated variations in our results of operations;

·                  Securitiesfilings or other public announcements by our large shareholders;

·                  Announcements ofnew product initiatives or growth strategies; and

·                  General marketconditions.

From January 1, 2006 through December 31, 2006, ourcommon stock price fluctuated, on a post one-for-four reverse stock splitbasis, from a low of $1.32 per share to a high of $3.77 per share and has onseveral occasions fluctuated more than 10% during a trading day.  These trading prices may change significantlyand arbitrarily.  In addition, broadmarket factors affecting telecommunications or technology stocks may adverselyaffect the market price of our common stock. General economic, political and market conditions, including interestrate changes and recession, may also adversely affect our stock price.

*Oregon law and provisions of our charter could makethe acquisition of our Company more difficult.*

We are authorized to issue up to 10,000,000 shares ofpreferred stock, and our Board of Directors has the authority to fix thepreferences, limitations and relative rights of those shares without any voteor action by the shareholders.  Thepotential issuance of preferred stock may delay or prevent a change in controlof our Company, may discourage bids for the common stock at a premium over themarket price and may adversely affect the market price of, and the voting andother rights of the holders of, our common stock.  In addition, provisions under Oregon lawlimit the ability of parties who acquire a significant amount of voting stockto exercise control over our Company. These provisions may have the effect of lengthening the time requiredfor a person to acquire control through a proxy contest or the election of amajority of the Board of Directors and may deter efforts to obtain control ofour Company.

**ITEM 1B.****               UNRESOLVEDSTAFF COMMENTS**

None.

**ITEM 2.****                  PROPERTIES.**

We lease our principal executive and administrative offices, consistingof approximately 36,000 square feet of space, in Beaverton, Oregon.  The lease term extends through mid-2009.  We also lease call centers and otheroperational facilities, which as of December 31, 2006, ranged in size from5,000 to 30,000 square feet.  At December31, 2006, we had 10 leases for call centers and other remote facilities, withremaining terms of up to three years.  Wehave adjusted and may adjust further, call centers and capacities in order toaddress changes in volume demands caused by the signing of new customercontracts, expiration of carrier contracts, and the development of our otherbusiness initiatives.

**ITEM 3.****                  LEGALPROCEEDINGS.**

We are not aware of any pending legal proceedingsother than routine litigation that is incidental to the business.

**ITEM 4.****                  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.**

No matters were submitted to a vote of securityholders during the quarter ended December 31, 2006.

 

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# **PART II**

**ITEM 5.****                                                     MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES.**

**Market Information For Common Stock**

Our common stock trades on the Nasdaq Capital Marketunder the symbol “INFO.”  In July 2006, weeffected a one-for-four reverse stock split. The high and low closing sales prices, on a post-split adjusted basis,as reported on the Nasdaq Capital Market for each quarterly period within thetwo most recent fiscal years were as follows:

| 2006                              | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------|------------|----------|------------|---------|------------|
| Quarter ended December 31,  2006  |       | $        | 2.74       |    | $          | 2.03 |   |
| Quarter ended September  30, 2006 |       | $        | 2.83       |    | $          | 1.85 |   |
| Quarter ended June 30, 2006       |       | $        | 2.68       |    | $          | 1.96 |   |
| Quarter ended March 31,  2006     |       | $        | 3.77       |    | $          | 1.32 |   |
|                              |       |     |       |    |       |
| **2005**                          | ** ** | **High** | ** ** | **Low** | ** ** |
| Quarter ended December 31,  2005  |       | $        | 2.96       |    | $          | 1.44 |   |
| Quarter ended September  30, 2005 |       | $        | 3.68       |    | $          | 2.68 |   |
| Quarter ended June 30, 2005       |       | $        | 5.48       |    | $          | 3.20 |   |
| Quarter ended March 31, 2005      |       | $        | 6.12       |    | $          | 4.96 |   |

 

The approximate number of shareholders of record as ofMarch 20, 2007 was 143.  On March 20,2007, the closing price of our common stock, as reported on the Nasdaq CapitalMarket, was $2.09 per share.

**Dividend Policy**

We have never declared or paid cash dividends on ourcommon stock.  We intend to retainearnings from operations for use in the operation and expansion of our businessand do not anticipate paying cash dividends with respect to our common stock inthe foreseeable future.

**Stock Performance Graph**

**Representation Of Data Points Used In The PerformanceGraph**

|          | ** ** | **Metro One** | ** ** | **Sic Code** | ** ** | **Russell 2000** | ** ** |
|----------|------------|--------------------|------------|-------------------|------------|-----------------------|------------|
| 12/31/01 |       | 100.00             |       | 100.00            |       | 100.00                |       |
| 12/31/02 |       | 21.32              |       | 40.86             |       | 78.42                 |       |
| 12/31/03 |       | 8.43               |       | 93.12             |       | 114.00                |       |
| 12/31/04 |       | 5.26               |       | 145.16            |       | 133.94                |       |
| 12/31/05 |       | 1.19               |       | 120.77            |       | 138.40                |       |
| 12/31/06 |       | 2.13               |       | 151.55            |       | 162.02                |       |

 

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**ITEM 6.****                  SELECTEDFINANCIAL DATA.**

Theselected financial data presented below should be read in conjunction with theFinancial Statements and related Notes that appear elsewhere in this annualreport and Management’s Discussion and Analysis of Financial Condition andResults of Operations set forth in Item 7.

|                                               | ** ** | **Years Ended December 31,**                           | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                    | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Operations data:                              |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenues                                      |       | $                                                                     | 30,339     |   | $ | 77,810 |   | $ | 140,369 |   | $ | 201,636 |   | $ | 257,951 |   |
| Direct operating  expenses                    |       | 19,074                                                                |       | 59,243 |   | 84,331 |   | 117,126 |   | 144,164 |   |
| Selling, general  and administrative expenses |       | 24,408                                                                |       | 51,969 |   | 94,208 |   | 128,271 |   | 72,461 |   |
| Impairment loss                               |       | —                                                                |       | — |   | 32,193 |   | 4,715 |   | — |   |
| Restructuring  charges                        |       | 6,610                                                                 |       | 6,814 |   | — |   | — |   | — |   |
| (Loss) income  from operations                |       | (19,753                                                               | )          | (40,216 | ) | (70,363 | ) | (48,476 | ) | 41,326 |   |
| Net (loss)  income                            |       | (19,221                                                               | )          | (39,759 | ) | (63,166 | ) | (33,309 | ) | 26,129 |   |
|                                          |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Basic (loss)  income per share                |       | $                                                                     | (3.08      | ) | $ | (6.36 | ) | $ | (10.16 | ) | $ | (5.40 | ) | $ | 4.24 |   |
| Diluted (loss)  income per share              |       | (3.08                                                                 | )          | (6.36 | ) | (10.16 | ) | (5.40 | ) | 4.16 |   |
|                                          |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Balance sheet data:                           |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                    |       | $                                                                     | 11,965     |   | $ | 17,769 |   | $ | 24,093 |   | $ | 44,381 |   | $ | 76,528 |   |
| Short-term  investments                       |       | —                                                                |       | — |   | 25,375 |   | — |   | — |   |
| Working capital                               |       | 13,280                                                                |       | 26,646 |   | 61,507 |   | 78,280 |   | 103,705 |   |
| Total assets                                  |       | 27,612                                                                |       | 52,017 |   | 95,830 |   | 164,884 |   | 198,689 |   |
| Long-term  liabilities                        |       | 470                                                                   |       | 626 |   | 1,158 |   | 3,523 |   | 9,310 |   |
| Shareholders’ equity                     |       | 20,576                                                                |       | 39,667 |   | 79,437 |   | 142,338 |   | 175,389 |   |

 

In July 2006, weeffected a one-for-four reverse split of our common stock.  All per share data presented in the tableabove have been restated for the reverse stock split.

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**ITEM 7.****                                                     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

*Results of operations for the periods discussedbelow should not be considered indicative of the results to be expected in anyfuture period and fluctuations in operating results may also result influctuations in the market price of our common stock.  Our quarterly and annual operating resultshave in the past and may in the future vary significantly depending on factorssuch as changes in the telecommunications market, the addition or expiration ofcustomer contracts, increased competition, changes in pricing policies by us orour competitors, lengthy sales cycles, the timing and expense of the expansionor contraction of our call center network, and other factors including thosediscussed under Item 1A, Risk Factors.*

### **Overview**

We are a providerof Enhanced Directory Assistance® and other information services deliveredthrough live operators and by electronic means. We contract primarily with wireless carriers, Voice over InternetProtocol (“VoIP”) providers, cable companies, Competitive Local ExchangeCarriers (“CLEC”), free directory assistance providers, prepaid carriers, andpayphone operators to provide our services to their subscribers and users.  Our proprietary Enhanced Directory Assistanceplatform provides comprehensive directory assistance listings and otherinformational content and services. Other non-directory assistance services and content include access topersonal contacts and calendars, reservation services, movie listings and avariety of other unique services.  Ourspecial return-to-operator features, StarBack® and AutoBack®, make thetelephone easier to use and are offered exclusively by Metro One.  All of our services are provided by operatorslocated only in the United States, or electronically.  Many of our features or aspects thereof arethe subject of patents or pending patent applications.  Revenues are derived principally through feescharged to telecommunications carriers and other customers.

In addition to voice-based services, we also provideEnhanced Directory Assistance services in electronic format.  These services are provided to customers whoelectronically issue directory assistance queries and use the returnedinformation to complete and correct their own data records.  We currently provide electronic directoryassistance services in a number of delivery formats to meet customer needsincluding automated file processing and real-time individual look ups.  We contract with a broad range of companiesthat require electronic directory assistance including companies in theservice, marketing, and financial sectors. Our Data Services business represents an emerging business based oninfrastructure originally developed to support our voice-based call centerbusiness.

Under a typical wholesale contract, a carrier agreesto route some or all of their directory assistance calls to us.  We offer our services to multiple carrierswithin the same market.  When a carrier’ssubscribers dial a typical directory assistance number, such as “411,” “555-1212”or “00,” the calls are routed to and answered by our operators identifying theservice by that carrier’s brand name.

Each carrier customer establishes its own directory assistance feestructure for its subscribers.  Wirelesssubscribers typically pay fees ranging from $1.25 to $1.79 plus airtime chargesfor our services.  We bear no subscribercollection risk with respect to carrier subscribers; however, there may becollection risk to the extent growth and profitability in thetelecommunications industry decreases and to the extent we provide services toother types of customers.

We charge our carrier customers on a per callbasis.  Prices for services provided toother types of customers, including businesses, governmental units or customerswho receive our services in electronic form, may vary based on the nature ofthe service, volume and other circumstances.

As discussedfurther under “Significant Events” below, as a result of the termination ofcontracts with significant customers, the Company has experienced significantfinancial losses and reduction of cash flows over the last several years.  It is likely that additional losses will beincurred during parts or all of 2007. Such customer losses have had, and will continue to have, a significantadverse impact on our results of operations and cash flows and these events andissues raise doubt as to whether we can continue to operate as a goingconcern.  We have experienced net lossesin each of the quarterly and annual periods since the first quarter of2003.  Our management is aggressivelypursuing new and additional sources of revenues and is working to grow ourvoice and data services businesses.  Overthe past two years we have significantly reduced the direct cost of deliveringour services as well as significantly reduced our general and administrativeoverhead.  In addition, our managementand board of directors are investigating and pursuing strategic alternativesfor the Company to improve operations, improve liquidity and capital resources,and provide stability to the Company’s financial position.  There can be no assurance that our plans willbe successful.  Our existing cash andcash equivalents will likely not be sufficient to fund our operations for theremainder of 2007 or beyond.  In order tocontinue as a going concern, we will need to significantly increase ourrevenues and/or further reduce our costs and/or obtain additional financing.  There can be no assurance that our efforts inthese areas will be successful.  In suchevent, we may attempt to establish borrowing arrangements in order to maintainadequate liquidity, although we cannot provide assurance that financing will beavailable in amounts or on terms acceptable to us.  If we are unable to execute our operationsaccording to our plans or obtain additional financing, we may be forced tocease operations.

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### **SignificantEvents**

***Termination of contracts.***

In February 2005, we entered into a Master ServicesAgreement for Directory Assistance Services (the “Services Agreement”) withNextel Operations, Inc., acting on behalf of certain affiliates (collectively “Nextel”)of Nextel Communications, Inc.  TheServices Agreement superseded our previous services agreement dated in June1999.  Under the Services Agreement, weagreed to provide directory assistance services to Nextel’s customers on anon-exclusive basis, and Nextel could transition call volume away from us onshort notice and/or terminate services entirely.

In October 2005, we received notification from Nextelthat it would be terminating the Services Agreement effective January 9,2006.  In February 2006, we entered intoa Settlement Agreement and Disentanglement Transition Plan (the “Plan”) withNextel that resolved certain disputed matters in connection with thetermination of the Services Agreement. Under the Plan, we continued to provide services to Nextel callersthrough March 31, 2006 in return for the payment by Nextel of approximately $5.75million.  Those payments were in additionto $2.5 million previously paid by Nextel in December 2005 in connection withthe transition and in addition to the contractual payments by Nextel for normalservice provided by us to Nextel callers through the transition period.  Calls from Nextel were substantiallytransitioned away from us by March 31, 2006, and we have received all amountsdue from Nextel.  Including the $5.75million received in the first quarter of 2006 as part of the settlementpayments, Nextel represented approximately 37% of our revenues in 2006.  Nextel accounted for approximately 76% and56% of our revenues in 2005 and 2004, respectively.

Our contract with AT&T Wireless expired inDecember 2003.  The call volume fromAT&T Wireless transitioned away during the second and third quarters of2004. AT&T Wireless accounted for approximately 28% of our revenues in2004.

Terminations of the contracts noted above have had,and will continue to have, a significant adverse impact on our results ofoperations and cash flows.

***Restructuring and exit activities.***

In 2006, we undertook significant restructuringactivities, due primarily to the departure of call volume from Nextel asdiscussed above.  During 2006, we closed13 call centers and significantly reduced the number of call center andadministrative employees.  As a result ofthe closure and other restructuring activities, we paid or accruedapproximately $2.8 million of termination and retention benefits.  We also recorded approximately $1.7 millionof expenses related to termination of lease obligations of closed facilitiesduring 2006.  In addition, we recordedapproximately $2.2 million of other costs, primarily legal and advisoryservices and dismantling costs in 2006. Included in these costs were losses incurred on disposal, in the secondquarter, of certain corporate and call center assets in the amount of$935,000.  These assets had a net bookvalue totaling $1,574,000 at the time of disposal, and we received proceeds of$639,000 from the sale.  At December 31,2006, we had approximately $712,000 of accrued restructuring costs, primarilyrelated to remaining lease obligations of closed facilities and accruedtermination benefits related to certain corporate employees. Approximately$520,000 of termination benefits was paid subsequent to December 31, 2006with the remainder of the accrued restructuring costs expected to be paid outprimarily during the second quarter of 2007.

Primarily during the second and third quarters of2005, as part of our ongoing efforts to cut costs and align expenses withreduced revenues, we closed and consolidated the operations of 12 of our callcenters.  Most significant costsassociated with closing those call centers were accrued and paid in 2005.

During 2005, we incurred approximately $6.8 million ofrestructuring costs.  That amountconsisted of approximately $1.9 million of severance and other employee-relatedtermination benefits, approximately $1.7 million of lease termination costs andapproximately $3.2 million of other costs of restructuring.  These other costs included approximately $1.5million of net non-cash intangible and other asset write-offs related to ourdiscontinued Infone service, approximately $800,000 paid for strategic advisoryservices, approximately $750,000 of costs associated with closing call centers,and approximately $270,000 of other costs.

***Significant new contract.***

In August 2006, weentered into a Telecom InformationServices Agreement (the “Agreement”) with Jingle Networks, Inc. (“Jingle”).  Under the Agreement, we will be a preferreddirectory assistance provider for “1-800-FREE411”.  In addition to per call charges, theAgreement includes financial commitments from Jingle based on call volumeexpansion and other financial incentives. The Agreement is for three years and will automatically renew annuallyfor up to two additional years unless either party provides notice oftermination at least 60 days prior to the commencement of such renewalperiod.  Under the Agreement, as a preferreddirectory provider we will be allocated no fewer calls than any other vendorproviding similar services.  TheAgreement provides that our status as a preferred provider may be terminated byJingle but, in such event, the warrants described below will be terminated.

In connection withthe Agreement, we issued to Jingle two warrants to purchase shares of ourcommon stock.  The first warrant was forthe purchase of up to 623,250 shares of common stock at an exercise price of$2.60 per share.  The warrant 

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was exercisableunder the condition that Jingle meet certain revenue and payment thresholdsthrough February 28, 2007.  The revenuetargets were not met, thus, the first warrant terminated on February 28, 2007.

The second warrant is for the purchase of up to870,075 shares of our common stock; provided, however, that shares representedby the sum of the first and second warrants, if exercised, cannot exceed 19.98%of our total shares outstanding after the warrants are exercised.  The exercise price for the second warrantwill equal 115% of the average closing price per share of the our common stockover the 20 consecutive trading days ending the last trading day prior to July1, 2007.  The second warrant will not beexercisable unless and until certain revenue and payment thresholds are achievedby Jingle during specified time periods as outlined in the Agreement.  The second warrant terminates on July 1,2009.

***Other***

In a 2004 decision, the California Public UtilitiesCommission (“PUC”) implemented competitive wholesale pricing for directory assistancedata for third party vendors purchasing the data from SBC Communications (“SBC”).  The decision determined that SBC continues toenjoy a dominant position as the former monopoly provider of local exchangeservice in its territory in California and could not use its market power toextract excessive directory assistance data prices that would discriminateagainst competitors.  The decisionrequired that SBC refund the improper charges with interest.  As a result,in the third quarter of 2004, we received a refund from SBC in the amount ofapproximately $2.9 million that is included in “Other income, net” in ourDecember 31, 2004 statement of operations.

***Infone***

Competition in the telecommunications industry, and inthe directory assistance market in which we participate, is and has beenintense.  With slowing subscriber growthand declining revenue per user, carriers are looking to lower their costs ofproviding directory assistance and other services through, among other ways,outsourcing to low cost domestic or overseas operators and utilizing automationto reduce costs.  In response to theseand other issues, in May 2003, we launched Infone, a service that providedenhanced directory and personal assistant services directly to consumers.

The initial launch of Infone was accompanied by asignificant nationwide marketing and promotion campaign designed to build brandawareness and encourage customers to sign up for Infone.  Because of our inability to attract a significantnumber of subscribers to this service, it was discontinued in December2005.  We spent approximately $2.8million and $17.5 million, in 2005 and 2004, respectively, on such marketingand promotion campaigns.  Revenues fromour Infone service were not significant in relation to total revenues in 2005or 2004.

### **Resultsof Operations**

The following table shows selected items of ourconsolidated statements of operations data expressed as a percentage ofrevenues:

|                                               | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                      |       | 100.0                                       | %          | 100.0 | % | 100.0 | % |
| Direct operating  expenses                    |       | 62.9                                        |       | 76.1 |   | 60.1 |   |
| Selling, general and  administrative expenses |       | 68.1                                        |       | 58.9 |   | 51.6 |   |
| Depreciation and  amortization                |       | 12.3                                        |       | 7.9 |   | 15.5 |   |
| Impairment loss                               |       | —                                      |       | — |   | 22.9 |   |
| Restructuring charges                         |       | 21.8                                        |       | 8.8 |   | — |   |
| Loss from operations                          |       | (65.1                                       | )          | (51.7 | ) | (50.1 | ) |
| Other income, net                             |       | 1.9                                         |       | 1.3 |   | 2.7 |   |
| Loss before income  taxes                     |       | (63.2                                       | )          | (50.4 | ) | (47.4 | ) |
| Income tax expense  (benefit)                 |       | 0.2                                         |       | 0.7 |   | (2.4 | ) |
| Net loss                                      |       | (63.4                                       | )%         | (51.1 | )% | (45.0 | )% |

 

**2006 Compared to 2005**

*Revenues.*Revenues decreased 61.0% to $30.3 million from $77.8million.  Call volume decreased toapproximately 85 million calls from approximately 231 million calls.  These decreases resulted primarily from lowercall volumes due to the termination of our services to Nextel Communications inMarch 2006.  In addition, our overallaverage revenue per call was approximately $0.27 in 2006 compared toapproximately $0.33 in 2005 primarily due to lower prices on renewals ofexisting contracts due to competitive pressures.

*Direct operating expenses.*Directoperating expenses, consisting of the costs of salaries, wages, benefits andtaxes of call center personnel, listings data and content acquisition costs,decreased 67.8% to $19.1 million from $59.2 million.  This decrease was primarily due to lowerpersonnel and data cost associated with servicing lower call volumes.  As a percentage 

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of revenues, direct operating expenses decreased to62.9% from 76.1%, due primarily to increased operational efficiencies in thecall centers as a result of our cost control initiatives.

*Selling, general and administrative expenses.*Selling,general and administrative expenses (excluding depreciation and amortization)decreased 54.9% to $20.7 million from $45.9 million resulting primarily fromcost-cutting efforts in response to the termination of our contract withNextel, including the closing of 13 call centers.  As a percentage of revenues, selling, generaland administrative expenses increased to 68.1% in 2006 compared to 58.9% in2005 primarily due to lower revenues.

*Depreciation and amortization.*Depreciationand amortization expense was $3.7 million in 2006 compared to $6.1 million in2005.  The decrease in depreciation andamortization was due primarily to overall reduction in acquisition of fixedassets in 2006 and the last several years as operations have been reduced.

*Restructuring charges.*Restructuringcharges in 2006 consisted primarily of one-time termination benefits paid toemployees of $2.77 million, lease termination costs of $1.67 million and $2.17million of other costs.  Other costsconsisted primarily of legal and advisory costs, costs to dismantle closed callcenters, and costs to implement our ongoing cost reduction plans.  These restructuring charges related primarilyto the 13 call centers we closed in 2006 and other cost cutting efforts at ourcorporate headquarters.  Restructuringcharges of approximately $712,000, primarily related to one-time terminationbenefits and continuing lease obligations on closed facilities, have beenaccrued but not paid at December 31, 2006.

*Other income, net*. Other incomein 2006 was approximately $583,000 consisting primarily of interest earned oncash and cash equivalents partially offset by a charge of approximately $218,000for penalties and interest on certain disputed federal and state income taxassessments and other miscellaneous non-operating expenses.

*Income taxes*. Income tax expensein 2006 was $51,000 primarily related to state income taxes.  Income tax expense in 2005 was $538,000,reflecting a provision for federal income tax expense related to a proposedadjustment by the Internal Revenue Service (“IRS”) relating to a prior year taxreturn under audit.  Our effective taxrates for 2006 and 2005 were approximately 0.3% and 1.4%, respectively.  The rates for both years differ from thestatutory rates primarily due to the increase in valuation allowance, as it ismore likely than not that some portion or all of the deferred tax assets may notbe realized.

**2005 Compared to 2004**

*Revenues.*Revenues decreased44.6% to $77.8 million from $140.4 million. Call volume decreased to approximately 231 million calls fromapproximately 306 million calls.  Thesedecreases resulted primarily from lower call volumes due to the expiration ofour contract with AT&T Wireless in mid-2004 as well as a lower averagerevenue per call related to decreased pricing in our new contract with Nextelin 2005.  Our overall average revenue percall was approximately $0.33 in 2005 compared to approximately $0.46 in 2004.

*Direct operating expenses.*Directoperating expenses, consisting of the costs of salaries, wages, benefits andtaxes of call center personnel, listings data and content acquisition costs,decreased 29.8% to $59.2 million from $84.3 million.  This decrease was primarily due to lowerpersonnel and data cost associated with servicing lower call volumes.  As a percentage of revenues, direct operatingexpenses increased to 76.1% from 60.1%, due primarily to a lower averagerevenue per call.

*Selling, general and administrative expenses.*Selling,general and administrative expenses decreased 44.8% to $52.0 million from $94.2million resulting primarily from decreased advertising expense related to thediscontinued Infone service of approximately $14.8 million and cost-cuttingefforts, including the closing of 12 call centers.  As a percentage of revenues, selling, generaland administrative expenses remained relatively flat at 66.8% in 2005 comparedto 67.1% in 2004.

*Restructuring charges.*Restructuringcharges in 2005 consisted primarily of one-time termination benefits paid toemployees of $1.9 million, lease termination costs of $1.7 million and $3.2million of other costs.  Other costsconsisted primarily of costs to dismantle closed call centers, costs toimplement our ongoing cost reduction plans, and non-cash write-downs of certainintangible and other assets related to our discontinued Infone service.  These restructuring charges related primarilyto the 12 call centers we closed in 2005.

*Depreciation and amortization.*Depreciationand amortization expense was $6.1 million in 2005 compared to $21.7 million in2004.  The decrease in depreciation andamortization was due primarily to the write-down of fixed assets in the fourthquarter of 2004 and the overall reduction in acquisition of fixed assets in thelast several years as operations have been reduced.

*Other income, net*. Other incomein 2005 was approximately $1.0 million and consisted primarily of interestearned on cash and cash equivalents. Other income in 2004 was approximately $3.8 million, consistingprimarily of the $2.9 million refund from SBC discussed above and approximately$694,000 of interest income earned on cash, cash equivalents and short-terminvestments.

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*Income taxes*. Income tax expensein 2005 was $538,000, reflecting a provision for federal income tax expenserelated to a proposed adjustment by the IRS relating to a prior year tax returnunder audit.  Income tax benefit in 2004was $3.4 million. This benefit resulted primarily from our ability to carrylosses back to offset income in prior years and to receive refunds of incometaxes paid in those years.  Our effectivetax rate for 2005 was approximately 1.4%. Our effective tax rate for 2004 was a tax benefit of approximately 5.1%.  The rates for both years differ from thestatutory rates primarily due to the increase in valuation allowance in bothyears, as it is more likely than not that some portion or all of the deferredtax assets may not be realized.

### **Liquidityand Capital Resources**

Cash and cashequivalents, short-term investments and restricted cash are recorded at costwhich approximates their fair market value. As of December 31, 2006, we had approximately $16.7 million in cashand cash equivalents, short-term investments and restricted cash (including$4.7 million of restricted cash) compared to approximately $24.6 million(including $6.9 million of restricted cash) at December 31, 2005.  The net decrease of $7.9 million resultedprimarily from net operating losses.  Wehave no outstanding debt.

Working capital was $13.3 million at December 31, 2006, compared to$26.6 million at December 31, 2005.  Thischange was primarily due to net operating losses incurred in 2006.

*Cash flow from operations.*Netcash used in operations in 2006 was $8.6 million compared to net cash used of$28.3 million in 2005; accordingly, we used approximately $19.7 million lesscash in operations in 2006 as compared to 2005. The decrease in cash used was primarily as follows: we paid $46.3million less to or on behalf of employees and we paid $18.0 million less tosuppliers of goods and services, including advertising services, in 2006 versus2005.  Offsetting these decreases in cashpayments were decreases in cash received from customers of $43.3 million and incash refunds of federal income taxes of $3.0 million

*Cash flow from investing activities.*Cashprovided by investing activities was $2.8 million in 2006, primarily resultingfrom release of cash used to secure a letter of credit and cash proceeds fromthe sale of excess equipment and other assets, partially offset by cash usedfor capital purchases.  Cash provided byinvesting activities was $22.0 million in 2005, primarily resulting fromconversion of short term investments to cash for use in operations, partiallyoffset by cash used to secure a letter of credit and cash used for capitalpurchases.  In 2006 and 2005, capitalexpenditures were primarily for equipment to upgrade existing call centers andcorporate networks and infrastructure.

*Cash flow from financing activities*.Cash used in financing activities was not significant in 2006 or 2005.

*Future capital needs and resources.*Theprimary uses of our capital in the near future are expected to be primarily forworking capital.  We expect to adjustpersonnel, call centers and network capacities in order to address varyingbusiness circumstances, including changes in volume and pricing and otherprovisions of customer contracts.

Although cash on hand (including restricted cash) and short-term investmentsat December 31, 2006 was approximately $16.7 million, our operations and futureactivities, including additional restructuring efforts, will reduce availablecash.

Our existing cash and cash equivalents will likely not be sufficient tofund our operations for the remainder of 2007 or beyond.  Our management is aggressively pursuing newand additional sources of revenues and is working to grow our voice and dataservices businesses.  Over the past twoyears, we have significantly reduced the direct cost of delivering our servicesas well as significantly reduced our general and administrative overhead;however, in order to continue as a going concern, we will need to significantlyincrease our revenues and/or further reduce our costs and/or obtain additionalfinancing.  In addition, our managementand board of directors are investigating and pursuing strategic alternativesfor the Company to improve operations, improve liquidity and capital resources,and provide stability to the Company’s financial position.  There can be no assurance that management’sefforts in these areas will be successful. In such event, we may attempt to establish borrowing arrangements inorder to maintain adequate liquidity, although we cannot provide assurance thatfinancing will be available in amounts or on terms acceptable to us.  If we are unable to execute our operationsaccording to our plans or obtain additional financing, we may be forced tocease operations.

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*Contractual obligations and commitments.*Ourcontractual obligations are presented in the table below. Other than operatingleases, we have no significant off-balance sheet arrangements or obligations.

|                                  | ** ** | **Payments due by period  (in thousands)** | ** ** |
|----------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                       | ** ** | ** **                                                     | ** ** | **Less** | ** ** | ** ** | ** ** | ** ** | ** ** | **More** | ** ** |
| ** **                       | ** ** | ** **                                                     | ** ** | **than 1** | ** ** | **1 - 3** | ** ** | **3 - 5** | ** ** | **than 5** | ** ** |
| **Contractual Obligations** | ** ** | **Total**                                                      | ** ** | **year** | ** ** | **years** | ** ** | **years** | ** ** | **years** | ** ** |
|                             |       |                                                           |       |   |   |   |   |   |   |   |   |
| Operating lease  obligations     |       | $                                                              | 4,528      |   | $ | 2,011 |   | $ | 2,517 |   | — |   | — |   |
| Total                            |       | $                                                              | 4,528      |   | $ | 2,011 |   | $ | 2,517 |   | — |   | — |   |

 

We generally lease our facilities throughnon-cancelable operating leases extending for up to ten years.

From time to time, in the normal course of our business, we issuestandby letters of credit and bank guarantees. At December 31, 2006, we had one letter of credit outstanding in theamount of $4,741,000 related to our workers’ compensation program. The letterof credit is secured by a certificate of deposit for the same amount that isrecorded as restricted cash.  Thiscommitment expires on April 1, 2007 and is typically renewed on an annualbasis.

In accordance with accounting principles generally accepted in theUnited States of America, these contractual obligations and commitments are notreflected in our balance sheets.

### **Effectof Inflation**

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

### **CriticalAccounting Policies**

We prepare our financial statements in conformity with accountingprinciples generally accepted in the United States of America.  As such, we are required to make certainestimates, judgments and assumptions that we believe are reasonable based uponthe information available.  Theseestimates and assumptions affect the reported amounts of assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the periods presented. Management believes that of our significant accounting policies (seeNote 1 to the financial statements), those governing accounts receivable, thelives and recoverability of the carrying amount of equipment and otherlong-lived assets, such as existing intangible assets, estimates involving thelevels of our contingent liabilities for workers’ compensation and medicalself-insurance and estimates of current taxes owed may involve a higher degreeof judgment, estimation and uncertainty.

*Accounts receivable.*Ourwholesale customer base has primarily consisted of large wireless telephonecarriers in the United States.  As such,we have had minimal risk of uncollectibility, at any point in time, related tooutstanding accounts receivable with these customers.  We have not experienced significantcollection issues or write-offs related to these customers.  Since our accounts receivable areconcentrated in relatively few of these wholesale customers, a significantchange in the liquidity or financial position of any one of them couldadversely impact collection of our accounts receivable and therefore have amaterial adverse effect on our financial position and future operatingresults.  In addition, our data servicesbusiness is generating receivables from customers that may not be asfinancially stable as our large carrier customers which to date has not but mayin the future expose us to greater risk of uncollectible receivables than wehave experienced in the past.

*Long-lived assets and intangibles.*Weevaluate the remaining life and recoverability of equipment and other assets,including patents and trademarks and internally developed software, wheneverevents or changes in circumstances indicate that the carrying amount of theassets may not be recoverable.  At suchtime, we estimate the future cash flows expected from use of such assets andtheir eventual disposition and, if lower than the carrying amounts, adjust thecarrying amount of the assets to their estimated fair value.  Because of our changing business conditions,including lower wholesale prices and dependence on a relatively small number ofcustomers for a significant portion of our revenues, our estimates of futurecash flows to be generated from our operations could change materially, resultingin the need for us to record additional impairment charges.  In addition, as a result of our changingbusiness conditions, we expect to adjust personnel, call centers and networkcapacities.  If any of these activitiesresult in certain of our assets no longer being used in operations, we may needto record an additional impairment charge. As a result of certain of the circumstances noted above, we evaluatedour fixed assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” as of December 31, 2004.  We determined that 

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the value of our fixed assets was impaired, thus, inthe fourth quarter of 2004, we recorded a $32.2 million write-down of thoseassets to their estimated fair market value. As a result of the decision by Nextel to terminate its contract with us,as discussed under Significant Events above, and because of continuingoperating losses, we evaluated our fixed assets and intangibles as of December31, 2006 and 2005 for impairment in accordance with SFAS No. 144.  Our evaluation determined that the assetswere not impaired as of December 31, 2006 and 2005.

*Self-insurance reserves.*In thepast, we have self-insured a portion of our workers’ compensation and employeemedical insurance programs.  In some periods we purchased stop losscoverage at varying levels in order to mitigate our potential futurelosses.  The nature of the liabilities associated with theseself-insurance programs, which may not fully manifest themselves for severalyears, requires significant judgment.  We evaluate open workers’compensation and medical claims under these policies periodically to determinethe reasonableness of the reserves we have recorded for such claims.  Our evaluation includes estimates of potentialincurred-but-unreported claims as well as factors that may cause originalestimates of such claims to increase over time, such as available claims dataand historical trends and experience, as well as future projections of ultimatelosses, expenses, premiums and administrative costs.  We adjust thesereserves if events or changes in circumstances indicate that ultimate paymentsrelated to the claims will be more than the recorded reserves.  At December 31, 2006, we have reservedapproximately $1.9 million and $284,000 related to these self-insured workers’compensation and medical programs, respectively.  While we believe that the amounts reservedfor these obligations are sufficient, any significant change in the status ofopen claims or costs associated with claims made under these plans could have amaterial adverse effect on our financial position, results of operations orcash flows.

*Income taxe*s.  Accountingfor income taxes requires us to estimate our income taxes in each jurisdictionin which we operate.  Due to differences in the recognition of itemsincluded in income for accounting and tax purposes, temporary differences arisewhich are recorded as deferred tax assets or liabilities.  We estimate thelikelihood of recovery of these assets, which is dependent on future levels ofprofitability and enacted tax rates.  Should any amounts be determined notto be recoverable, or assumptions change, we would be required to take a chargeto establish a valuation allowance against such deferred tax assets, whichcould have a material effect on our financial position, results of operationsor cash flows.  At December 31, 2006 and2005, a valuation allowance reduced net deferred tax assets to zero.

### **RecentAccounting Pronouncements**

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 48(“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation ofFASB Statement No. 109.”  FIN 48prescribes a recognition threshold and measurement attribute for financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition.  FIN 48 is effective for our fiscal yearbeginning January 1, 2007.  We areevaluating the impact that the adoption of FIN 48 will have on our consolidatedfinancial position and results of operations.

In September 2006,the FASB issued Statement of Financial Accounting Standard (“SFAS”)No. 157, “Fair Value Measurements,” which establishes a framework formeasuring the fair value of assets and liabilities.  This framework is intended to increaseconsistency in how fair value determinations are made under various existingaccounting standards that permit, or in some cases require, estimates of fairmarket value.  SFAS No. 157 alsoexpands financial statement disclosure requirements about a company’s use offair value measurements, including the effect of such measures onearnings.  SFAS No. 157 is effectivefor fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years.  We do notexpect the adoption of this statement to have a material effect on ourconsolidated financial position or results of operations.

**ITEM 7A.****               QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

Substantially allof our liquid resources are invested in money market instruments and short-termdebt securities.  However, these fundswere invested in overnight money market instruments or debt securities withshort-term effective maturities at December 31, 2006 and were redeemable on adaily or monthly basis.  Therefore, thefair market value of these investments is not materially affected by changes inmarket interest rates.  All of theunderlying investments in the money market fund had maturities of three monthsor less.  A hypothetical 1% fluctuationin interest rates would not have a material adverse effect on our financialposition, results of operations or cash flows.
| **ITEM 8.** | **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.** |
|-------------|--------------------------------------------------|

 

See pages 29 through 43.

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**ITEM 9.****                                                     CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

None.

**ITEM 9A.****               CONTROLSAND PROCEDURES.**

Under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, we conducted an evaluation of our disclosure controls and procedures(as such term is defined under Rule 13a-15(e) promulgated under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) at the end of the periodcovered by this annual report.  Basedupon that evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this annual report.

**ITEM 9B.****               OTHERINFORMATION.**

None

# **PART III**

**ITEM10.**               DIRECTORS, EXECUTIVE OFFICERS, ANDCORPORATE GOVERNANCE.

The information required by Item 10 is incorporated byreference to the Proxy Statement for our 2007 Annual Meeting under the captions“Management,” “Nominees and Directors” and “Corporate Governance” to be filedwith the Securities and Exchange Commission within 120 days of our fiscal yearend.

*Compliance with Section 16(a) of the Exchange Act.*Theinformation required by Item 10 relating to compliance with Section 16(a) ofthe Securities Exchange Act of 1934 is incorporated by reference to the ProxyStatement for our 2007 Annual Meeting under the caption “Section 16(a)Beneficial Ownership Reporting Compliance” to be filed with the Securities andExchange Commission within 120 days of our fiscal year end.

*Code of Ethics.*We have adopted a“Code of Business Conduct and Ethics” applicable to our directors, officers andemployees and a “Code of Ethics” applicable to our Chief Executive Officer andour senior financial officers.  Both ourCode of Business Conduct and Ethics and our Code of Ethics are available in theInvestor Relations section of our website (www.metro1.com/corporate-governance.html)or by requesting a free copy by writing us at Metro One Telecommunications,Inc., 11200 Murray Scholls Place, Beaverton, OR 97007, attention InvestorRelations.  We intend to satisfy thedisclosure requirements regarding any amendment to, or waiver from, a provisionof our Code of Business Conduct and Ethics or Code of Ethics by disclosing suchmatters in the Investor Relations section of our website.

**ITEM11.**               EXECUTIVE COMPENSATION.

The information required by Item 11 is incorporated byreference to the Proxy Statement for our 2007 Annual Meeting under the caption “ExecutiveCompensation,” to be filed with the Securities and Exchange Commission within120 days of our fiscal year end.

**ITEM 12.**                                              SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND OTHER STOCKHOLDER MATTERS.

The information required by Item 12 is incorporated byreference to the Proxy Statement for our 2007 Annual Meeting under the caption “SecurityOwnership of Certain Beneficial Owners and Management and Other StockholderMatters,” to be filed with the Securities and Exchange Commission within 120days of our fiscal year end.

**Securities Authorized for Issuance Under EquityCompensation Plans**

For information concerning securities authorized forissuance under our equity compensation plans see Note 6 of the Notes to ConsolidatedFinancial Statements included in this Form 10-K under Item 8.

**ITEM 13.**                                              CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS AND DIRECTOR INDEPENDENCE.

The information required by Item 13 is incorporated byreference to the Proxy Statement for our 2007 Annual Meeting under the caption “Management- Employment Related Matters,” to be filed with the Securities and ExchangeCommission within 120 days of our fiscal year end.

**ITEM 14.****               PRINCIPALACCOUNTANT FEES AND SERVICES.**

The information required by Item 14 is incorporated byreference to the Proxy Statement for our 2007 Annual Meeting under the caption “PrincipalAuditor Fees and Services,” to be filed with the Securities and ExchangeCommission within 120 days of our fiscal year end.

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# **PART IV**

**ITEM 15.****               EXHIBITSAND FINANCIAL STATEMENT SCHEDULES.**
| **(a)(1)**  |       | Consolidated  Financial Statements                                                                                                                      |       |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|        |       |                                                                                                                                                    |       |
| Pg. 27 |       | Report  of BDO Seidman LLP, independent registered public accounting firm                                                                               |       |
|        |       |                                                                                                                                                    |       |
| Pg. 28 |       | Report  of Deloitte & Touche LLP, independent registered public accounting firm                                                                     |       |
|        |       |                                                                                                                                                    |       |
| Pg. 29 |       | Consolidated Statements of Operations for each of the  years ended December 31, 2006, 2005, and 2004                                                    |       |
|        |       |                                                                                                                                                    |       |
| Pg. 30 |       | Consolidated Balance Sheets at December 31, 2006 and  2005                                                                                              |       |
|        |       |                                                                                                                                                    |       |
| Pg. 31 |       | Consolidated Statements of Shareholders’ Equity for  each of the years ended December 31, 2006, 2005, and 2004                                     |       |
|        |       |                                                                                                                                                    |       |
| Pg. 32 |       | Consolidated Statements of Cash Flows for each of the  years ended December 31, 2006, 2005, and 2004                                                    |       |
|        |       |                                                                                                                                                    |       |
| Pg. 33 |       | Notes to Consolidated Financial Statements                                                                                                              |       |
|        |       |                                                                                                                                                    |       |
| **(a)(3)**  | ** ** | **Exhibits**                                                                                                                                            | ** ** |
|        |       |                                                                                                                                                    |       |
| 3.1         |       | Third  Restated Articles of Incorporation of Metro One Telecommunications, Inc.  (“the Company”) (1)                                          |       |
|        |       |                                                                                                                                                    |       |
| 3.2         |       | Amendment  to Third Restated Articles of Incorporation of the Company (1)                                                                               |       |
|        |       |                                                                                                                                                    |       |
| 3.3         |       | Amended  and Restated Bylaws of the Company (1)                                                                                                         |       |
|        |       |                                                                                                                                                    |       |
| 3.4         |       | Amendment  to Third Restated Articles of Incorporation of the Company (2)                                                                               |       |
|        |       |                                                                                                                                                    |       |
| 4.1         |       | Common  Stock Warrant issued to Jingle Networks, Inc. (3)                                                                                               |       |
|        |       |                                                                                                                                                    |       |
| 4.2         |       | Common  Stock Warrant issued to Jingle Networks, Inc. (3)                                                                                               |       |
|        |       |                                                                                                                                                    |       |
| 10.1        |       | Lease  Agreement between Murray Scholls, LLC, Gramor Development Northwest, Inc. and  the Company (4)                                                   |       |
|        |       |                                                                                                                                                    |       |
| 10.2        |       | 2004  Stock Incentive Plan (5)*                                                                                                                         |       |
|        |       |                                                                                                                                                    |       |
| 10.3        |       | 2006  Stock Incentive Plan (6)*                                                                                                                         |       |
|        |       |                                                                                                                                                    |       |
| 10.4        |       | Form  of Stock Option Agreements and Exercise Notice under 2004 Stock Incentive  Plan (7)*                                                              |       |
|        |       |                                                                                                                                                    |       |
| 10.5        |       | Form  of Restricted Stock Purchase Agreement under 2004 Stock Incentive Plan (7)*                                                                       |       |
|        |       |                                                                                                                                                    |       |
| 10.6        |       | 1999  Employee Stock Purchase Plan, as amended (6)*                                                                                                     |       |
|        |       |                                                                                                                                                    |       |
| 10.7        |       | 1994  Stock Incentive Plan, as amended (8)*                                                                                                             |       |
|        |       |                                                                                                                                                    |       |
| 10.8        |       | Separation  and Consulting Agreement between Timothy A. Timmins and the Company, date  October 4, 2005 (9)*                                             |       |
|        |       |                                                                                                                                                    |       |
| 10.9        |       | Consulting  Agreement between James M. Usdan and the Company, dated October 4, 2005 (10)*                                                               |       |
|        |       |                                                                                                                                                    |       |
| 10.10       |       | Amendment  letter to Consulting Agreement between James M. Usdan and the Company, dated  June 1, 2006 (11)*                                             |       |
|        |       |                                                                                                                                                    |       |
| 10.11       |       | Metro  One Telecommunications, Inc. Retention Plan and form of Retention Agreement  thereunder (12)*                                                    |       |
|        |       |                                                                                                                                                    |       |
| 10.12       |       | Form  of Indemnity Agreement between the Company and its directors and officers  (13)                                                                   |       |
|        |       |                                                                                                                                                    |       |
| 10.13       |       | Master  Services Agreement for Directory Assistance Services, by and between the  Company and Nextel Operations, Inc., dated as of January 1, 2005 (14) |       |
|        |       |                                                                                                                                                    |       |
| 10.14       |       | Settlement  Agreement and Disentanglement Transition Plan, by and between the Company and  Nextel Operations, Inc. dated as of February 10, 2006 (15)   |       |
|        |       |                                                                                                                                                    |       |
| 10.15       |       | Telecom  Information Services Agreement, by and between the Company and Jingle  Networks, Inc., dated as of August 2, 2006 (16)                         |       |
|        |       |                                                                                                                                                    |       |

 

24

----

 
| 10.16  |   | Registration  Rights Agreement, by and between the Company and Jingle Networks, Inc., dated  as of August 2, 2006 (3)                                                                              |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                               |   |
| 23.1   |   | Consent  of BDO Seidman LLP, independent registered public accounting firm                                                                                                                         |   |
|   |   |                                                                                                                                                                                               |   |
| 23.2   |   | Consent  of Deloitte & Touche LLP, independent registered public accounting firm                                                                                                               |   |
|   |   |                                                                                                                                                                                               |   |
| 31.1   |   | Certification  of Principal Executive Officer pursuant to Securities and Exchange Commission  Rule 13a-14(a)                                                                                       |   |
|   |   |                                                                                                                                                                                               |   |
| 31.2   |   | Certification  of Principal Financial Officer pursuant to Securities and Exchange Commission  Rule 13a-14(a)                                                                                       |   |
|   |   |                                                                                                                                                                                               |   |
| 32.1   |   | Certification of Principal  Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act Of 2002 |   |

----

| *****  |   | Management  contract or compensatory plan                                                                                                                                                                  |   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                                       |   |
| (1)    |   | Incorporated  herein by reference to the Company’s Annual Report on Form 10-K dated March  15, 2004.                                                                                                  |   |
|   |   |                                                                                                                                                                                                       |   |
| (2)    |   | Incorporated  herein by reference from Annex A to the Company’s Definitive Proxy Statement  on Schedule 14-A dated May 1, 2006.                                                                       |   |
|   |   |                                                                                                                                                                                                       |   |
| (3)    |   | Incorporated  herein by reference to the Company’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2006.                                                                           |   |
|   |   |                                                                                                                                                                                                       |   |
| (4)    |   | Incorporated  herein by reference to the Company’s Annual Report on Form 10-K for the year  ended December 31, 1998.                                                                                  |   |
|   |   |                                                                                                                                                                                                       |   |
| (5)    |   | Incorporated  herein by reference from Annex C to the Registrant’s Definitive Proxy  Statement on Schedule 14-A dated May 1, 2006.                                                                    |   |
|   |   |                                                                                                                                                                                                       |   |
| (6)    |   | Incorporated  herein by reference from Appendix A to the Registrant’s Definitive Proxy  Statement on Schedule 14-A dated April 26, 2004.                                                              |   |
|   |   |                                                                                                                                                                                                       |   |
| (7)    |   | Incorporated  herein by reference to the Company’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2004.                                                                           |   |
|   |   |                                                                                                                                                                                                       |   |
| (8)    |   | Incorporated  herein by reference to the Company’s Form S-8 dated February 12, 2002 and to  the Company’s Form S-8 dated September 10, 2002.                                                     |   |
|   |   |                                                                                                                                                                                                       |   |
| (9)    |   | Incorporated  herein by reference to the Company’s Current Report on Form 8-K dated  December 6, 2005.                                                                                                |   |
|   |   |                                                                                                                                                                                                       |   |
| (10)   |   | Incorporated  herein by reference to the Company’s Current Report on Form 8-K dated  November 29, 2005.                                                                                               |   |
|   |   |                                                                                                                                                                                                       |   |
| (11)   |   | Incorporated  herein by reference to the Company’s Quarterly Report on Form 10-Q for the  quarter ended June 30, 2006.                                                                                |   |
|   |   |                                                                                                                                                                                                       |   |
| (12)   |   | Incorporated  herein by reference to the Company’s Current Report on Form 8-K dated  December 28, 2005.                                                                                               |   |
|   |   |                                                                                                                                                                                                       |   |
| (13)   |   | Incorporated  herein by reference to the Company’s Current Report on Form 8-K dated  February 8, 2005.                                                                                                |   |
|   |   |                                                                                                                                                                                                       |   |
| (14)   |   | Incorporated  herein by reference to the Company’s Quarterly Report on Form 10-Q for the  quarter ended March 31, 2005. Confidential treatment requested as to certain  portions of this exhibit.     |   |
|   |   |                                                                                                                                                                                                       |   |
| (15)   |   | Incorporated  herein by reference to the Company’s Quarterly Report on Form 10-Q for the  quarter ended March 31, 2006.                                                                               |   |
|   |   |                                                                                                                                                                                                       |   |
| (16)   |   | Incorporated  herein by reference to the Company’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2006. Confidential treatment requested as to  certain portions of this exhibit. |   |
|   |   |                                                                                                                                                                                                       |   |

 

25

----

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) ofthe Exchange Act, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.
|        |   | Metro One Telecommunications, Inc.    |
|--------|--------|---------------------------------------|
|   |   |                                  |
|   |   |                                  |
|   | By:    | /s/ Gary E. Henry                     |
|   |   | Gary E. Henry                         |
|   |   | President and Chief Executive Officer |

 

Date:       April2, 2007

**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESEPRESENTS, that each person whose signature appears below constitutes andappoints Gary E. Henry and William D. Rutherford, jointly and severally, his orher attorneys-in-fact, each with the power of substitution, for him or her inany and all capacities, to sign any amendments to this Report on Form 10-K, andto file the same, with exhibits thereto and other documents in connectiontherewith with the Securities and Exchange Commission, hereby ratifying andconfirming all that each of said attorneys-in-fact, or his or her substitute orsubstitutes may do or cause to be done by virtue hereof.

Pursuant to therequirements of the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant in the capacities and on the dateindicated:
| Signature                 | ** ** | **Title**                                       | ** ** | **Date**      |
|---------------------------|------------|-------------------------------------------------|------------|---------------|
|                      |       |                                            |       |          |
| /s/ Gary E. Henry         |       | President, Chief Executive Officer and Director |       | April 2, 2007 |
| Gary E. Henry             |       | (Principal Executive Officer)                   |       |          |
|                      |       |                                            |       |          |
| /s/ Duane C. Fromhart     |       | Senior Vice President, Chief Financial Officer  |       | April 2, 2007 |
| Duane C. Fromhart         |       | (Principal Financial and Accounting Officer)    |       |          |
|                      |       |                                            |       |          |
| /s/ William D. Rutherford |       | Chairman of the Board of Directors              |       | April 2, 2007 |
| William D. Rutherford     |       |                                            |       |          |
|                      |       |                                            |       |          |
| /s/ Elchanan (Nani) Maoz  |       | Director                                        |       | April 2, 2007 |
| Elchanan (Nani) Maoz      |       |                                            |       |          |
|                      |       |                                            |       |          |
| /s/ Mary H. Oldshue       |       | Director                                        |       | April 2, 2007 |
| Mary H. Oldshue           |       |                                            |       |          |
|                      |       |                                            |       |          |
| /s/ Murray L. Swanson     |       | Director                                        |       | April 2, 2007 |
| Murray L. Swanson         |       |                                            |       |          |
|                      |       |                                            |       |          |
| /s/ James M. Usdan        |       | Director                                        |       | April 2, 2007 |
| James M. Usdan            |       |                                            |       |          |

 

26

----

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

To theBoard of Directors and Shareholders ofMetro One Telecommunications, Inc.Portland, Oregon

We have audited the accompanying consolidated balancesheet of Metro One Telecommunications, Inc. and subsidiaries (the “Company”) asof December 31, 2006, and the related consolidated statements ofoperations, shareholders’ equity, and cash flows for the year then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  The Company was not required to have, norwere we engaged to perform, an audit of its control over financialreporting.  Our audit includedconsideration of control over financial reporting as a basis for designingaudit procedures that are appropriate in the circumstances, but not for thepurpose of expressing an opinion on the effectiveness of the Company’s internalcontrol over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

In our opinion, the consolidated financial statements referredto above present fairly, in all material respects, the financial position ofthe Company as of December 31, 2006, and the results of its operations andits cash flows for the year then ended, in conformity with accounting principlesgenerally accepted in the United States of America.

As discussed in note 1 to the consolidatedfinancial statements, during 2006, the Company adopted Statement of FinancialAccounting Standards No. 123 (R), *Share Based Payment*.

The accompanying financial statements have beenprepared assuming that the Company will continue as a going concern.  As described in Note 1 to the financialstatements, the Company’s recurring losses from operations and loss ofsignificant customers raise substantial doubt as to its ability to continue asa going concern. Management’s plans concerning these matters are also describedin Note 1.  The financial statements donot contain any adjustments that might result from the outcome of thisuncertainty.

BDO SEIDMAN, LLP

Seattle, Washington

April2, 2007

27

----

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

To theBoard of Directors and Shareholders ofMetro One Telecommunications, Inc.Portland, Oregon

We have audited the accompanying consolidated balancesheet of Metro One Telecommunications, Inc. and subsidiaries (the “Company”) asof December 31, 2005, and the related consolidated statements ofoperations, shareholders’ equity, and cash flows for each of the two years inthe period ended December 31, 2005. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. For the year ended December 31, 2005, the Company wasnot required to have, nor were we engaged to perform, an audit of its controlover financial reporting. Our audits included consideration of control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting as of December 31, 2005. Accordingly, we express no such opinion. Anaudit also includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of the Company as of December 31, 2005, and the results of its operationsand its cash flows for each of the two years in the period endedDecember 31, 2005, in conformity with accounting principles generallyaccepted in the United States of America.

The accompanying financial statements have beenprepared assuming that the Company will continue as a going concern. Asdescribed in Note 1 to the financial statements, the Company’s recurring lossesfrom operations and loss of significant customers raise substantial doubt as toits ability to continue as a going concern. Management’s plans concerning thesematters are also described in Note 1. The financial statements do not containany adjustments that might result from the outcome of this uncertainty.

DELOITTE & TOUCHE LLP

Portland, Oregon

April 17,2006 (April 2, 2007 as to the effects of the reverse stock split desrcibed in Note1.)

 

28

----

**Metro OneTelecommunications, Inc.**

**Consolidated Statements of Operations **(In thousands, except pershare amounts)
| ** **                            | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                                        |       |   |   |   |   |
| Revenues                              |       | $                                           | 30,339     |   | $ | 77,810 |   | $ | 140,369 |   |
|                                  |       |                                        |       |   |   |   |   |
| Costs and expenses:                   |       |                                        |       |   |   |   |   |
| Direct operating                      |       | 19,074                                      |       | 59,243 |   | 84,331 |   |
| Selling, general  and administrative  |       | 20,664                                      |       | 45,856 |   | 72,470 |   |
| Depreciation and  amortization        |       | 3,744                                       |       | 6,113 |   | 21,738 |   |
| Impairment loss                       |       | —                                      |       | — |   | 32,193 |   |
| Restructuring  charges                |       | 6,610                                       |       | 6,814 |   | — |   |
|                                  |       | 50,092                                      |       | 118,026 |   | 210,732 |   |
|                                  |       |                                        |       |   |   |   |   |
| Loss from operations                  |       | (19,753                                     | )          | (40,216 | ) | (70,363 | ) |
|                                  |       |                                        |       |   |   |   |   |
| Other income, net                     |       | 583                                         |       | 995 |   | 3,808 |   |
|                                  |       |                                        |       |   |   |   |   |
| Loss before income  taxes             |       | (19,170                                     | )          | (39,221 | ) | (66,555 | ) |
| Income tax expense  (benefit)         |       | 51                                          |       | 538 |   | (3,389 | ) |
| Net loss                              |       | $                                           | (19,221    | ) | $ | (39,759 | ) | $ | (63,166 | ) |
|                                  |
| Net loss per common  share:           |       |                                        |       |   |   |   |   |
| Basic and  diluted                    |       | $                                           | (3.08      | ) | $ | (6.36 | ) | $ | (10.16 | ) |
|                                  |       |                                        |       |   |   |   |   |
| Weighted average shares  outstanding: |       |                                        |       |   |   |   |   |
| Basic and  diluted                    |       | 6,232                                       |       | 6,251 |   | 6,217 |   |

 

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

29

----

**Metro One Telecommunications, Inc.**

**Consolidated Balance Sheets **(In thousands)
| ** **                                                                                                                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                                                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Assets**                                                                                                                                        |       |                  |       |   |   |
|                                                                                                                                              |       |                  |       |   |   |
| Current assets:                                                                                                                                   |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                         |       | $                     | 11,965     |   | $ | 17,769 |   |
| Restricted cash                                                                                                                                   |       | 4,741                 |       | 6,860 |   |
| Accounts receivable                                                                                                                               |       | 2,179                 |       | 11,982 |   |
| Prepaid costs and other current assets                                                                                                            |       | 961                   |       | 1,759 |   |
|                                                                                                                                              |       |                  |       |   |   |
| Total current assets                                                                                                                              |       | 19,846                |       | 38,370 |   |
|                                                                                                                                              |       |                  |       |   |   |
| Furniture,  fixtures and equipment, net                                                                                                           |       | 3,014                 |       | 7,963 |   |
| Intangible  assets                                                                                                                                |       | 4,666                 |       | 5,382 |   |
| Other assets                                                                                                                                      |       | 86                    |       | 302 |   |
|                                                                                                                                              |       |                  |       |   |   |
| Total assets                                                                                                                                      |       | $                     | 27,612     |   | $ | 52,017 |   |
|                                                                                                                                              |       |                  |       |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                    |       |                  |       |   |   |
| ** **                                                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current  liabilities:                                                                                                                             |       |                  |       |   |   |
| Accounts payable                                                                                                                                  |       | $                     | 983        |   | $ | 534 |   |
| Accrued liabilities                                                                                                                               |       | 1,685                 |       | 2,637 |   |
| Accrued payroll and related costs                                                                                                                 |       | 3,898                 |       | 8,553 |   |
|                                                                                                                                              |       |                  |       |   |   |
| Total current  liabilities                                                                                                                        |       | 6,566                 |       | 11,724 |   |
|                                                                                                                                              |       |                  |       |   |   |
| Long-term  liabilities                                                                                                                            |       | 470                   |       | 626 |   |
|                                                                                                                                              |       |                  |       |   |   |
| Total  liabilities                                                                                                                                |       | 7,036                 |       | 12,350 |   |
|                                                                                                                                              |       |                  |       |   |   |
| Commitments and  contingencies                                                                                                                    |       |                  |       |   |   |
|                                                                                                                                              |       |                  |       |   |   |
| Shareholders’  equity:                                                                                                                       |       |                  |       |   |   |
| Preferred stock,  no par value; 10,000 shares authorized, no shares issued or outstanding                                                         |       | —                |       | — |   |
| Common stock, no  par value; 50,000 shares authorized, 6,233 and 6,237 shares issued and  outstanding at December 31, 2006 and 2005, respectively |       | 120,067               |       | 119,937 |   |
| Deficit                                                                                                                                           |       | (99,491               | )          | (80,270 | ) |
|                                                                                                                                              |       |                  |       |   |   |
| Shareholders’  equity                                                                                                                        |       | 20,576                |       | 39,667 |   |
|                                                                                                                                              |       |                  |       |   |   |
| Total liabilities and  shareholders’ equity                                                                                                  |       | $                     | 27,612     |   | $ | 52,017 |   |

 

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

30

----

**Metro One Telecommunications, Inc.**

**Consolidated Statements of Shareholders’Equity **(In thousands)
| ** **                              | ** ** | **Shareholders’ Equity** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|
| ** **                              | ** ** | **Common Stock**              | ** ** | **Retained** | ** ** | **Shareholders’** | ** ** |
| ** **                              | ** ** | **Shares**                         | ** ** | **Amount** | ** ** | **(Deficit) Earnings** | ** ** | **Equity** | ** ** |
|                                    |       |                               |       |   |   |   |   |   |   |
| Balances at  January 1, 2004            |       | 6,194                              |       | $ | 119,683 |   | $ | 22,655 |   | $ | 142,338 |   |
|                                    |       |                               |       |   |   |   |   |   |   |
| Employee stock  purchase plan           |       | 46                                 |       | 258 |   | — |   | 258 |   |
| Employee  restricted stock grant        |       | 6                                  |       | 7 |   | — |   | 7 |   |
| Net loss                                |       | —                             |       | — |   | (63,166 | ) | (63,166 | ) |
|                                    |       |                               |       |   |   |   |   |   |   |
| Balances at  December 31, 2004          |       | 6,246                              |       | 119,948 |   | (40,511 | ) | 79,437 |   |
|                                    |       |                               |       |   |   |   |   |   |   |
| Employee stock  purchase plan           |       | 29                                 |       | 103 |   | — |   | 103 |   |
| Share  repurchases                      |       | (38                                | )          | (121 | ) | — |   | (121 | ) |
| Employee  restricted stock grant        |       | —                             |       | 7 |   | — |   | 7 |   |
| Net loss                                |       | —                             |       | — |   | (39,759 | ) | (39,759 | ) |
|                                    |       |                               |       |   |   |   |   |   |   |
| Balances at  December 31, 2005          |       | 6,237                              |       | 119,937 |   | (80,270 | ) | 39,667 |   |
|                                    |       |                               |       |   |   |   |   |   |   |
| Stock  compensation expense             |       | —                             |       | 130 |   | — |   | 130 |   |
| Cancellation of  restricted stock grant |       | (4                                 | )          | — |   | — |   | — |   |
| Net loss                                |       | —                             |       | — |   | (19,221 | ) | (19,221 | ) |
|                                    |       |                               |       |   |   |   |   |   |   |
| Balances at December  31, 2006          |       | 6,233                              |       | $ | 120,067 |   | $ | (99,491 | ) | $ | 20,576 |   |

 

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

31

----

**Metro One Telecommunications, Inc.**

**Consolidated Statements of Cash Flows **(In thousands)
| ** **                                                                                 | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                       |       |                                        |       |   |   |   |   |
| Cash flows from  operating activities:                                                     |       |                                        |       |   |   |   |   |
| Net loss                                                                                   |       | $                                           | (19,221    | ) | $ | (39,759 | ) | $ | (63,166 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                              |       | 3,744                                       |       | 6,113 |   | 21,738 |   |
| Loss on disposal of fixed assets                                                           |       | 1,101                                       |       | 370 |   | 230 |   |
| Impairment loss and non-cash restructuring charges                                         |       | 129                                         |       | 1,797 |   | 32,193 |   |
| Deferred rent                                                                              |       | (156                                        | )          | (532 | ) | 489 |   |
| Stock compensation expense                                                                 |       | 130                                         |       | 7 |   | 7 |   |
| Changes in certain assets and liabilities:                                                 |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                        |       | 9,803                                       |       | 5,542 |   | 14,554 |   |
| Prepaid costs and other assets                                                             |       | 1,014                                       |       | 1,632 |   | 6,656 |   |
| Accounts payable and other liabilities                                                     |       | (5,158                                      | )          | (3,511 | ) | (3,788 | ) |
|                                                                                       |       |                                        |       |   |   |   |   |
| Net cash (used in) provided by operating activities                                        |       | (8,614                                      | )          | (28,341 | ) | 8,913 |   |
| Cash flows from  investing activities:                                                     |       |                                        |       |   |   |   |   |
| Purchase of short-term securities                                                          |       | —                                      |       | (36,805 | ) | (32,050 | ) |
| Sales of short-term securities                                                             |       | —                                      |       | 62,180 |   | 6,675 |   |
| Decrease (increase) in cash restricted to secure  letter of credit                         |       | 2,119                                       |       | (1,960 | ) | — |   |
| Capital expenditures                                                                       |       | (120                                        | )          | (1,718 | ) | (4,084 | ) |
| Proceeds from sale of fixed assets                                                         |       | 811                                         |       | 338 |   | — |   |
|                                                                                       |       |                                        |       |   |   |   |   |
| Net cash provided by (used in) investing activities                                        |       | 2,810                                       |       | 22,035 |   | (29,459 | ) |
| Cash flows from  financing activities:                                                     |       |                                        |       |   |   |   |   |
| Share repurchases                                                                          |       | —                                      |       | (121 | ) | — |   |
| Proceeds from exercise of stock options and employee  stock purchases                      |       | —                                      |       | 103 |   | 258 |   |
|                                                                                       |       |                                        |       |   |   |   |   |
| Net cash (used in) provided by financing activities                                        |       | —                                      |       | (18 | ) | 258 |   |
|                                                                                       |       |                                        |       |   |   |   |   |
| Net decrease in  cash and cash equivalents                                                 |       | (5,804                                      | )          | (6,324 | ) | (20,288 | ) |
|                                                                                       |       |                                        |       |   |   |   |   |
| Cash and cash  equivalents, beginning of year                                              |       | 17,769                                      |       | 24,093 |   | 44,381 |   |
|                                                                                       |       |                                        |       |   |   |   |   |
| Cash and cash  equivalents, end of year                                                    |       | $                                           | 11,965     |   | $ | 17,769 |   | $ | 24,093 |   |
|                                                                                       |       |                                        |       |   |   |   |   |
| Supplemental  disclosure of cash flow information:                                         |       |                                        |       |   |   |   |   |
| Cash (paid)  refunded for income taxes, net                                                |       | $                                           | (112       | ) | $ | 2,972 |   | $ | 10,002 |   |

 

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

 

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**Metro One Telecommunications,Inc.**

**Notes toConsolidated Financial Statements**

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

***Natureof Operations.***We are a provider of EnhancedDirectory Assistance® and other information services delivered through liveoperators and by electronic means.  Wecontract primarily with wireless carriers, Voice over Internet Protocol (“VoIP”)providers, cable companies, Competitive Local Exchange Carriers (“CLEC”), freedirectory assistance providers, prepaid carriers, and payphone operators toprovide our services to their subscribers and users.  Our proprietary Enhanced Directory Assistanceplatform provides comprehensive directory assistance listings and otherinformational content and services. Other non-directory assistance services and content include access topersonal contacts and calendars, reservation services, movie listings and avariety of other unique services.  Ourspecial return-to-operator features, StarBack® and AutoBack®, make thetelephone easier to use and are offered exclusively by Metro One. All of ourservices are currently provided by operators located only in the UnitedStates.  Many of our features or aspectsthereof are the subject of patents or pending patent applications.  Revenues are derived principally through feescharged to telecommunications carriers and other customers.

In addition to voice-based services, we also provideEnhanced Directory Assistance services in electronic format.  These services are provided to customers whoelectronically issue directory assistance queries and use the returnedinformation to complete and correct their own data records.  We currently provide electronic directoryassistance services in a number of delivery formats to meet customer needsincluding automated file processing and real-time individual look ups.  We contract with a broad range of companiesthat require electronic directory assistance including companies in theservice, marketing, and financial sectors.

***Major Customers.***Ineach of the years ended December 31, 2006, 2005 and 2004, a small number ofcustomers accounted for substantially all revenue and accounts receivablereported.  In 2006, three customersaccounted for approximately 37%, 25%, and 14% of our revenues.  One of those customers, as discussed below,was Nextel Communications, Inc. which terminated its contract with us during2006.  Nextel accounted for approximately37% of revenues in 2006.  In 2005, Nextelaccounted for approximately 76% of our revenues.  In 2004, Nextel and AT&T Wirelessaccounted for approximately 56% and 28% of revenues, respectively.  Three customers accounted for approximately71% of total receivables at December 31, 2006. In 2006 and historically, we have not incurred significant lossesrelated to our accounts receivable.

***Significant Events***

**Termination of contracts and going concern.**

In February 2005, we entered into a Master ServicesAgreement for Directory Assistance Services (the “Services Agreement”) withNextel Operations, Inc., acting on behalf of certain affiliates (collectively “Nextel”)of Nextel Communications, Inc.  TheServices Agreement superseded our previous services agreement dated in June1999.  Under the Services Agreement, weagreed to provide directory assistance services to Nextel’s customers on anon-exclusive basis, and Nextel could transition call volume away from us onshort notice and/or terminate services entirely.

In October 2005, we received notification from Nextelthat it would be terminating the Services Agreement effective January 9,2006.  In February 2006, we entered intoa Settlement Agreement and Disentanglement Transition Plan (the “Plan”) withNextel that resolved certain disputed matters in connection with thetermination of the Services Agreement. Under the Plan, we continued to provide services to Nextel callersthrough March 31, 2006 in return for the payment by Nextel of approximately$5.75 million.  Those payments were inaddition to $2.5 million previously paid by Nextel in December 2005 inconnection with the transition and in addition to the contractual payments byNextel for normal service provided by us to Nextel callers through thetransition period.  Calls from Nextelwere substantially transitioned away from us by March 31, 2006, and we havereceived all amounts due from Nextel. Including the $5.75 million received in the first quarter of 2006 aspart of the settlement payments, Nextel represented approximately 37% of ourrevenues in 2006.  Nextel accounted forapproximately 76% and 56% of our revenues in 2005 and 2004, respectively.

Our contract with AT&T Wireless expired inDecember 2003.  The call volume fromAT&T Wireless transitioned away during the second and third quarters of2004. AT&T Wireless accounted for approximately 28% of our revenues in2004.

As a result of termination of the contracts notedabove the Company has experienced significant financial losses and reduction ofcash flows over the last several years. It is likely that additional losses will be incurred during parts or allof 2007.  Such customer losses have had,and will continue to have, a significant adverse impact on our results ofoperations and cash flows and these events and issues raise doubt as to whetherwe can continue to operate as a going concern. We have experienced net losses in each of the quarterly and annualperiods since the first quarter of 2003. Our management is aggressively pursuing new and additional sources ofrevenues and is working to grow our voice and data services businesses. Overthe past two years we have significantly reduced the direct cost of deliveringour services as well as significantly 

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reduced our general and administrative overhead.  In addition, our management and board ofdirectors are investigating and pursuing strategic alternatives for the Companyto improve operations, improve liquidity and capital resources, and providestability to the Company’s financial position. There can be no assurance that our plans will be successful.  Our existing cash and cash equivalents willlikely not be sufficient to fund our operations for the remainder of 2007 orbeyond.  In order to continue as a goingconcern, we will need to significantly increase our revenues and/or furtherreduce our costs and/or obtain additional financing.  There can be no assurance that our efforts inthese areas will be successful.  In suchevent, we may attempt to establish borrowing arrangements in order to maintainadequate liquidity, although we cannot provide assurance that financing will beavailable in amounts or on terms acceptable to us.  If we are unable to execute our operationsaccording to our plans or obtain additional financing, we may be forced tocease operations.

**Significant new contract.**

In August 2006, weentered into a Telecom InformationServices Agreement (the “Agreement”) with Jingle Networks, Inc. (“Jingle”).  Under the Agreement, we will be a preferreddirectory assistance provider for “1-800-FREE411”.  In addition to per call charges, theAgreement includes financial commitments from Jingle based on call volumeexpansion and other financial incentives. The Agreement is for three years and will automatically renew annuallyfor up to two additional years unless either party provides notice oftermination at least 60 days prior to the commencement of such renewalperiod.  Under the Agreement, as apreferred directory provider we will be allocated no fewer calls than any othervendor providing similar services.  TheAgreement provides that our status as a preferred provider may be terminated byJingle but, in such event, the warrants described below will be terminated.

In connection withthe Agreement, we issued to Jingle two warrants to purchase shares of ourcommon stock.  The first warrant was forthe purchase of up to 623,250 shares of common stock at an exercise price of$2.60 per share.  The warrant wasexercisable under the condition that Jingle meet certain revenue and paymentthresholds through February 28, 2007. The revenue targets were not met, thus, the first warrant terminated onFebruary 28, 2007.

The second warrant is for the purchase of up to870,075 shares of our common stock; provided, however, that shares representedby the sum of the first and second warrants, if exercised, cannot exceed 19.98%of our total shares outstanding after the warrants are exercised.  The exercise price for the second warrantwill equal 115% of the average closing price per share of the our common stockover the 20 consecutive trading days ending the last trading day prior to July1, 2007.  The second warrant will not beexercisable unless and until certain revenue and payment thresholds areachieved by Jingle during specified time periods as outlined in theAgreement.  The second warrant terminateson July 1, 2009.

**Other.**

In a 2004 decision, the California Public UtilitiesCommission (“PUC”) implemented competitive wholesale pricing for directoryassistance data for third party vendors purchasing the data from SBCCommunications (“SBC”).  The decisiondetermined that SBC continues to enjoy a dominant position as the formermonopoly provider of local exchange service in its territory in California andcould not use its market power to extract excessive directory assistance dataprices that would discriminate against competitors.  The decision required that SBC refund theimproper charges with interest.  As a result, in the third quarter of2004, we received a refund from SBC in the amount of approximately $2.9 millionthat is included in “Other income, net” in our December 31, 2004 statement ofoperations.

***Use of Estimates.***Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires us to makeestimates and assumptions that affect reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the fiscal year.  Actual resultscould differ from those estimates.

***Cash, Cash Equivalents, and Restricted Cash***. Cashand cash equivalents include cash deposits in banks and highly liquidinvestments with maturity dates of three months or less at the date ofacquisition.  Restricted cash consists ofcash restricted to secure a letter of credit related to our workers’ compensationprogram and is invested in a bank certificate of deposit.

***Furniture, Fixtures and Equipment.***Furniture,fixtures and equipment are stated at cost and are depreciated over theirestimated useful lives of three to seven years using the straight-line method.  Depreciation expense was $3.2 million,$5.4 million, and $21.1 in the years ended December 31, 2006, 2005, and2004, respectively.  Leaseholdimprovements are amortized over the lesser of the remaining lease term or theuseful life. Expenditures for repairs and maintenance are expensed as incurred.

***Intangible Assets.***Intangibleassets include patents, patents pending and trademarks.  These assets are carried at cost lessaccumulated amortization and are amortized on a straight-line basis over theirestimated useful lives of three to ten years beginning at the time the relatedpatent or trademark is granted.  Therelated amortization expense was $587,000, $681,000, and $592,000 for the yearsended December 31, 2006, 2005 and 2004, respectively.  During 2005 we wrote off $1,629,000 and$148,000 of intangibles and related accumulated amortization, respectively,primarily related to our discontinued Infone service.

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Theestimated aggregate amortization expense related to intangible assets for thefive years subsequent to 2006 is shown below. We have not included any amounts related to amortization of costs ofpatents or trademarks currently pending but not yet granted, totaling $3.2million at December 31, 2006.

| Year Ending      | ** ** | **Estimated**                 | ** ** |
|-----------------------|------------|-------------------------------|------------|
| **December 31,** | ** ** | **amortization expense** | ** ** |
| ** **            | ** ** | **(In thousands)**       | ** ** |
| 2007                  |       | $                             | 589        |   |
| 2008                  |       | 407                           |       |
| 2009                  |       | 213                           |       |
| 2010                  |       | 158                           |       |
| 2011                  |       | 125                           |       |
|                       |            |                               |            |  |

 

***Impairment of Long-lived andIntangible Assets.***In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” we evaluate the carrying value of furniture,fixtures, equipment and intangible assets with finite lives for possibleimpairment whenever events or changes in circumstances indicate that thecarrying amounts of such assets may not be recoverable.  If an asset or group of assets is determinedto be impaired, the impairment loss is measured as the amount by which thecarrying value of the asset or group of assets exceeds its fair value.  We prepare an estimate of future discountedcash flows expected to result from the use of the asset and its eventualdisposition to determine its fair value. Because of our changing business conditions, including lower wholesaleprices and dependence on a relatively small number of customers for asignificant portion of our revenues, in the fourth quarter of 2004, we testedthe recoverability of the carrying value of our fixed assets and determinedthat the value was impaired.  As aresult, we recorded a $32.2 million write-down of those assets to theirestimated fair value based on estimated prices for similar assets.  As a result of the decision by Nextel toterminate its contract with us, as discussed under Significant Events above,and because of continuing operating losses, we evaluated our fixed assets and intangiblesas of December 31, 2006 and 2005 for impairment in accordance with SFAS No.144.  Our evaluation determined that theassets were not impaired as of December 31, 2006 and 2005.

***Deferred Income Taxes.***Deferredincome taxes are provided for temporary differences between the amounts ofassets and liabilities for financial and tax reporting purposes.  Deferred tax assets are reduced by avaluation allowance when it is estimated to be more likely than not that someor all of the deferred tax assets will not be realized.

***Fair Value of FinancialInstruments.***The carrying value of cash and cashequivalents, short-term investments, restricted cash, accounts receivable,accounts payable, accrued liabilities and accrued payroll and related costsapproximates fair value due to their short-term maturities.

***Revenue Recognition.***Underexisting contracts with telecommunications carriers, we record revenue for thenumber of calls processed at the agreed upon price per call, calculated on amonthly basis.  Revenue per call may varybased on monthly volumes achieved. Revenue is recognized as services are provided.  Revenue in 2006 also includes $5.75 millionreceived from Nextel as part of the settlement arrangement discussed aboveunder “Significant Events.”

***Advertising.***Costs of advertising are expensed as incurred.  Advertising expense was not significant in2006.  Advertising expense wasapproximately $2.8 million and $17.5 million in 2005 and 2004,respectively.  Prior to 2006, advertisingexpense was primarily related to marketing and promotion of our Infone service,which was discontinued in the fourth quarter of 2005.  Advertising expenses are included in selling,general and administrative expenses in the consolidated statements ofoperations.

***Net Loss Per Share.***Wereport basic and diluted net loss per share in accordance with SFAS No. 128, “Earningsper Share.”  Basic net loss per share iscalculated based on the weighted average number of common shares outstandingduring each period.  Diluted net loss pershare is calculated based on these same shares plus potential shares issuableupon assumed exercise of outstanding stock options, based on the treasury stockmethod, unless inclusion of such potential shares would be anti-dilutive.

***Reverse stock split.*** On July 6, 2006, we effecteda one-for-four reverse split of our common stock.  All share and per share data presented in theaccompanying financial statements and notes thereto have been restated for thereverse stock split.

***Stock-Based Compensation.***EffectiveJanuary 1, 2006, we adopted the fair value recognition provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-BasedPayment,” under which compensation expense is recognized in the statement ofoperations for the fair value of employee stock-based compensation.  We elected the modified-prospectivetransition method as permitted by SFAS No. 123R and accordingly, priorperiods have not been restated to reflect the effect of SFASNo. 123R.  The modified-prospectivetransition method requires that stock-based compensation expense recognized inthe statement of operations include (1) quarterly amortization of allstock-based compensation granted prior to, but not vested as of January 1,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of 

35

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SFAS No. 123 and (2) quarterly amortizationof all stock-based payments granted subsequent to January 1, 2006, basedon the grant date fair value estimated in accordance with the provisions of SFASNo. 123R.  In addition, pursuant toSFAS No. 123R, we estimate forfeitures when calculating stock-basedcompensation expense, rather than accounting for forfeitures as incurred, whichwas our previous method.  Compensationexpense is recognized over the requisite service (vesting) period using thestraight-line attribution method.

As aresult of adopting SFAS 123R, net loss for 2006 was $130,000 greater than if wehad continued to account for stock-based compensation under APB OpinionNo. 25 as we did in 2005.  Theeffect of recording stock-based compensation on basic and diluted earnings pershare for 2006 was a per share increase in our net loss of $0.02.  Costs related to stock-based compensation arerecorded in selling, general, and administrative expenses in the statement ofoperations.

Priorto the January 1, 2006 adoption of SFAS No. 123R we accounted forstock-based compensation using the intrinsic value method prescribed inAccounting Principles Board (APB) Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations.  Accordingly, under APB Opinion No. 25,no compensation expense was recognized because the exercise price of ouremployee stock options was equal to the market price of the underlying stock onthe date of grant.  We applied thedisclosure provisions of SFAS No. 123, “Accounting for Stock BasedCompensation,” as amended by SFAS No. 148, “Accounting for Stock BasedCompensation — Transition and Disclosure,” as if the fair value method had beenapplied in measuring compensation expense.

The followingtable illustrates the effect on net income and earnings per share for the yearsended December 31, 2005 and 2004 if we had applied the fair valuerecognition provisions of SFAS No. 123 to our stock-based compensation:

|                                                    | ** ** | **2005**                                                          | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------------------------|------------|----------|------------|
| ** **                                         | ** ** | **(in thousands, except  per share amounts)** | ** ** |
|                                               |       |                                                              |       |     |       |
| Net loss, as  reported                             |       | $                                                                 | (39,759    | )        | $          | (63,166 | ) |
| Stock-based  compensation expense                  |       | (2,134                                                            | )          | (3,451   | )          |
| Net loss, pro  forma                               |       | $                                                                 | (41,893    | )        | $          | (66,617 | ) |
|                                               |       |                                                              |       |     |       |
| Basic and  diluted net loss per share, as reported |       | $                                                                 | (6.36      | )        | $          | (10.16 | ) |
| Basic and  diluted net loss per share, pro forma   |       | $                                                                 | (6.72      | )        | $          | (10.72 | ) |

 

Optionsto purchase our common stock are granted at prices equal to or greater than thefair market value on the date of grant. Options granted to directors generally vest immediately while optionsgranted to employees generally vest and become exercisable quarterly over afour year period.  All options generallyexpire ten years from the date of the grant.

We estimate the fair value of stock options using theBlack-Scholes option pricing model.  Keyinput assumptions used to estimate the fair value of stock options include theexercise price of the award, the expected option term, the expected volatilityof our stock over the option’s expected term, and the risk-free interest rateover the option’s expected term and the Company’s expected annual dividendyield.  The expected option termrepresents the estimated time until exercise and is based on our historicalexperience with similar awards, taking into consideration contractual terms,vesting schedules and expected employee behavior.  The expected stock price volatility is basedon the historical volatility of our stock over the most recent period equal tothe expected term of the option, adjusted for activity that is not expected tooccur in the future.  The risk-freeinterest rate is based on the U.S. Treasury yield curve in effect at the timeof grant for periods corresponding with the expected term of the option.  We have not yet paid a dividend, and thus thedividend yield is 0.0%.  Prospectively,the assumptions will be evaluated and revised as necessary to reflect changesin market conditions and our experience.

Estimatesof fair value are not intended to predict actual future events or the valueultimately realized by people who receive equity awards.

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

|                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |     |       |
| Dividend yield                                  |       | 0.0      | %          | 0.0      | %          | 0.0      | %          |
| Risk free  interest rate                        |       | 4.8      | %          | 4.3      | %          | 3.0      | %          |
| Expected  volatility                            |       | 96.9     | %          | 60.3     | %          | 75.2     | %          |
|                                            |       |     |       |     |       |     |       |
| Expected life in  years                         |       | 4.0      |       | 4.0      |       | 4.0      |       |
| Weighted-average fair  value of options granted |       | $        | 2.33       |     | $          | 2.36     |       | $ | 4.84 |   |
|                                                 |            |          |            |          |            |          |            |  |  |  |

 

In March 2005, our Board of Directors acceleratedvesting on all of the then outstanding stock options, of which all had fairmarket values that were less than the exercise prices at that time.  In determining to accelerate the vesting ofthese options, the Board considered the effect on our reported stock optionexpense in future periods, the comparability of our statements of operations inprior and subsequent periods, and the potential benefit to the Company and ourshareholders in retaining the services of affected officers and employees.  The pro forma expense included in thestock-based compensation expense noted above associated with the acceleratedvesting was approximately $1,592,000.

***Commitments and Contingencies.***Weare party to various legal actions and administrative proceedings arising inthe ordinary course of business.  Webelieve the disposition of these matters will not have a material adverseeffect on our financial position, results of operations or cash flows.

From time to time, in the normal course of our business, we issuestandby letters of credit and bank guarantees. At December 31, 2006, we had one letter of credit outstanding in theamount of $4,741,000 related to our workers’ compensation program.  The letter of credit is secured by acertificate of deposit for the same amount that is recorded as restrictedcash.  This commitment expires on April1, 2007 and is typically renewed on an annual basis.

***RecentAccounting Pronouncements.*** In July 2006, the FinancialAccounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”),“Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109.”  FIN 48prescribes a recognition threshold and measurement attribute for financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition.  FIN 48 is effective for our fiscal yearbeginning January 1, 2007.  We areevaluating the impact that the adoption of FIN 48 will have on our consolidatedfinancial position and results of operations.

In September 2006, theFASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “FairValue Measurements,” which establishes a framework for measuring the fair valueof assets and liabilities.  Thisframework is intended to increase consistency in how fair value determinationsare made under various existing accounting standards that permit, or in somecases require, estimates of fair market value. SFAS No. 157 also expands financial statement disclosurerequirements about a company’s use of fair value measurements, including theeffect of such measures on earnings. SFAS No. 157 is effective for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.  We do not expect the adoption of thisstatement to have a material effect on our consolidated financial position orresults of operations.

**2.****             RestructuringCharges and Exit Activities**

In 2006, we undertook significant restructuringactivities, due primarily to the departure of call volume from Nextel asdiscussed above.  During 2006, we closed13 call centers and significantly reduced the number of call center andadministrative employees.  As a result ofthe closure and other restructuring activities, we paid or accruedapproximately $2.8 million of termination and retention benefits.  We also recorded approximately $1.7 millionof expenses related to termination of lease obligations of closed facilitiesduring 2006.  In addition, we recordedapproximately $2.2 million of other costs, primarily legal and advisoryservices and dismantling costs in 2006. Included in these costs were losses incurred on disposal, in the secondquarter, of certain corporate and call center assets in the amount of$935,000.  These assets had a net bookvalue totaling $1,574,000 at the time of disposal, and we received proceeds of$639,000 from the sale.  At December 31,2006, we had approximately $712,000 of accrued restructuring costs, primarilyrelated to remaining lease obligations of closed facilities and accrued terminationbenefits related to certain corporate employees.  Approximately $520,000 of terminationbenefits was paid subsequent to December 31, 2006 with the remainder ofthe accrued restructuring costs expected to be paid out primarily during thesecond quarter of 2007.

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Primarilyduring the second and third quarters of 2005, as part of our ongoing efforts tocut costs and align expenses with reduced revenues, we closed and consolidatedthe operations of 12 of our call centers. Most significant costs associated with closing those call centers wereaccrued and paid in 2005.

During 2005, we incurred approximately $6.8 million ofrestructuring costs.  That amountconsisted of approximately $1.9 million of severance and other employee-relatedtermination benefits, approximately $1.7 million of lease termination costs andapproximately $3.2 million of other costs of restructuring.  These other costs included approximately $1.5million of net non-cash intangible and other asset write-offs related to ourdiscontinued Infone service, approximately $800,000 paid for strategic advisoryservices, approximately $750,000 of costs associated with closing call centers,and approximately $270,000 of other costs. At December 31, 2005, we had approximately $498,000 of accruedrestructuring costs, primarily related to remaining lease obligations of closedfacilities.

Costs incurred inrestructuring activities during the years ended December 31, 2006 and 2005 areas follows:

|                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Major cost type                |       |     |       |     |       |
|                           |       |     |       |     |       |
| One-time  termination benefits |       | $        | 2,766      |     | $          | 1,908 |   |
| Lease  termination costs       |       | 1,670    |       | 1,706    |       |
| Other                          |       | 2,174    |       | 3,200    |       |
|                           |       | $        | 6,610      |     | $          | 6,814 |   |

 

The followingsummarizes the provisions, payments, adjustments and liability for costsassociated with our cost reduction efforts for the period shown (in thousands):

|                                | ** ** | **One-time  termination  benefits** | ** ** | **Lease  termination  costs** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------------------|------------|-------------------------------------|------------|-------------------------------|------------|-----------|------------|-----------|------------|
| Balance at  January 1, 2005    |       | $                                   | —     |                          | $          | —    |       | $         | —     |   | $ | — |   |
| Provisions                     |       | 1,908                               |       | 2,081                         |       | 3,200     |       | 7,189     |       |
| Payments                       |       | (1,908                              | )          | (1,351                        | )          | (1,778    | )          | (5,037    | )          |
| Adjustments and non-cash items |       | —                              |       | (375                          | )          | (1,279    | )          | (1,654    | )          |
| Balance at  December 31, 2005  |       | —                              |       | 355                           |       | 143       |       | 498       |       |
| Provisions                     |       | 2,766                               |       | 1,670                         |       | 2,174     |       | 6,610     |       |
| Payments                       |       | (2,246                              | )          | (1,814                        | )          | (1,136    | )          | (5,196    | )          |
| Adjustments and non-cash items |       | —                              |       | (19                           | )          | (1,181    | )          | (1,200    | )          |
| Balance at December 31,  2006  |       | $                                   | 520        |                          | $          | 192       |       | $         | —     |   | $ | 712 |   |

 

We may undertakeadditional restructuring and/or consolidation efforts in the future that wouldcause us to incur additional restructuring charges.

**3.****             Furniture,Fixtures and Equipment**

Furniture, fixtures and equipment by majorclassification are summarized as follows:

|                                               | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **(In thousands)** | ** ** |
|                                          |       |                    |       |   |   |
| Equipment                                     |       | $                       | 8,764      |   | $ | 11,596 |   |
| Furniture and  fixtures                       |       | 778                     |       | 1,780 |   |
| Leasehold  improvements and other             |       | 19                      |       | 19 |   |
|                                          |       |                    |       |   |   |
|                                          |       | 9,561                   |       | 13,395 |   |
| Accumulated  depreciation                     |       | (6,547                  | )          | (5,432 | ) |
|                                          |       |                    |       |   |   |
| Total furniture,  fixtures and equipment, net |       | $                       | 3,014      |   | $ | 7,963 |   |

 

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**4.****             Intangibleassets**

Below is a summary of other intangible assets atDecember 31:

|                        | ** ** | **2006**                | ** ** | **2005**         | ** ** |
|------------------------|------------|-------------------------|------------|------------------|------------|
| ** **             | ** ** | **Gross carrying** | ** ** | **Accumulated**  | ** ** | **Gross carrying** | ** ** | **Accumulated** | ** ** |
| ** **             | ** ** | **amount**              | ** ** | **amortization** | ** ** | **amount** | ** ** | **amortization** | ** ** |
| ** **             | ** ** | **(in thousands)** | ** ** |
| Amortized  intangibles |       |                    |       |             |       |   |   |   |   |
| Patents                |       | $                       | 6,851      |             | $          | 2,391 |   | $ | 6,851 |   | $ | 1,871 |   |
| Trademarks             |       | 720                     |       | 514              |       | 850 |   | 448 |   |
|                   |       |                    |       |             |       |   |   |   |   |
| Totals                 |       | $                       | 7,571      |             | $          | 2,905 |   | $ | 7,701 |   | $ | 2,319 |   |

 

During 2006, we wrote off $130,000 and $1,000 ofintangibles and related accumulated amortization, respectively.  These write-offs related to abandonedtrademark efforts.  During 2005 we wroteoff $1,629,000 and $148,000 of intangibles and related accumulatedamortization, respectively, primarily related to our discontinued Infoneservice.  These write-offs have beenclassified as restructuring charges in our consolidated financial statements.

**5.**             **Lease Obligations**

We lease operating facilities and equipment underoperating leases with remaining terms of one to six years.  Rental expenses related to operating leaseswere approximately $2,458,000, $7,858,000, and $9,888,000 in 2006, 2005, and 2004,respectively.

Minimum annual rent payments for the five yearssubsequent to 2006 and in the aggregate thereafter are as follows:

| Year Ending              | ** ** | ** **                          | ** ** |
|-------------------------------|------------|-------------------------------------|------------|
| **December 31,**         | ** ** | **Annual lease payments** | ** ** |
| ** **                    | ** ** | **(In thousands)**             | ** ** |
| 2007                          |       | $                                   | 2,011      |   |
| 2008                          |       | 1,642                               |       |
| 2009                          |       | 875                                 |       |
| 2010                          |       | —                              |       |
| 2011                          |       | —                              |       |
| Thereafter                    |       | —                              |       |
| Total minimum lease  payments |       | $                                   | 4,528      |   |

 

**6.****             Shareholders’Equity**

***Preferred Stock.***Wehave authorized 10,000,000 shares of preferred stock for issuance.  Our board of directors has the authority toissue one or more series of preferred shares and the authority to fix anddetermine the rights and preferences of such shares.  No preferred shares were issued oroutstanding as of December 31, 2006 and 2005.

***Common Stock Options.***In2006, our shareholders approved the 2006 Stock Incentive Plan (the “Plan”),which provides for the award of incentive stock options to key employees andthe award of non-qualified stock options, stock sales and grants to employees,outside directors, independent contractors and consultants.  As of December 31, 2006, approximately401,000 shares of common stock remained reserved for issuance under thePlan.  It is intended that the Plan willbe used principally to attract and retain key employees.

The option price per share of an incentive stockoption may not be less than the fair market value of a share of common stock asof the date of the option grant.  Theoption price per share of a non-qualified stock option may be at a priceestablished by the board of directors or a committee thereof charged withadministering the plan, which price generally equals the fair market value of ashare of common stock as of the option grant. Options become exercisable at the times and subject to the conditionsprescribed by the board of directors. Generally, options vest over a period of four years and the term may notexceed ten years.  Payment for sharespurchased pursuant to options may be made, at the option of the board ofdirectors, in cash or by delivery of shares of common stock having a marketvalue equal to the exercise price of the options.

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A summary of the status of our option plan as of December 31, andchanges during the years ending on those dates follows:
| ** **                        | ** ** | **2006**                                                              | ** ** | **2005**             | ** ** | **2004**   | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------|------------|------------|------------|
| ** **                        | ** ** | ** **                                                            | ** ** | **Weighted-**        | ** ** | ** ** | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                        | ** ** | ** **                                                            | ** ** | **Average**          | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                        | ** ** | **Shares**                                                            | ** ** | **Exer. Price** | ** ** | **Shares** | ** ** | **Exer. Price** | ** ** | **Shares** | ** ** | **Exer. Price** | ** ** |
| ** **                        | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Outstanding at  beginning of year |       | 718                                                                   |       | $                    | 35.92      |       | 757        |   | $ | 42.88 |   | 723 |   | $ | 48.72 |   |
| Granted                           |       | 35                                                                    |       | 2.33                 |       | 205        |       | 4.84 |   | 104 |   | 9.88 |   |
| Exercised                         |       | —                                                                |       | —               |       | —     |       | — |   | — |   | — |   |
| Forfeited                         |       | (209                                                                  | )          | 39.93                |       | (244       | )          | 31.32 |   | (70 | ) | 54.00 |   |
|                              |       |                                                                  |       |                 |       |       |       |   |   |   |   |   |   |
| Outstanding at  end of year       |       | 544                                                                   |       | $                    | 32.21      |       | 718        |   | $ | 35.92 |   | 757 |   | $ | 42.88 |   |
|                              |       |                                                                  |       |                 |       |       |       |   |   |   |   |   |   |
| Options exercisable at  year-end  |       | 507                                                                   |       | 34.17                |       | 612        |       | 41.40 |   | 634 |   | 45.60 |   |

 

The following tablesummarizes information about stock options outstanding and exercisable underthe Plan at December 31, 2006:

|                          | ** ** | **Outstanding**                                                       | ** ** | **Exercisable**     | ** ** |
|--------------------------|------------|-----------------------------------------------------------------------|------------|---------------------|------------|
| ** **               | ** ** | ** **                                                            | ** ** | **Weighted-**       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                                                            | ** ** | **Average**         | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **               | ** ** | **Number**                                                            | ** ** | **Remaining**       | ** ** | **Average** | ** ** | **Number** | ** ** | **Average** | ** ** |
| **Range of**        | ** ** | **of**                                                                | ** ** | **Contractual**     | ** ** | **Exercise** | ** ** | **of** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Options**                                                           | ** ** | **Life (yrs)** | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** |
| ** **               | ** ** | **(In thousands, except per share amounts)** | ** ** |
| $1.72 — 5.72        |       | 174                                                                   |       | 8.64                |       | $ | 4.03 |   | 136 |   | $ | 3.56 |   |
| 5.92 — 20.04        |       | 115                                                                   |       | 6.81                |       | 14.49 |   | 115 |   | 14.49 |   |
| 22.68 — 33.68       |       | 117                                                                   |       | 2.04                |       | 27.80 |   | 118 |   | 27.80 |   |
| 41.84 — 92.00       |       | 99                                                                    |       | 3.92                |       | 77.32 |   | 99 |   | 77.32 |   |
| 102.00 — 152.00     |       | 39                                                                    |       | 5.01                |       | 108.92 |   | 39 |   | 108.92 |   |
| $1.72 — 152.00      |       | 544                                                                   |       | 5.71                |       | $ | 32.21 |   | 507 |   | $ | 34.17 |   |

 

The aggregate intrinsic value of outstanding optionsin each of the ranges noted in the above table is zero.  

The total compensation cost not yet recognized relatedto unvested option awards and the weighted average period over which such costis expected to be recognized is $86,000 and 2.25 years, respectively.

We have a compensatory Employee Stock Purchase Plan(the “ESPP”), the purpose of which is to attract and retain qualified employeesessential to our success, and to provide such persons with an incentive toperform in our best interests.  The ESPPallows qualified employees to purchase shares of our common stock on asemi-annual basis, limited to 10% of pre-tax compensation.  The purchase price is set at 85% of the lowerof the stock price at the beginning or ending of each purchase period.  In 2003, our shareholders approved anamendment to the ESPP which increased the number of shares of common stockinitially authorized for purchase under the ESPP by 62,500 shares, from 56,250to 118,750 shares of common stock.  Inaddition, the amendment provided that the number of authorized sharesautomatically increases on January 1 of each year until and including January1, 2013 by 1% of the number of shares of common stock outstanding on that date;provided, however, that the total number of shares of common stock availablefor issuance under the ESPP shall not exceed 3% of the number of shares ofcommon stock outstanding on that date. As of December 31, 2006, 157,000 shares of common stock were reservedfor issuance under the ESPP.  In thefourth quarter of 2005, our Board of Directors suspended further purchasesunder the ESPP indefinitely; consequently, no shares were issued under the ESPPduring 2006.  During 2005, under theESPP, employees purchased approximately 29,000 shares at an average price of$3.60 per share.

In July 2005, our Board of Directors approved a sharerepurchase program for the repurchase of up to 62,500 shares of our commonstock per month.  During the thirdquarter of 2005, we repurchased a total of 37,750 shares at an average purchaseprice of $3.20 per share.  The repurchaseprogram was terminated in the fourth quarter of 2005.

**7.****             OtherIncome and Expense**

Included in other income and expense are certain itemsthat do not relate directly to current ongoing business activity.  Included in this classification for the yearsended December 31, 2006, 2005 and 2004, is interest income of $767,000,$980,000, and $694,000, respectively. Other income in 2006 was offset by a charge of approximately $218,000 forpenalties and interest related to certain federal and state income taxassessments currently in dispute.  Otherincome in 2004 included the $2.9 million refund of data costs from SBCCommunications as discussed in “Significant Events” in Note 1. above.  In addition, this classification includedother miscellaneous non-operating income and expenses in 2006, 2005, and 2004,none of which were individually significant.

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**8.****             IncomeTaxes**

The components of income tax expense (benefit) for theyears ended December 31 are as follows:

|                              | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                   | ** ** | **(In thousands)** | ** ** |
|                         |       |                    |       |     |       |     |       |
| Current:                     |       |                    |       |     |       |     |       |
| Federal                      |       | $                       | —     |     | $          | 346      |       | $ | (3,508 | ) |
| State                        |       | 51                      |       | 192      |       | 119      |       |
|                         |       | 51                      |       | 538      |       | (3,389   | )          |
| Deferred:                    |       |                    |       |     |       |     |       |
| Federal                      |       | —                  |       | —   |       | —   |       |
| State                        |       | —                  |       | —   |       | —   |       |
|                         |       | —                  |       | —   |       | —   |       |
|                         |       |                    |       |     |       |     |       |
| Total tax expense  (benefit) |       | $                       | 51         |     | $          | 538      |       | $ | (3,389 | ) |

 

Income tax expense (benefit) differs from the amountthat would result from applying the U.S. statutory rate to income beforetaxes.  A reconciliation of thisdifference is as follows:

|                                             | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                        |       |                  |       |   |   |   |   |
| Federal  statutory rate                     |       | 35.0                  | %          | 35.0 | % | 35.0 | % |
| State income  taxes, net of federal benefit |       | 6.2                   |       | 5.9 |   | 4.5 |   |
| Federal and  state tax credits              |       | 0.4                   |       | 0.7 |   | 0.5 |   |
| Change in  valuation allowance              |       | (40.5                 | )          | (42.8 | ) | (35.8 | ) |
| Other                                       |       | (1.4                  | )          | (0.2 | ) | 0.9 |   |
|                                        |       |                  |       |   |   |   |   |
| Effective tax rate                          |       | 0.3                   | %          | 1.4 | % | 5.1 | % |

 

Thetemporary differences and carryforwards that give rise to deferred tax assetsand liabilities are as follows:

|                                           | ** ** | **December 31,**   | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(In thousands)** | ** ** |
|                                      |       |                    |       |   |   |
| Deferred tax  assets:                     |       |                    |       |   |   |
| Net operating loss carryforwards          |       | $                       | 44,133     |   | $ | 31,526 |   |
| Reserves not currently deductible         |       | 1,131                   |       | 2,554 |   |
| Start-up costs                            |       | —                  |       | 1,839 |   |
| Deferred rent                             |       | 182                     |       | 246 |   |
| Impairment loss on long-lived assets      |       | 13,328                  |       | 13,328 |   |
| Tax credit carryforwards                  |       | 4,331                   |       | 4,622 |   |
| Total deferred tax asset                  |       | 63,105                  |       | 54,115 |   |
| Less: Valuation allowance                 |       | (50,911                 | )          | (43,140 | ) |
|                                      |       |                    |       |   |   |
| Net deferred tax asset                    |       | 12,194                  |       | 10,975 |   |
|                                      |       |                    |       |   |   |
| Deferred tax  liabilities:                |       |                    |       |   |   |
| Accumulated depreciation and amortization |       | (12,194                 | )          | (10,843 | ) |
| Other                                     |       | —                  |       | (132 | ) |
| Total deferred tax liability              |       | (12,194                 | )          | (10,975 | ) |
|                                      |       |                    |       |   |   |
| Net deferred tax  asset (liability)       |       | $                       | —     |   | $ | — |   |

 

AtDecember 31, 2006, we had approximately $101,878,000 and $132,434,000 offederal and state net operating loss carryforwards, respectively.  These net operating loss carryforwards expireprimarily during the years 2007 to 2026 but certain state credits may becarried forward indefinitely.  Theultimate realization of the deferred tax assets is dependent upon 

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generationof future taxable income before the carryforwards expire.  Ownership changes as defined by section 382of the Internal Revenue Code could limit the amount of net operating losscarryforwards used in any one year or in the aggregate.

Wehave accrued charges for certain prior year federal and state income taxassessments.  These amounts consist oftaxes, penalties, and interest, currently under dispute, in the amounts of$975,000 and $860,000 at December 31, 2006 and 2005, respectively.  These amounts are recorded in accruedliabilities in the accompanying balance sheets.

**9.****             Net Loss PerShare**

Basic net loss per share is based on the weighted average number ofcommon shares outstanding.  Diluted netloss per share reflects the potential dilution that could occur if outstandingoptions to purchase common stock were exercised or converted into commonstock.  There were no adjustments to netloss for the calculation of both basic and diluted net loss per share for allperiods.  For all periods presented inthese financial statements, the calculation of weighted-average outstandingshares is the same on both a basic and diluted basis because inclusion ofpotential common shares would be anti-dilutive.

Options to purchase approximately 544,000, 718,000,and 757,000 shares of common stock were outstanding at December 31, 2006, 2005,and 2004, respectively, but were not included in the computation of diluted netloss per share because their effect would be anti-dilutive.

**10.**          **Benefit Plans**

We have a deferred compensation savings plan for thebenefit of our eligible employees.  Theplan permits certain voluntary employee contributions to be excluded fromemployees’ current taxable income under the provisions of Internal Revenue CodeSection 401(k).  Employees becomeeligible to participate in the savings plan six months following the initialdate of employment.  Employees must alsocomplete at least 500 hours of service in any twelve-month period to beeligible for participation.  Under theplan, we can make discretionary contributions to the plan as approved by theboard of directors.  Participants’interest in our contributions to the plan vest over a four-year period.  We made contributions of approximately$63,000, $145,000 and $180,000 during 2006, 2005 and 2004, respectively.

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**SupplementalInformation**

**QuarterlyFinancial Data (Unaudited)**
| ** **                                   | ** ** | **Quarter ended**                                               | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **March 31**                                                    | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| ** **                                   | ** ** | **(In thousands except per share amounts)** | ** ** |
| **2006**                                     |       |                                                                 |       |   |   |   |   |   |   |
| Revenues                                     |       | $                                                                    | 15,229     |   | $ | 5,118 |   | $ | 5,205 |   | $ | 4,786 |   |
| Direct operating  expense                    |       | 7,765                                                                |       | 3,764 |   | 3,789 |   | 3,755 |   |
| Selling, general  and administrative expense |       | 13,358                                                               | (1)        | 7,122 | (1) | 5,604 | (1) | 4,935 | (1) |
| Loss from  operations                        |       | (5,894                                                               | )          | (5,768 | ) | (4,188 | ) | (3,904 | ) |
| Net loss                                     |       | (5,707                                                               | )          | (5,593 | ) | (4,001 | ) | (3,921 | ) |
| Basic net loss  per share                    |       | (0.92                                                                | )          | (0.90 | ) | (0.64 | ) | (0.63 | ) |
| Diluted net loss  per share                  |       | (0.92                                                                | )          | (0.90 | ) | (0.64 | ) | (0.63 | ) |
|                                         |       |                                                                 |       |   |   |   |   |   |   |
| **2005**                                     |       |                                                                 |       |   |   |   |   |   |   |
| Revenues                                     |       | $                                                                    | 18,379     |   | $ | 20,149 |   | $ | 19,211 |   | $ | 20,071 |   |
| Direct operating  expense                    |       | 17,220                                                               |       | 14,743 |   | 15,390 |   | 11,890 |   |
| Selling, general  and administrative expense |       | 14,829                                                               |       | 14,976 | (2) | 15,528 | (2) | 13,450 | (2) |
| Loss from  operations                        |       | (13,670                                                              | )          | (9,570 | ) | (11,707 | ) | (5,269 | ) |
| Net loss                                     |       | (13,344                                                              | )          | (9,247 | ) | (11,895 | ) | (5,273 | ) |
| Basic net loss  per share                    |       | (2.12                                                                | )          | (1.48 | ) | (1.90 | ) | (0.84 | ) |
| Diluted net loss per  share                  |       | (2.12                                                                | )          | (1.48 | ) | (1.90 | ) | (0.84 | ) |

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(1)          Includes $5.0 million,$761,000, $453,000 and $380,000 of restructuring charges in the quarters endedMarch 31, June 30, September 30, and December 31, 2006, respectively.

(2)          Includes$1.3 million, $2.7 million and $2.8 million of restructuring charges in thequarters ended June 30, September 30, and December 31, 2005, respectively.

 

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