** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.   20549**

 

**Form 10-K**

 

| **ý****ANNUAL REPORT UNDER SECTION 13  OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**                                                           |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                   |
| **For  the fiscal year ended December 31, 2002**                                                                                                       |
|                                                                                                                                                   |
| **or**                                                                                                                                                 |
|                                                                                                                                                   |
| **o****TRANSITION REPORT UNDER SECTION  13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**                                                            |
|                                                                                                                                                   |
| **For  the transition period from            to           ** |
|                                                                                                                                                   |
| **Commission  File Number 0-27024**                                                                                                                    |

 

**METRO ONETELECOMMUNICATIONS, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Oregon**                                                      |   | **93-0995165**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **11200  Murray Scholls Place**                                 |   | **Beaverton,  OR  97007**        |
| (Address of  principal executive offices)                       |   |                                  |
|                                                            |   |                                  |
| Registrant’s  telephone number, including area code:       |   | **503-643-9500**                      |
|                                                            |   |                                  |
| Securities  registered pursuant to Section 12(b) of the Act:    |
| **NONE**                                                        |
|                                                            |   |                                  |
| Securities  registered pursuant to Section 12(g) of the Act:    |
|                                                            |
| **Common  Stock, No Par Value**                                 |
| (Title of Class)                                                |

 

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  ý   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 Form 10-K. o

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act).   YES  ý  NO  o

 

The aggregatemarket value of the voting and non-voting common equity held by non-affiliates,(which excludes shares held by Sonera Holding B.V.) based on the closing priceof the common stock as reported by the Nasdaq stock market on June 28, 2002 was$211,641,097.  The aggregate marketvalue of registrant’s common stock held by non-affiliates, (which excludesshares held by Sonera Holding B.V.) based on the closing price of the commonstock as reported by the Nasdaq stock market on March 17, 2003, was $70,681,318.

 

The number of sharesoutstanding of the registrant’s common stock, as of March 17, 2003, was24,682,318.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of theregistrant’s Proxy Statement for its 2003 Annual Meeting, to be filed with theSecurities and Exchange Commission within 120 days of the registrant’s fiscalyear end, are incorporated by reference into Part III of this Report.

 

 

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**METRO ONE TELECOMMUNICATIONS, INC.**

**2002 FORM 10-K ANNUAL REPORT**

**TABLE OF CONTENTS**

 
| **PART I**    |
|---------------|
|          |   |
| Item 1        | Business |
|          |   |
| Item 2        | Properties |
|          |   |
| Item 3        | Legal Proceedings |
|          |   |
| Item 4        | Submission of Matters to a Vote of Security  Holders |
|          |   |
| **PART  II**  |
|          |   |
| Item 5        | Market for Registrant’s Common Equity and  Related Stockholder Matters |
|          |   |
| Item 6        | Selected Financial Data |
|          |   |
| Item 7        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|          |   |
| Item 7A       | Quantitative and Qualitative Disclosures about  Market Risk |
|          |   |
| Item 8        | Financial Statements and Supplementary Data |
|          |   |
| Item 9        | Changes In and Disagreements With Accountants  on Accounting and Financial Disclosure |
|          |   |
| **PART  III** |
|          |   |
| Item 10       | Directors and Executive Officers of the  Registrant |
|          |   |
| Item 11       | Executive Compensation |
|          |   |
| Item 12       | Security Ownership of Certain Beneficial  Owners and Management |
|          |   |
| Item 13       | Certain Relationships and Related Transactions |
|          |   |
| Item 14       | Controls and Procedures |
|          |
| **PART  IV**  |
|          |   |
| Item 15       | Exhibits, Financial Statement Schedules, and  Reports on Form 8-K |
|          |   |
|          | Signatures |

 

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# ***In this annual report on Form10-K, “Metro One” and the terms “Company,” “we,” “us” and “our” refer to MetroOne Telecommunications, Inc.***

 

# **PART I**

 

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

 

Metro One is a leadingdeveloper and provider of Enhanced Directory Assistance® and informationservices for the telecommunications industry. We primarily contract with wireless carriers to provide our services totheir subscribers.  In 1989, we openedour first call center and began testing and offering our Enhanced DirectoryAssistance and information services.  In1991, we entered into our first contract with a wireless carrier to provide ourservices to that carrier’s subscribers on a charge per call basis.  Our carrier customers include many of theleading wireless telecommunications carriers such as AT&T WirelessServices, Nextel Communications and ALLTEL Communications.  In addition, we have expanded into thelandline telecommunications market and provide our services to regionalcompetitive local exchange carriers.

 

### **TelecommunicationsIndustry**

 

The U.S.telecommunications industry has generally been characterized by strong growthand increased competition due to new technologies, a more favorable regulatoryenvironment and, for carriers, an increasingly sophisticated and demandingsubscriber.  Telecommunications carriersface increasing competitive pressures to differentiate their products andestablish brand loyalty.  With risingcosts to acquire new subscribers, carriers are seeking ways to minimizesubscriber turnover through the use of, among other things, value-addedservices and features.  In addition,carriers are increasingly offering local, long distance, wireless, cable andInternet services bundled into one package in order to appeal to a widermarket.  Competitive pressures are particularlyacute for wireless and newer landline carriers, such as competitive localexchange carriers.  The industry hasalso experienced a considerable amount of consolidation and investment in newtechnologies and alternative methods of delivery, including cable and theInternet.

 

*WirelessTelecommunications.* The U.S. wireless telecommunications market has experienced dramaticgrowth over the last decade.  Thisgrowth has been largely due to technological advances that give callersaffordable, high-quality mobile services. According to industry analysts, the number of wireless subscribers inthe United States approached 137 million at the end of 2002, and while growthis expected to slow over the next several years, industry experts stillestimate that by 2006, there will be over 175 million wireless phone users inthe United States.  A relatively smallnumber of carriers dominate the wireless telecommunications market.  In terms of estimated number of subscribers,the largest U.S. wireless carriers include Verizon Wireless, AT&T WirelessServices and Cingular Wireless.  Othernationwide carriers include Sprint PCS, Nextel Communications and T-Mobile.

 

In most of the major U.S.markets, at least five carriers compete for wireless subscribers.  As a result, carriers are seeking todifferentiate themselves from their competitors.  While price continues to be an important competitive factor,carriers increasingly focus on value-added services and features as a means ofdifferentiating themselves.  Carriershave discovered that a quality directory assistance service can increaserevenue and customer satisfaction.

 

*Landline Telecommunications.*  The U.S. landline telecommunications marketis significantly larger than the U.S. wireless market.  For example, in 2001, domestic landlineservices generated approximately $227 billion in revenues as compared toapproximately $75 billion in revenues generated by wireless services, accordingto the Federal Communications Commission. Like the wireless market, the landline 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 competitive local exchange carriers, such as CoxCommunications or Integra Telecom. Carriers providing long distance service include AT&T, MCI WorldComand Sprint Corp., as well as many discount long distance companies such as IDTCorporation and Talk America.

 

Local and longdistance carriers competing in each other’s markets, as well as against newerand smaller independent carriers, have added to competition in the landlinemarket.  With deregulation, the entry ofnew landline competitors and the increasing affordability of wireless services,subscribers who were historically bound to local carriers as a matter ofgeography are now increasingly able to choose their carriers.  This includes the opportunity to select acompetitive local exchange carrier. These companies compete with incumbent local carriers to provide avariety of services, including local, long distance and Internet and other dataservices.  As a result, the landlinetelecommunications market is rapidly becoming subscriber-based and carriersmust find ways to differentiate their services to attract and retainsubscribers.  In addition, to maintainoperational focus, competitive local exchange carriers often outsource non-coreoperations, including directory assistance services.  While many incumbent carriers provide directory assistanceservices on an outsourced basis, the competitive local exchange carriers mayprefer to outsource their directory assistance needs to independent companiesrather than use the services of their competitors.

 

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*International Telecommunications.*  The international telecommunications marketis characterized by increasing privatization, competition and, in the wirelessmarket, rapid growth.  As governmentsprivatize their national telecommunications companies, these companies faceincreased competition from large international carriers who have access to andinterest in the newly opened markets.

 

### **DirectoryAssistance Market**

 

Call volumesgenerated by the wireless directory assistance market in the United States areestimated to grow significantly to over 3.6 billion calls by the end of 2006,according to some industry sources, among which individual estimates vary.  Wireless subscribers tend to be heavy usersof directory assistance services. According to Frost & Sullivan, growth in the wireless directoryassistance market is driven by a number of factors, including growth in thewireless subscriber base, rising wireless penetration, increasing subscribermobility and the offering of quality directory assistance services by wirelesscarriers.

 

The landline directoryassistance market is significantly larger than the wireless directoryassistance market.  According to theindustry sources, landline directory assistance is projected to reach fourbillion calls by the end of 2006. Growth in the landline directory services market is driven by a numberof factors, including the growing information needs of subscribers and theoffering by landline carriers of call completion services.

 

### **OurBusiness Strategy**

 

Metro One’s businessstrategy includes the following key elements:

 

•                  *Build on ourcurrent carrier relationships, while seeking new domestic and internationalcustomers, including landline carriers, other business and direct customers*

 

Where attractive from a profitability standpoint, weare continuing to expand our relationships with our existing carriercustomers.  We believe that our servicescan increase carriers’ revenues by minimizing subscriber turnover, increasingthe number of calls made and, in the case of wireless and long distancecarriers, increasing billable airtime. Further, our national call center network, integrated search engines anddatabase systems allow carriers operating in multiple markets to offerconsistent quality directory assistance and other information services on anationwide basis.  This consistencypermits greater system-wide marketing opportunities and brand identificationfor these carriers.  We believe that ourexisting relationships and the quality of our services help us to expand ourbusiness with existing customers, providing us an opportunity to deliver ourservices to them and their affiliates in additional markets.

 

We are also pursuing business opportunities withadditional wireless and landline carriers with a view to leveraging ourreputation for high quality service and our nationwide call centernetwork.  We believe increasingcompetition among landline carriers is leading to an increasingly subscriber-basedbusiness, which will result in the need to differentiate their productofferings.  Our services provide anopportunity to do so and, accordingly, could help us expand into thesignificantly larger landline directory assistance market.

 

The information content that resides in our databasesystems, along with our ability to store, maintain, manipulate and deliver it,provides an opportunity to pursue businesses and other customers and providethem with our services over private networks or other delivery systems.  We believe that the quality of our servicesand that of the resultant caller experience have created additional demand forenhanced information services.  Aportion of that demand may be served through delivery systems that aredifferent, in part, from those we employ to service our carrier customers.  We intend to meet some of this demandthrough such delivery systems.

 

•                  *Develop andoffer additional value-added services and features*

 

We believe that we arewell positioned to continue developing and providing the types of services andfeatures that enhance the utility of the telephone and other communicationsdevices.  For example, our MetroDex®service is designed to provide individual callers and business users with theability to quickly and efficiently access their personal or business contactdatabases, including otherwise unpublished numbers, and potentially takeadvantage of additional services such as accessing a “personal assistant” overthe telephone.  We believe that suchinnovative features will increase caller satisfaction.

 

•                  *Expand ournational network and capabilities, while adding greater bandwidth, storagecapacity, speed and efficiency to our systems*

 

We intend to continue to expand our network capacityand efficiency, including adding to our call routing flexibility, redundancyand signaling systems.  We may alsoincrease or otherwise adjust our capacity as required by demand and customercommitments.  In addition, we intend toadd to our storage capacity both for purposes of database backup and fordelivery of personal database,

 

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concierge and other personalized andfulfillment-oriented services.  We maybuild or license specialty call centers to deliver special products such ascustomer service and fulfillment assistance, as well as international callcenters, should attractive opportunities arise.

 

•                  *Enhance thequantity and quality of our current content databases*

 

We intend to continue to improve the breadth and depthof the information content within our database systems.  We intend to seek additional content to makeour directory listings and other data more useful and to enhance our ability toprovide other services.  Additions tothis content may be virtual, through the Internet or other links that allow us tolicense or barter content.  Some of thisinformation will be deliverable to subscribers through portals other than thevoice telephony portal, such as those available on the Internet.

 

•                  *Leverage ourvoice telephony portal by delivering greater volumes of existing and newservices through our call center network as well as through other portals*

 

Our strength has been to provide enhanced servicesthrough the voice telephony portal we have created.  We are seeking opportunities to provide access to some of thecontent we acquire, develop and maintain, as well as our applications andrelated features, to other portals, including those available through theInternet.  We believe that telephonecarriers and other customers could use our content, applications and featuresto provide high quality services that are consistent across various portals andgeographic areas.  In so doing, thesecustomers, particularly the telephone carriers, could further bind theirsubscribers to them as competition in their markets becomes increasinglysubscriber-based.  We also intend tobroaden the market for our enhanced information services by delivering thoseservices to other types of customers in an effort to capture additional marketshare.

### ** **

### **Customers**

 

Metro One providesEnhanced Directory Assistance and information services to several of thenation’s leading wireless carriers in all or a portion of their serviceareas.  Our carrier customers includeAT&T Wireless Services, Nextel Communications, ALLTEL Communications and,during a transition period, Sprint PCS. In addition, we provide our services to certain competitive localexchange carriers in the landline telecommunications market.  Carrier customers that accounted for morethan 10% of our revenues during any of the periods indicated are as follows:

 
| **Customer**               |   | **2002** |   | **2001** |   | **2000** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Sprint PCS                 |   | 33       | %      | 32       | %      | 31       | %      |
| AT&T Wireless Services |   | 33       |   | 30       |   | 29       |   |
| Nextel Communications      |   | 24       |   | 23       |   | 21       |   |

 

Our contract withSprint PCS expired on December 31, 2002. In October 2002, Sprint PCS indicated to us that it would not be signinga new contract upon expiration of the existing contract.  In December 2002, we agreed to a transitionarrangement with Sprint PCS, pursuant to which we will continue to handle itssubscribers’ calls subsequent to December 31, 2002 with different phase-outperiods for different markets and a complete transition by the middle of2003.  The phase-out periods aregoverned by a mutually agreed upon schedule; however, given uncertaintiesbeyond our control and knowledge, we are unable to predict the exact timing ofthe Sprint PCS transition.  It is likelythat the expiration of the Sprint PCS contract will have an adverse effect onour financial position and future operating results, as well as our operations,although it is not possible to determine the exact timing, nature or magnitudeat this time.

 

In May 2002, ourcontract with Cingular Wireless expired. We continued to serve Cingular Wireless customers in its California,Nevada and Washington markets subsequent to the contract expiration while weattempted to secure a new contract or extension of the then existing one.   Cingular Wireless subsequently notified usthat they would not be extending the existing contract or signing a newone.  Cingular Wireless accounted forapproximately five percent of our revenues in 2002 and approximately sevenpercent in 2001.  Service to CingularWireless customers ceased during October 2002.

 

We offer ourservices to a carrier’s subscribers under a brand name selected by the carrier,such as “AT&T Wireless Connect” or “Nextel 411.”  The carrier establishes its own fee structure with itssubscribers.  Subscribers typically paythe carrier’s fees ranging from $0.75 to $1.40 plus airtime charges for ourservices.  Metro One charges carriersdirectly and, at present, bears no subscriber collection risk.  We charge our carriers on a per callbasis.  To stimulate increased callvolume and to attract and expand customer commitments, we offer volume-pricingdiscounts to our carrier customers. Our success with this program resulted incall volume increases over the last four years, which has caused our averagerevenue per call to decrease.

 

5

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### **We currently provide our servicesto 13 carrier customers in addition to various affiliates of AT&T WirelessServices.  The terms of these contractsare generally similar, with variations in the geographic market to be served,the services and features we are to provide the carriers’ subscribers and theterm, which is generally up to five years. None of these contracts preclude us from providing services toothers.  Generally, carrier customersagree to route some or all of their directory assistance and/or alphanumericmessaging calls to us.**

 

### **CallCenter Network**

 

We operate 31 callcenters strategically located in markets throughout the United States.  Our call center network enables us toprovide Enhanced Directory Assistance and information services nationwide.  We are situated in or near major metropolitanareas and therefore are situated locally for more than one-half of the U.S.population.  We believe that the localnature of our call centers and operators permits us to offer more accurate andvaluable service than would be available through a single or a few call centersattempting to serve the entire U.S. market. We operate our call centers 24 hours a day, seven days a week, 365 daysa year.

 

We periodicallyupgrade our network and systems to allow greater utility, speed and efficiencyin processing calls.  We also frequentlyexpand our capacity to store, manipulate and manage the additional data that weacquire.  In addition, our telephoneswitching systems allow scalability, including the ability to join multipleswitches together or configure switches so that they can handle large volumesof calls.  These systems, covering allof our call centers, are monitored and supported on a 24-hour basis from ournetwork operations center located at our corporate headquarters.  We have designed our systems to permitredundancy and avoid downtime from natural disasters or other adverse events.

 

Because a carrieroffers our services to its subscribers under its brand name, we believe qualityand reliability are important considerations in a carrier’s decision to use ourservices.  To ensure high quality andconsistency, we emphasize training, monitoring and customer support.  We maintain a national training force withtraining personnel in each call center. Our operators undergo extensive training and testing on searchtechniques, etiquette and local information, including landmarks, majorthoroughfares and geography.  Wecontinually monitor, test and evaluate call center performance.  We also monitor our call centers forcompliance with contract performance standards and report this information tothe carriers on a regular basis.  Inaddition to accessing our systems maintenance and support personnel, carriercustomers can obtain extensive customer usage information.

 

### **OurServices and Features**

 

We use acustomized array of hardware and software, along with proprietary databasesearch engines, to provide our Enhanced Directory Assistance and informationservices.  We receive incoming calls bymeans of assigned telephone numbers, which are “411,” “555-1212” or “00” inalmost all cases.  Our operators answerincoming calls and identify the service using the appropriate carrier’s brandname.  Upon receiving informationrequests from callers, operators search applicable databases using one or moreof our search engines.  The operatorthen connects the caller to the called party or supplies the caller with therequested information.  We offer avariety of information and services, including the following:

 

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

 

•                  Time, weatherand traffic information;

 

•                  Movie andrestaurant information;

 

•                  TeleConcierge®services;

 

•                  Local events andvenue information; and

 

•                  Turn-by-turndriving instructions.

 

Our EnhancedDirectory Assistance and information services also incorporate connectivityfeatures that make the telephone more useful and easier to use.  These connectivity features include thefollowing:

 

•                  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 other options upon abusy signal, “ring-no-answer” or other common situations without pressing asingle key;

 

•                  MessageBack® –delivers a caller’s message to a desired party and, when configured withAutoBack, provides a convenient tool for ensuring communication;

 

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

 

•                  QuickSend®  – a short messaging service thatallows our operators to send customized alphanumeric messages on behalf of acaller.

 

We are developing,testing and improving new services that add new content and connectivityfeatures, such as MetroDex, which allows callers to use their telephone or theInternet to access their personal or business contact databases andPersonalProfiler, which allows subscribers to customize how our services aredelivered to them as well as allowing them to have access to “personalassistant” services.  Other featuresunder development include on-line research and verification utilities for useby businesses with a direct private connection to us, speechrecognition-related elements and added personalization features.  Equipment at our corporate headquartersfacilitates this development and testing by simulating many ranges of callcenter operations.

 

### **DatabaseSystems and Content**

 

We believe the quality ofour services is related to the scope, quantity and quality of the informationcontent that resides within our database systems.  The majority of the information that we acquire, develop andmaintain is telephone listings data.  Weobtain these listings data from multiple sources, including the regional Belloperating companies, independent telephone companies and other commercialsources, to ensure high quality and accuracy. These data are enhanced by our direct data collection efforts and aprincipal database of local information is developed for each call center orregion.

 

Our proprietary operatorinterface software allows operators to efficiently and simultaneously searchand reverse-search multiple databases.  We use proprietary database management systems to maintain and updateour directory listings.  We continuallyacquire additional content or access to content that will, in many cases, buildon these listings data to make them more useful.  Acquisitions are made from a variety of sources and aresupplemented with information relating to local events and amenities.

 

Our ContentDevelopment group builds application-specific databases for a variety ofportals, be they wired or wireless, voice or data.  Our proprietary data extraction and processing technology enablesthe creation and ongoing maintenance of high quality databases from distributedand fragmented data on the web and elsewhere. We believe that these capabilities will contribute to the expansion ofour services and data offerings to our wireless and other customers.

 

### **Marketing**

 

We market totelecommunications carriers, businesses, governmental units, other enterprisesand anyone who may be a potential caller or user of our informationservices.  The marketing processinvolves a considerable amount of time and attention by our seniormanagement.  Call center managers alsoplay a key role in maintaining and developing wholesale customerrelationships.  Some of our contractsprovide for customer promotion of the services we provide to their subscribers/ callers.  In addition, we occasionallyassist our carrier customers in the promotion of these services.  We intend to continue to participate inmarketing services in conjunction with carrier programs and increase ourmarketing to promote our Enhanced Directory Assistance directly to businesses,governmental units, other customers and callers who may be potential users ofour information services.

 

We communicate on aregular basis with our existing carrier customers through our quality assuranceand customer service programs.  We havedeveloped proprietary programs that allow us and our customers to monitor thequality of our performance and the volume and duration of directory assistanceand information requests on a real-time basis. These programs also give us an opportunity to learn more about ourcarriers’ evolving needs.

 

### **Technology**

 

Our ability to provideEnhanced Directory Assistance and information services is dependent to a greatextent on our proprietary technology. Our proprietary software applications enhance our call handling anddelivery capabilities and provide the basis for our connectivity features.  We have developed search engines to quicklyaccess information from our databases. We continue to upgrade our operator interface software, databasemanagement systems and search engines to increase the efficiency and broadenthe search capability of our operators.

 

Our call processingsystems incorporate programmable switching equipment, host computers, voiceresponse units and database servers. Our advanced technology is based on customized software running SunMicrosystems and Dell servers and Lucent switching equipment.  One of the characteristics of our callprocessing systems is the ability to take all calls from a carrier’s switch andhave these run through our switch for the entire length of the call so that weare able to provide a full range of our services to the caller.

 

We are also monitoringtechnological advances in the methods of delivery of information and data andare working to insure that our systems are compatible with, and we can takeadvantage of, such developments.  We believethat by expanding reliance on the telephone as a

 

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source of information,the application of various new data and voice technologies will also benefitour Enhanced Directory Assistance and information services business.

 

### **IntellectualProperty**

 

We rely on a combinationof trademark, patent and trade secrets laws and confidentiality procedures toprotect our intellectual property rights. We have 14 U.S. patents issued and one foreign patent issued, includingfour relating to our StarBack technology and others associated with ourturn-by-turn driving directions and other services.  We have approximately 46 applications pending for additional U.S.patents and 15 applications pending for additional foreign patents.  We also have U.S. and foreign registeredtrademarks for, among others, “Metro One Telecommunications,” “Metro One,”“Enhanced Directory Assistance,” “StarBack,” “TeleConcierge,” “LocationPro,”“AutoBack,” “MetroDex,” “NumberBack,” “QuickSend,” “RadioPro,” and “PersonalProfiler,”  and applications pending for U.S. trademarkregistrations for, among others, “EventPro,” “RescuePro” and “TaxiPro.”

 

### **Competition**

 

The directory assistanceand information services markets are characterized by rapidly changing marketforces, technological advancements and increasing competition from largecarrier-affiliated companies and small, independent companies.  Our principal competitors include regionalBell operating companies and other independent providers.  Telephone carriers provide directoryassistance or information services both in and outside their own operatingregions.  Although we believe that noneof these competitors offers a form of directory assistance that incorporatesall of our features, they may have substantially greater financial, technicaland marketing resources than we do and may be able to offer features similar toours in the future.  We also facecompetition from independent companies seeking to offer forms of directoryassistance and other information services.

 

We believe the principalcompetitive factors in the directory assistance market are quality and range offeatures, technological innovation, experience, responsiveness to customers andprice.  Historically, we have sought todistinguish ourselves from our competitors based on the quality of ourservices, the development of useful features, the breadth of the contentprovided and our extensive national network of call centers.  In recent years, wireless carriers appear tohave become more focused on reducing costs even if such reduction results indiminished services.

 

### **GovernmentRegulation**

 

While our principal business as a wholesale supplier of enhanced directory assistance and information services for telecommunications common carriers has not been directly regulated, the offering of those services to the public by our telecommunications carrier customers is regulated by the Federal Communications Commission and state regulatory authorities to varying degrees.  Recently, telecommunications carriers have inquired as to our future willingness to carry telecommunications traffic for them on an outsourced basis.  Also, the FCC has opened an inquiry concerning promotion of competition in the retail directory assistance market.  We can predict neither the timing nor the outcome of that proceeding or its ultimate impact, if any, on our operations.  New product initiatives or our efforts to pursue additional growth strategies may subject us to further regulation by various regulatory agencies including the FCC and state and local public utility commissions.  To the extent we carry telecommunciations traffic ourselves, for our benefit or for the benefit of others (outsourced), we may be directly subject to regulation similar to that imposed on telecommunications common carriers, including the carrier customers from whom we have derived our principal business. 

 

### **Employees**

 

As of December 31, 2002,Metro One had approximately 5,900 employees, including approximately 28% whowere employed on a part-time basis. Most of our employees are operators, and the number of full-time andpart-time operators varies from time to time reflecting fluctuations in thevolume of calls.  We anticipate that thedeparture of Sprint PCS call volume during 2003 may result in a significantreduction in staffing needs in many of our call centers that service thiscarrier.  However, given the expectedtiming of the departure of this volume, normal fluctuations in employee tenure,new product initiatives and our pursuit of additional growth strategies, webelieve that most staffing reductions will be substantially aided by normalattrition.  None of our employees aresubject to a collective bargaining agreement. We consider relations with our employees to be good.

 

We invest significantresources in the recruitment, training and retention of qualifiedoperators.  Our organizational structureprovides opportunities and encourages talented individuals to take on roles ofincreasing responsibility.  We alsoinvest considerable resources in personnel motivation, including providingincentive plans for our operators, management and corporate staff.

 

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### **AvailableInformation**

 

We invite you to visitour website at www.metro1.com to access free-of-charge our annual report onForm 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-Kand any amendments to those reports, which we make available as soon asreasonably practicable after we electronically file such materials with orfurnish such materials to the Securities and Exchange Commission.

 

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

 

We lease our principalexecutive and administrative offices, consisting principally of two adjacentlocations totaling approximately 57,000 square feet of space, in Beaverton,Oregon.  The terms of the leases extendthrough 2009.

 

We also leaseoffice facilities for our call center operations, which generally range in sizefrom 5,000 to 40,000 square feet, including space sublet to others.  We have 34 leases for call centers and otherremote facilities, with remaining terms of up to six years.  In the future, we may expand or otherwiseadjust the size and configuration of our call center network for a variety ofreasons, including call volume fluctuations.

 

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

 

We are not aware of anypending legal proceedings other than routine litigation that is incidental tothe business.

 

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

 

No matters were submittedto a vote of security holders during the quarter ended December 31, 2002.

 

# **PART II**

 

**ITEM 5.****                                   MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**

 

Metro One’s common stocktrades on the NASDAQ National Market under the symbol “MTON.”  The high and low closing sales prices asreported on the Nasdaq National Market for each quarterly period within the twomost recent fiscal years were as follows:

 

| **2002**                          |   | **High** |   | **Low** |   |
|-----------------------------------|--------|----------|--------|---------|--------|
| Quarter ended December  31, 2002  |   | $        | 9.60   |    | $      | 4.49 |   |
| Quarter ended  September 30, 2002 |   | $        | 15.35  |    | $      | 8.49 |   |
| Quarter ended June 30,  2002      |   | $        | 26.01  |    | $      | 11.06 |   |
| Quarter ended March  31, 2002     |   | $        | 30.80  |    | $      | 19.52 |   |
|                              |   |     |   |    |   |
| **2001**                          |   | **High** |   | **Low** |   |
| Quarter  ended December 31, 2001  |   | $        | 39.30  |    | $      | 22.20 |   |
| Quarter  ended September 30, 2001 |   | 45.75    |   | 21.50   |   |
| Quarter ended June 30,  2001      |   | 44.27    |   | 17.38   |   |
| Quarter ended March  31, 2001     |   | 23.67    |   | 13.67   |   |

 

On May 16, 2001, ourBoard of Directors approved a 50% stock dividend, thereby effecting athree-for-two stock split resulting in the distribution of approximately8,100,000 shares on June 29, 2001.  Allshare and per share data presented in the table above and elsewhere in thisreport have been adjusted to give effect to the stock dividend.

 

The approximate number ofshareholders of record as of March 17, 2003 was 160.  On March 17, 2003, the closing price of our common stock, asreported on the Nasdaq National Market, was $5.67 per share.

 

9

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We have never declared orpaid cash dividends on our common stock. We intend to retain earnings from operations for use in the operationand expansion of our business and do not anticipate paying cash dividends withrespect to our common stock in the foreseeable future.

 

The following tablecontains information as of December 31, 2002, with respect to compensationplans under which our equity securities are authorized for issuance.

 
| **Plan Category**                                           |   | **Number of  securities to be  issued upon exercise of  outstanding options, warrants  and rights (a)** |   | **Weighted  average exercise price  of outstanding options, warrants  and rights  (b)** |   | **Number of  securities remaining  available for future issuance  under equity compensation plans  (excluding securities reflected in  column (a)  (c)** |      |
|-------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
|                                                        |   |                                                                                                         |   |
| Equity  compensation plans approved by security holders     |   | 2,421,739                                                                                                    |   | $                                                                                       | 13.81  |                                                                                                                                                     | 1,370,045 |   |
| Equity  compensation plans not approved by security holders |   | —                                                                                                       |   | —                                                                                  |   | —                                                                                                                                                   |      |
|                                                        |   |                                                                                                         |   |                                                                                    |   |                                                                                                                                                     |      |
| Total                                                       |   | 2,421,739                                                                                                    |   | $                                                                                       | 13.81  |                                                                                                                                                     | 1,370,045 |   |

 

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

 

The selected financial data presented below for, andas of the end of, each of the years in the five-year period ended December 31,2002 have been derived from our audited financial statements.  The financial data should be read inconjunction with the Financial Statements and related Notes that appearelsewhere in this annual report and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations set forth in Item 7.

 
|                                 |   | **Years  Ended December 31,**                |    |
|--------------------------------------|--------|----------------------------------------------|---------|
|                                 |   | **2002**                                     |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                 |   | **(In thousands, except per share amounts)** |    |
| Operations data:                     |   |                                         |    |   |   |   |   |   |   |   |   |
| Revenues                             |   | $                                            | 257,951 |   | $ | 233,318 |   | $ | 156,981 |   | $ | 77,831 |   | $ | 45,139 |   |
| Direct  operating expenses           |   | 144,164                                      |    | 131,851 |   | 97,438 |   | 46,494 |   | 23,107 |   |
| General  and administrative expenses |   | 72,461                                       |    | 65,422 |   | 46,112 |   | 28,711 |   | 18,334 |   |
| Income  from operations              |   | 41,326                                       |    | 36,045 |   | 13,431 |   | 2,626 |   | 3,698 |   |
| Net income                           |   | 26,129                                       |    | 28,422 |   | 9,742 |   | 1,906 |   | 3,603 |   |
|                                 |   |                                         |    |   |   |   |   |   |   |   |   |
| Basic  income per share              |   | 1.06                                         |    | 1.20 |   | .56 |   | .11 |   | .22 |   |
| Diluted income per share             |   | 1.04                                         |    | 1.15 |   | .54 |   | .11 |   | .21 |   |
| Cash  flow from operations           |   | 45,307                                       |    | 49,862 |   | 5,350 |   | 3,326 |   | 6,546 |   |
|                                 |   |                                         |    |   |   |   |   |   |   |   |   |
| Balance sheet data (1):              |   |                                         |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents            |   | $                                            | 76,528  |   | $ | 53,692 |   | $ | 6,463 |   | $ | 9,564 |   | $ | 7,570 |   |
| Working capital                      |   | 103,705                                      |    | 73,747 |   | 17,066 |   | 11,750 |   | 8,414 |   |
| Total assets                         |   | 198,689                                      |    | 169,759 |   | 106,641 |   | 65,475 |   | 36,311 |   |
| Long-term liabilities                |   | 9,310                                        |    | 3,844 |   | 29,074 |   | 18,940 |   | 719 |   |
| Shareholders’ equity            |   | 175,389                                      |    | 147,369 |   | 45,404 |   | 31,979 |   | 28,242 |   |

 

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(1)               In February 2001,we completed a transaction with Sonera Media Holding B. V. (“Sonera”), at thattime a wholly-owned subsidiary of Sonera Corporation of Helsinki, Finland,whereby Sonera purchased six million newly-issued shares of our common stock ata price of $11.33 per share, for an aggregate price of $64.6 million and anapproximate 25.5% ownership position at that time.  A portion of the proceeds from this transaction was used to payoff all outstanding debt.  See“Significant Events” in Item 7. below.

 

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

 

All statements and trendanalyses contained in this item and elsewhere in this annual report on Form10-K relative to the future constitute “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements may, but donot necessarily, also 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 and economic risks,uncertainties and other factors that may cause our actual results, performanceor achievements to be materially different from any future results, performanceor achievements expressed or implied by such forward-looking statements.  These risks, uncertainties and other factorsinclude those discussed in this Item 7. under “Issues and Uncertainties.”  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datehereof.  We undertake no obligation topublicly release any revisions to these forward-looking statements to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events.

 

Results of operations forthe periods discussed below should not be considered indicative of the resultsto be expected in any future period and fluctuations in operating results mayalso result in fluctuations 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, lack of market acceptance or delays inthe introduction of new versions of our products or features, the cost andsuccess of new growth strategies, the timing of the initiation of wireless orother telecommunications services though new delivery systems or theiracceptance by customers, the timing and expense of the expansion or contractionof our national call center network, the general employment environment,general economic conditions and the other factors discussed under the heading“Issues and Uncertainties” in this Item 7.

 

### **Overview**

 

We are a leadingdeveloper and provider of Enhanced Directory Assistance and informationservices for the telecommunications industry. We primarily contract with wireless carriers to provide these servicesto their subscribers.

 

Under our contracts,carriers agree to route some or all of their directory assistance and/oralphanumeric messaging calls to us.  Wealso offer our services to multiple carriers within the same market.  When a carrier’s subscribers dial a typicaldirectory assistance number, such as “411,” “555-1212” or “00,” the callsare answered by our operators identifying the service by that carrier’s brandname, such as “AT&T  WirelessConnect,” or “Nextel 411.”  We intend toprovide services to additional carriers, businesses, governmental units andcallers in general through alternate strategies intended to attract calls,information queries and other transactions.

 

Each carriercustomer establishes its own directory assistance fee structure for itssubscribers.  Wireless subscriberstypically pay fees ranging from $0.75 to $1.40 plus airtime charges for ourservices.  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, including businesses, governmental units or callersattracted through other means or affiliations.

 

We charge our carriercustomers directly on a per call basis, with prices varying in some cases basedon call volume.  In order to encourageour carrier customers to route more of their calls to us, our long-termstrategy has been based in part on reducing the price we charge our carriercustomers.  We expect that averagerevenue per call may continue to decrease over time, as we believe this pricingstrategy better positions us to retain and expand service with existing carriercustomers, where profitable, and to attract new carrier customers and toachieve greater operating margins over time. Prices for services provided to other types of customers, includingbusinesses, governmental units or other callers, may vary based on the natureof the service, volume and other circumstances.

 

In 2003, we expect tocontinue to expand or otherwise adjust capacities in order to address varyingbusiness circumstances, including changes in volume demands and execution ofour long-term business strategy. Capacity needs could vary significantly as a result of additional volumefrom existing customers in the form of new markets, increased usage withinexisting markets served, changes in the carrier customers and/or the number ofcalls routed to us or as a result of new product initiatives and growthstrategies.  We will also continue toopportunistically pursue additional significant new business.  Call center and network expansion effortsare intended to increase our local service coverage and our capacity to processadditional call volume.

 

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### **SignificantEvents**

 

Our contract with SprintPCS expired on December 31, 2002.  InOctober 2002, Sprint PCS indicated to us that it would not be signing a newcontract upon expiration of the existing contract.  Sprint PCS accounted for approximately 33% and 32%, of ourrevenues in 2002 and 2001, respectively. In December 2002, we agreed to a transition arrangement with Sprint PCS,pursuant to which we will continue to handle its subscribers’ calls subsequentto December 31, 2002 with different phase-out periods for different markets anda complete transition by the middle of 2003. The phase-out periods are governed by a mutually agreed upon schedule;however, given uncertainties beyond our control and knowledge, we are unable topredict the exact timing of the Sprint PCS transition.  It is likely that the expiration of theSprint PCS contract will have an adverse effect on our financial position andfuture operating results, as well as our operations, although it is notpossible to determine the exact timing, nature or magnitude at this time.

 

In May 2002, our contractwith Cingular Wireless expired.  Wecontinued to serve Cingular Wireless customers in its California, Nevada andWashington markets subsequent to the contract expiration while we attempted tosecure a new contract or extension of the existing one.   Cingular Wireless subsequently notified usthat they would not be extending the existing contract or signing a newone.  Cingular Wireless accounted forapproximately 5% of our revenues in 2002 and approximately 7% in 2001.  Service to Cingular Wireless customersceased during October 2002.

 

In February 2001, wecompleted a transaction with Sonera Media Holding B. V. (“Sonera”), at thattime a wholly-owned subsidiary of Sonera Corporation of Helsinki, Finland,whereby Sonera purchased six million newly-issued shares of our common stock ata price of $11.33 per share, for an aggregate price of $64.6 million and anapproximate 25.5% ownership position at that time.  A portion of the proceeds from this transaction was used to payoff all outstanding debt.  In August2002, the shares were transferred to Sonera Holding B.V., another wholly-ownedsubsidiary of Sonera Corporation.  InDecember 2002, Sonera merged with Telia AB to form TeliaSonera AB, which is aleading mobile operator and fixed voice and data provider in Scandinavia.

 

In February 2001, weacquired Enthusiasm Technologies, Inc., a developer of web-based dataextraction and processing technology for a combination of cash and stock.  This group builds application-specificdatabases for a variety of portals, be they wired or wireless, voice ordata.  Our proprietary data extractionand processing technology enables the creation and ongoing maintenance of highquality databases from distributed and fragmented data on the web andelsewhere. These capabilities contribute to the expansion of our services anddata offerings to our wireless and other customers.  The purchase price in this transaction was not material to ourfinancial position.

 

### **Resultsof Operations**

 

The following table showsselected items of our statements of operations data expressed as a percentageof revenues:

 

|                                   |   | **Years  Ended December 31,** |   |
|----------------------------------------|--------|-------------------------------|--------|
|                                   |   | **2002**                      |   | **2001** |   | **2000** |   |
| Revenues                               |   | 100.0                         | %      | 100.0 | % | 100.0 | % |
| Direct  operating expenses             |   | 55.9                          |   | 56.5 |   | 62.1 |   |
| General  and administrative expenses   |   | 28.1                          |   | 28.0 |   | 29.2 |   |
| Income  from operations                |   | 16.0                          |   | 15.5 |   | 8.7 |   |
| Other  income, net                     |   | 0.4                           |   | 0.5 |   | 0.0 |   |
| Interest  and loan fees                |   | (0.0                          | )      | (0.3 | ) | (2.1 | ) |
| Income  before income taxes            |   | 16.4                          |   | 15.7 |   | 6.6 |   |
| Income  tax expense                    |   | 6.3                           |   | 3.5 |   | 0.4 |   |
| Net  income                            |   | 10.1                          | %      | 12.2 | % | 6.2 | % |
|                                   |   |                          |   |   |   |   |   |
| Call  centers in operation at year-end |   | 31                            |   | 30 |   | 28 |   |

 

### **2002Compared to 2001**

* *

*Revenues.* Revenues increased 10.6% to $258.0 million from $233.3 million.  Call volume grew to approximately 544million calls from approximately 472 million calls.  This increase resulted from growth in call volume under existingcontracts and markets, as well as new call volume from new contracts and newmarkets.  Our average revenue per callwas approximately $0.47 in 2002 compared to $0.49 in 2001 as we continued to offervolume pricing discounts to encourage carrier customers to send us additionalcall volume.

 

*Direct operating expenses.*  Direct operating expenses consist of callcenter personnel and listings data and content acquisition costs.  These expenses increased 9.3% to $144.2million from $131.9 million.  Thisincrease was primarily due to the costs of servicing increased call

 

12

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volumes.  As a percentage of revenues, directoperating expenses decreased to 55.9% from 56.5%, due primarily to operatingefficiencies realized from greater call volumes and lower costs of accessinginformation content.

 

*General and administrative expenses.*  General and administrative expensesincreased 10.8% to $72.5 million from $65.4 million.  This increase resulted primarily from additional costs necessaryto support our increased call center capacity and call volumes.* *Asa percentage of revenues, general and administrative expenses remainedapproximately flat at 28.1% in 2002 compared to 28.0% in 2001 with additional efficienciesrelated to the growth of our business offset by new product development costs.

 

*Depreciation and amortization.*  Depreciation and amortization increased by19.0% to $18.8 million from $15.8 million, due primarily to equipment purchasedfor new call centers, for upgrades and expansions of existing call centers andproduct development activities offset by the decrease in amortization of$518,000 due to the adoption of Statement of Financial Standards (SFAS) No.142, “Goodwill and Other Intangible Assets.”

 

*Other income, net*.  Other income for the years ended December31, 2002 and 2001 consisted primarily of interest income earned on cash andcash equivalents of approximately $978,000 and $1.3 million, respectively.  The 2002 decrease resulted primarily from adecrease in market interest rates.

 

*Interest expense and loan fees.*  Interest expense and loan fees decreased99%, to $10,000 in 2002 from $895,000 in 2001. This decrease resulted from a reduction in average debt outstandingduring the year.  All debt was paid infull as of March 31, 2001.

 

*Income tax expense.*  Income tax expense for 2002 was $16.2million for an effective tax rate of approximately 38.2% which resulted fromthe combined federal and state statutory rate of approximately 39% partiallyoffset by various federal and state tax credits.  For 2001, income tax expense was $8.1 million for an effectivetax rate of approximately 22.2%.  Thisrate differs from the combined federal and state statutory rate ofapproximately 39% due primarily to the use of net operating loss carryforwardsand various federal and state tax credits.

 

### **2001Compared to 2000**

* *

*Revenues.* Revenues increased 48.6% to $233.3 million from $157.0 million.  Call volume grew to approximately 472million calls from approximately 302 million calls.  This increase resulted from growth in call volume under existingcontracts and markets, as well as new call volume from new contracts and newmarkets.  Our average revenue per callwas approximately $0.49 in 2001 compared to $0.52 in 2000 resulting mainly fromvolume discount pricing intended to encourage customers to send us additionalcall volume.

 

*Direct operating expenses.*  Direct operating expenses increased 35.3% to$131.9 million from $97.4 million.  Thisincrease was primarily due to the costs of servicing increased callvolumes.  As a percentage of revenues,direct operating expenses decreased to 56.5% from 62.1%, due primarily tooperating efficiencies realized from greater call volumes and lower costs ofaccessing information content.

 

*General and administrative expenses.*  General and administrative expensesincreased 41.9% to $65.4 million from $46.1 million.  This increase resulted primarily from additional costs necessaryto support our larger base of call centers and increased call volumes.* *Asa percentage of revenues, general and administrative expenses decreased to28.0% from 29.2%.  This decreaseresulted primarily from efficiencies associated with the growth of ourbusiness.

 

*Depreciation and amortization.*  Depreciation and amortization increased by51.2% to $15.8 million from $10.5 million, due primarily to equipment purchasedfor new call centers, for upgrades and expansions of existing call centers,product development activities and amortization related to a businessacquisition.

 

*Other income, net.*  Other income for 2001 consisted primarily ofinterest income of approximately $1.3 million. For 2000, other income consisted primarily of interest income of$301,000 partially offset by miscellaneous non-operating expenses of$106,000.  The increase in interestincome resulted primarily from increases in cash and cash equivalents due tothe issuance of common stock to Sonera as discussed above in “SignificantEvents.”

 

*Interest expense and loan fees.*  Interest expense and loan fees decreased72.1% to $895,000 from $3.2 million. This decrease resulted from a decrease in average debt outstandingduring the year.  All debt was paid infull as of March 31, 2001 as a result of the Sonera transaction discussed abovein “Significant Events.”

 

*Income tax expense.*  Income tax expense for 2001 was $8.1 millionfor an effective tax rate of approximately 22.2%.  Income tax expense for 2000 was $678,000 for an effective taxrate of approximately 6.5%.  These ratesdiffer from the combined federal and state statutory rate of approximately 39%due primarily to the use of net operating loss carryforwards and variousfederal and state tax credits.

### ** **

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### **Liquidityand Capital Resources**

 

Cash and cashequivalents are recorded at cost which approximates their fair marketvalue.  As of December 31, 2002, wehad approximately $76.5 million in cash and cash equivalents compared toapproximately $53.7 million at December 31, 2001.  The net increase of $22.8 million resultedprimarily from cash generated from operations which totaled $45.3 million,offset by capital expenditures of approximately $21.4 million.  We have no outstanding debt.

 

Working capitalwas $103.7 million at December 31, 2002, compared to $73.7 million at December31, 2001. This increase was primarily due to working capital generated fromoperations, offset by the use of working capital for capital expenditures.

 

*Cash flow from operations.*  Net cash provided by operating activitieswas $45.3 million for the year ended December 31, 2002 resulting primarily fromnet income, the effect of non-cash depreciation, amortization and deferredtaxes and decreases in accounts receivable offset by decreases in accountspayable and accrued expenses and increases in prepaid expenses and otherassets.  Net cash provided by operatingactivities was $49.9 million for the year ended December 31, 2001 resultingprimarily from net income, the effect of non-cash depreciation, amortization,deferred taxes and the tax benefit from employee stock plans and decreases inaccounts receivable and Increases in accounts payable and other liabilitiesoffset by increases in prepaid expenses and other assets.   For the year ended December 31, 2000, netcash provided by operating activities was $5.4 million resulting primarily fromnet income, the effect of non-cash depreciation and amortization and decreasesin accounts payable and other liabilities, offset by increases in accountsreceivable and prepaid expenses and other assets.

 

*Cash flow from investing activities.*  Cash used in investing activities was $21.4million, $31.4 million and $26.8 million for the years ended December 31, 2002,2001 and 2000 and was related primarily to capital expenditures for the purchaseof equipment for new call centers, the upgrade and expansion of existing callcenters, upgrades and expansions of corporate networks and infrastructure and,in 2001, cash paid in the acquisition of a data extraction and processingcompany as discussed above in “Significant Events.”

 

*Cash flow from financing activities*.  Cash used in financing activities was $1.1million for the year ended December 31, 2002 and was primarily related to cashused to secure a letter of credit offset by proceeds from the exercise of stockoptions and proceeds from employee stock purchases.  Cash provided by financing activities was $28.7 million for theyear ended December 31, 2001 resulting primarily from the proceeds of theinvestment by Sonera and the receipt of cash proceeds from the exercise ofstock options and from employee stock purchases, offset by the repayment of alloutstanding debt.  Net cash provided byfinancing activities was $18.3 million in 2000 resulting primarily fromborrowings under credit facilities and the receipt of cash proceeds from theexercise of stock options and from employee stock purchases, offset by therepayment of debt obligations.

 

*Future capital needs and resources.*  The primary uses of our capital in the nearfuture are expected to be the development or acquisition of technologies,features and content complementary to our business and the potential expansionof our call center network and its capacity to serve existing and potential newcustomers and for general corporate purposes. These general corporate purposes include possible acquisitions, effortsto pursue and market new growth strategies and other corporate developmentactivities and working capital.  Weintend to expand or otherwise adjust our capacity in order to address varying businesscircumstances, including changes in volume demands and execution of ourlong-term business strategy.

 

We believe ourexisting cash and cash equivalents and cash from operations will be sufficientto fund our operations for the next twelve months.  Although cash on hand (including restricted cash) at December 31,2002  was approximately $80 million,future activities, including execution of new product initiatives and growthstrategies, expanded marketing and new product development and rollout may reduceavailable cash.  In such event, we willattempt to establish borrowing arrangements in order to maintain adequateliquidity.   We believe we will haveaccess to future financing sources, although we cannot provide assurance thatfunding will be available in amounts or on terms agreeable to us.

 

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

 

Minimum annual rentalpayments on leases for the five years subsequent to 2002 and in the aggregatethereafter are as follows:

 

| **Year Ending**December 31,   |   | **Annual lease payments** |   |
|-------------------------------|--------|---------------------------|--------|
|                          |   | **(In  thousands)**       |   |
| 2003                          |   | $                         | 8,812  |   |
| 2004                          |   | 8,197                     |   |
| 2005                          |   | 6,988                     |   |
| 2006                          |   | 5,177                     |   |
| 2007                          |   | 3,619                     |   |
| Thereafter                    |   | 2,796                     |   |
|                          |   |                      |   |
| Total  minimum lease payments |   | $                         | 35,589 |   |

 

From time to time,in the normal course of our business, we issue standby letters of credit andbank guarantees.  At December 31, 2002,we had one letter of credit outstanding in the amount of $3.3 million relatedto our workers’ compensation insurance program.  The letter of credit is secured by a certificate of deposit forthe same amount.  This commitmentexpires on April 1, 2003 and is typically renewed on an annual basis.

 

In accordance withaccounting principles generally accepted in the United States of America, thesecommitments are not reflected in our balance sheets.

 

### **Effectof Inflation**

 

Inflation did notmaterially affect our business during the last several years.

 

### **CriticalAccounting Policies**

 

We prepare ourfinancial statements in conformity with accounting principles generallyaccepted in the United States of America. As such, we are required to make certain estimates, judgments andassumptions that we believe are reasonable based upon the informationavailable.  These estimates andassumptions affect the reported amounts of assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring 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 intangibles and goodwill, estimatesinvolving the levels of our contingent liabilities for workers’ compensationand medical self-insurance and estimates of current and deferred taxes owed mayinvolve a higher degree of judgment, estimation and uncertainty.

 

*Accounts receivable.* Our customer baseconsists mostly of large wireless telephone carriers in the United States.  As such, management believes we have minimalrisk of uncollectability, at any point in time, related to outstanding accountsreceivable.  We have not experiencedsignificant collection issues or write-offs related to these customers.  Consequently, we do not maintain anallowance for doubtful accounts.  Sinceour accounts receivable are concentrated in relatively few customers, asignificant change in the liquidity or financial position of any one of thesecustomers could adversely impact collection of our accounts receivable andtherefore have a material adverse effect on our financial position and futureoperating results.

 

*Long-lived assets and goodwill.* 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 theasset may not be recoverable.  At suchtime, we estimate the future cash flows expected upon eventual disposition and,if lower than the carrying amount, adjust the carrying amount of the asset toits estimated fair value.

 

Purchased goodwill, whichrepresents the excess of cost over the fair value of net assets acquired in abusiness combination, was amortized on a straight-line basis, over theestimated economic life, through December 31, 2001.  As discussed below under “Recent Accounting Pronouncements,” weadopted SFAS No. 142, “Goodwill and Other Intangible Assets,” as of January 1,2002.  Under SFAS No. 142, we evaluategoodwill for impairment annually and whenever events or changes incircumstances indicate the carrying amount of goodwill may not berecoverable.  We perform our annualimpairment test in November each year. To perform that test, we compare the carrying value of our business toour estimates of the fair value of our business.  If our evaluation indicates that the fair value of our businessis less than its carrying value, we will write down the related goodwill to itsimplied fair value.  We use estimates offuture cash flows, discounted to

 

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present value, marketprices and other measures to estimate the fair value of our business.  It is reasonably possible that our estimatesof future cash flows, discount rates and other assumptions inherent in thecalculation of the estimated fair value of our business will change in thefuture, which could cause us to write down goodwill at that time.

 

*Self-insurance reserves.* We self-insure aportion of our workers’ compensation and employee medical insuranceprograms.  We purchase stop loss coverage at varying levels in order tomitigate our potential future losses.  The nature of these liabilities,which may not fully manifest themselves for several years, requires significantjudgment.  We evaluate pending workers’ compensation and medical claimsperiodically to determine the reasonableness of the reserves we have recorded forsuch claims.  Our evaluation includesestimates of potential incurred-but-unreported claims as well as factors thatmay cause original estimates of such claims to increase over time, such as  available claims data and historical trendsand experience, as well as future projections of ultimate losses, expenses,premiums and administrative costs.  We adjust these reserves if events orchanges in circumstances indicate that ultimate payments related to the claimswill be more than the recorded reserves. While we believe that the amounts reserved for these obligations aresufficient, any significant increase in the number of claims and costsassociated with claims made under these plans could have a material effect onour financial position, results of operations or cash flows.

 

*Income taxe*s.  Accounting for incometaxes requires us to estimate our income taxes in each jurisdiction in which weoperate.  Due to differences in the recognition of items included inincome for accounting and tax purposes, temporary differences arise which arerecorded 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 acharge, which could have a material effect on our financial position or resultsof operations.

 

### **RecentAccounting Pronouncements**

 

In June 2001, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwilland Other Intangible Assets.”  This newstatement addresses financial accounting and reporting for goodwill and otherintangible assets. Under this new standard, goodwill and other intangibleassets that are deemed to have an indefinite life are no longer amortized.However, goodwill and other intangible assets with indefinite lives will betested for impairment on an annual basis by applying a fair value basedtest.  We adopted SFAS No. 142 as ofJanuary 1, 2002 and therefore ceased amortization of goodwill.  Other than cessation of amortization ofgoodwill, the adoption of SFAS No. 142 had no impact on our financial position,results of operations or cash flows for the year ended December 31, 2002.  Goodwill amortization for the twelve monthsended December 31, 2001 was $518,000. During the fourth quarter of 2002, we completed an impairment test ongoodwill and determined that there was no impairment.

 

In August 2001, the FASBissued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.”  SFAS No. 144 establishes asingle accounting model for long-lived assets to be disposed of and replacesSFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed of” and Accounting Principles Bulletin (“APB”) No. 30,“Reporting Results of Operations – Reporting the Effects of Disposal of ASegment of Business.”  We adopted SFASNo. 144 effective January 1, 2002.  Theadoption of SFAS No. 144 had no impact on our financial position, results ofoperations or cash flows.

 

In July 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  The statement requiresthat a liability for a cost associated with an exit or disposal activity berecognized when the liability is incurred. Under previous guidance, a liability for an exit cost was recognized atthe date of an entity’s commitment to an exit plan.  The provisions of the statement are effective for exit ordisposal activities that are initiated after December 31, 2002.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transitionand Disclosure,” which amends FASB Statement No. 123, “Accounting forStock-Based Compensation.”  Thisstatement provides alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employeecompensation.  In addition, SFAS No. 148amends the disclosure requirements of SFAS No. 123 to require more prominentand more frequent disclosure in financial statements about the effects ofstock-based compensation.  We havechosen to continue to account for stock-based compensation using the intrinsicvalue method prescribed by APB No. 25, “Accounting for Stock Issued to Employees”and related interpretations.  Theprovisions of SFAS No. 148 are effective for fiscal years ended after December15, 2002.  Accordingly, we have adoptedthe disclosure provisions of SFAS No. 148 in the financial reports for the yearended December 31, 2002.  As theadoption of this statement involves disclosure only, we do not expect amaterial impact on our financial position, results of operations or cash flows.

 

In December 2002, theFASB issued Financial Interpretation (‘FIN”) No. 45, “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”  FinancialInterpretation No. 45 elaborates on the existing disclosure requirements formost guarantees, including loan guarantees such as standby letters ofcredit.  It also clarifies that at thetime a company issues a guarantee, the company must recognize an initialliability for the fair value, or market value, of the obligations it assumesunder that

 

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guarantee and mustdisclose that information in its interim and annual financial statements.  Financial Interpretation No. 45 is to beapplied prospectively to guarantees issued or modified after December 31, 2002.  The disclosure requirements in thisinterpretation are effective for financial statements of interim or annualperiods ending after December 31, 2002. We have adopted the disclosure provisions of FIN 45.  We believe the adoption of this statementwill not have a material impact on our financial position, results ofoperations or cash flows.

 

In January 2003, the FASBissued FIN No. 46, “Consolidation of Variable Interest Entities.”  Variable interest entities have beencommonly referred to as special-purpose entities or off-balance sheetstructures.  The purpose of FIN No. 46is to improve financial reporting by enterprises involved with variableinterest entities by requiring consolidation of such entities.  FIN No. 46 is to be applied immediately tovariable interest entities created after January 31, 2003.  The consolidation requirements apply toolder entities in the first fiscal year or interim period beginning after June15, 2003.  Certain of the disclosurerequirements apply in all financial statements issued after January 31, 2003,regardless of when the variable interest entity was established.  We believe the adoption of this statementwill not have a material impact on our financial position, results ofoperations or cash flows.

 

### **Issuesand Uncertainties**

 

While management isoptimistic about our long-term prospects, the following issues anduncertainties, among others, should be considered in evaluating our outlook.

 

*We have contracts with a limited number of carriercustomers.  If we fail to extend orrenew these contracts, or if these contracts are terminated prior to theirexpiration, our business could be adversely affected.*

 

A limited number ofcustomers account for substantially all our revenues.  For example, our top four customers accounted for approximately95.5% of our revenues in 2002.  Our twolargest customers, Sprint PCS and AT&T Wireless Services, accounted forapproximately 33% each in 2002.  Ourcontract with Sprint PCS expired on December 31, 2002 as described above in“Significant Events.”  Of our existingcontracts with significant customers, two expire in 2003, including ourcontract with AT&T Wireless Services. In addition, while our contract with Nextel Communications extendsthrough early in 2005, the contract provides for a window in 2003 during whichNextel can withdraw from the contract with proper notice and payment of asubstantial fee.  Some contracts containperformance and other standards and may be terminated prior to their scheduledexpiration dates under specified circumstances.  If we fail to extend or replace our contracts, or other contractsare terminated prior to their expiration, our business could be adverselyaffected.  Although we seek to increasethe number of our customers, opportunities are limited because a small numberof companies dominate the telecommunications market.  This limits the potential carrier customer base and our expansionopportunities through carrier relationships.

 

*Our inability to achieve desired pricing levels couldadversely affect our profitability and operations.*

 

We are subject tocompetitive pressures with respect to pricing that could adversely affect ourprofitability and operations.  Theprices that we charge our carrier customers are subject to the terms of ourcontracts.  The changingtelecommunications market, the relative leverage of the negotiating parties andthe overall competitive landscape can significantly impact contract pricingnegotiations.  We charge our carriercustomers on a per call basis, with prices varying in some cases based on callvolume.  Our long-term strategy is basedin part on reducing the price we charge our carrier customers.  Generally, our pricing levels have declinedand, in the future, will likely continue to decline as call volumes increasewith specific carrier customers.  If wewere to substantially reduce our prices without correspondingly increasingvolume, there could be an adverse impact on our ability to operate profitably.

 

*We face substantial competition from a number of othercompanies.*

 

Many of our competitors inthe directory assistance market, including the regional Bell operatingcompanies, have far greater resources and better name recognition.  The regional Bell operating companies alsomay have the advantage of being the local telephone carrier in their area ofoperation.  Some of these companies areor may be developing their own versions of quality directory assistanceservices.  We also face competition froma number of other independent directory assistance providers.  If we are unable to compete successfully, itcould have an adverse effect on our business, financial condition and resultsof operations.  Our ability to competesuccessfully depends, in part, on our ability to anticipate and appropriatelyrespond to many factors, including retail pricing decisions by carriers,decisions by carriers to force consumers to accept lower-quality informationservices products, the introduction of new services and products by ourcompetitors, changes in subscriber preferences, changes in economic conditionsand discount pricing strategies by our competitors.

 

*We are dependent on the wireless telecommunicationsindustry, and a decrease in wireless usage by subscribers could have an adverseimpact on our results of operations.*

 

Almostall of our revenues come from providing Enhanced Directory Assistance andinformation services to our wireless carrier customers’subscribers.  A decrease in wirelessusage in general, or of our products in particular, could have an adverseeffect on our results of operations. Wireless usage by subscribers appears to be affected by a number offactors, many of which are beyond our control, including

 

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pricing, safety concerns,reliability and availability of the wireless network, government regulation andreliability and availability of alternative technologies.

 

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

 

In the future, as in thepast, our quarterly and annual operating results may vary significantly as aresult of a number of factors.  Wecannot control many of these factors, 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;

 

•                  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;

 

•                  The timing andexpense of our call center network expansion or contraction, including changingstaffing and infrastructure expenses related to anticipated call volumechanges;

 

•                  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;

 

•                  Increases incosts associated with new product development and marketing or with growthstrategies without commensurate increases in revenues.

 

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

 

•                  General economicconditions.

 

For these reasons, youshould not rely on period-to-period comparisons of our financial results as anindication of any future results.  Ourfuture operating results could fall below the expectations of securitiesindustry analysts or investors.  Anysuch shortfall could result in a decline in the market price of our commonstock.  Fluctuations in our operatingresults would likely increase the volatility of our common stock price.

 

*The rapidly changing telecommunications market couldunfavorably affect us.*

 

The telecommunicationsmarket is subject to rapid change and uncertainty that may result incompetitive situations which could unfavorably affect us.  These changes and uncertainties 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.

 

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

 

A customer’s decision tocontract for our directory assistance and information services involves asignificant commitment of technical and other resources.  As a result, we have a long sales cycle forboth new and extended contracts, particularly with large customers.  The selling process involves demonstratingthe value-added benefits of outsourcing directory assistance and using ourservices rather than those of our competitors. Additionally, the effectiveness of our marketing to other types ofcustomers, including businesses, governmental units or callers attractedthrough other means or affiliations, is difficult to predict at any given pointin time, given a wide variety of potential business circumstances.  Any delays due to lengthy sales cycles couldsignificantly affect our revenue growth and operating results.

 

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*Our operating results are significantly affected by ourability to accurately estimate the amount and timing of call volume.  The actual amount and timing of call volumeis often subject to factors outside of our control.*

 

Our operating results aresignificantly affected by costs incurred for staffing and expandinginfrastructure.  We incur significantstaffing and general and administrative costs in anticipation of call volume underour customer contracts.  If such callvolume does not arrive as scheduled, in the amount anticipated, or at all, ouroperating results can be adversely affected. This could increase our operating expenses without a correspondingincrease in revenues from the anticipated call volume.

 

*We need to expand call volume and increase efficiencies inorder to be successful.*

 

In order to successfullyexecute our business strategies, we need to increase the volume of calls madeto our call center network, while realizing the benefits of operatingleverage.  We intend to increase callvolume by seeking additional customers, including landline carrier customers,as well as seeking additional business from our existing carrier customers andby offering our services to other types of customers.  We have limited experience in the landline market, which isdominated by the regional Bell operating companies.  If we are unable to expand our wireless business or attractsignificant landline business, on a cost effective basis or at all, we may beunable to increase profitability or sustain past growth rates.

 

*Regulations affecting our customers and suppliers and futureregulations to which we may be subject may adversely affect our business.*

 

While our principal business as a wholesale supplier of enhanced directory assistance and information services for telecommunications common carriers has not been directly regulated, the offering of those services to the public by our telecommunications carrier customers is regulated by the Federal Communications Commission and state regulatory authorities to varying degrees.  Recently, telecommunications carriers have inquired as to our future willingness to carry telecommunications traffic for them on an outsourced basis.  Also, the FCC has opened an inquiry concerning promotion of competition in the retail directory assistance market.  We can predict neither the timing nor the outcome of that proceeding or its ultimate impact, if any, on our operations.  New product initiatives or our efforts to pursue additional growth strategies may subject us to further regulation by various regulatory agencies including the FCC and state and local public utility commissions.  To the extent we carry telecommunciations traffic ourselves, for our benefit or for the benefit of others (outsourced), we may be directly subject to regulation similar to that imposed on telecommunications common carriers, including the carrier customers from whom we have derived our principal business. 

 

*Future acquisitions or efforts to pursue additional growthstrategies may strain our operations.*

 

We intend to evaluate,and in the future may pursue, acquisition or business opportunities that areconsistent with our business strategy. If we fail to adequately address financial and operational risksassociated with such acquisitions or business opportunities, such activitiesmay adversely affect our business.

 

These risks can include,among other things:

 

•                  Difficulties inassimilating the operations, technology, information systems and personnel ofan acquired company, including the inability to maintain uniform standards,controls and policies, and the loss of key employees of the acquired company;

 

•                  Diversion ofmanagement’s attention from other business concerns;

 

•                  Impairment ofrelationships with licensors, customers and suppliers;

 

•                  Difficulties inentering into markets in which we have no direct prior experience and potentialmarketing expenses related thereto;

 

•                  Use of cashresources, potentially dilutive issuances of equity securities and incurrenceof additional debt and contingent liabilities; and

 

•                  Significantwrite-offs related to goodwill and amortization expenses related to otherintangible assets.

 

*If we are unable to anticipate changes in technology andindustry standards and to develop new services and features, we may notsucceed.*

 

Our success depends, inpart, on our ability to anticipate changes in technology and industry standardsand to develop and introduce new services and features that are accepted by themarketplace and cost effective for us to provide as a part of our overallservice offerings.  The development ofnew services and features can be very expensive.  Further, given rapid technological changes, frequent introductionof new products, 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 new services and features, encounter difficultiesthat delay the introduction of such services and features, or incorrectlyanticipate future changes and develop services and features that are notaccepted by the marketplace or are not cost effective for us to provide as apart of our overall service offerings, we may not succeed at our business.

 

*Alternative methods for delivery of directory assistance andinformation services could reduce the demand for our services.*

 

Our business comesprimarily from providing Enhanced Directory Assistance and information servicesto telephone users.  However,information can be transmitted in other ways, including more intelligentcommunications devices and other technologies and protocols, and over theInternet.  For example, as the Internetcontinues to develop and becomes easier to use and access, technologies may bedeveloped that decrease or eliminate the demand for telephone-based orvoice-based directory or information services. Widespread acceptance of existing and developing technologies andprotocols, such as voice recognition and wireless application protocol, couldadversely affect our

 

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business.  Our call volume could decline if telephoneusers change their usage habits and rely on the Internet or other alternativesas their primary source for information.

 

*Systems failures, delays and other problems could harm ourreputation and business, cause us to lose customers and expose us to customerliability.*

 

Our success also dependson our ability to provide reliable services. Our operations could be interrupted by significant damage to or failureof our network, our connections to third parties, our computer hardware orsoftware 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, as call volume increases, wewill need to expand and upgrade our technology and network hardware andsoftware in order to provide services. Capacity limits on our technology and network hardware and software maymake it difficult for us to expand and upgrade our systems in a timely andeconomical manner.

 

*If we are unable to obtain or adequately update directory orinformation content at an economical cost, we may be unable to provide currentlevels of service or improve our service.*

 

Our operations depend onour access to the names, telephone numbers and other information that we supplydirectly to callers or we use in providing our services.  The availability, cost, quality andusefulness of such data varies widely across geographic regions.  If we are unable to obtain or updatedirectory or information content at an economical cost, we may be unable toprovide current levels of service, improve our Enhanced Directory Assistanceservice or provide new services and features. Ultimately, the satisfaction of callers and our carrier customers, andour ability to renew and extend our current customer contracts and enter intonew customer contracts, depends on the quality of services we provide.  The quality of our services is directlyrelated to the quality of our listings data and other information content.

 

*As we rely on a limited number of suppliers, an abrupt lossof any key supplier could adversely affect our business operations or delay ourdevelopment efforts.*

 

We rely on some keysuppliers to provide us with programming and engineering services and tolicense us their technology.  An abruptloss of any current key supplier could cause a disruption in our operations ora delay in our development efforts, including the planned expansion of our callcenter network, and could adversely affect our business operations.

 

*If we are unable to continue to attract and retain qualifiedsenior management, technical personnel and call center operators, or our callcenter staff is unionized, our operations could be adversely affected.*

 

Our success depends to asignificant extent on the efforts and abilities of our senior management,technical personnel and call center operators. The loss of the services of our senior management and technicalpersonnel could have a material adverse effect on our business and our abilityto meet our strategic objectives.  We alsodepend on the continued service of our call center operators, who we hire fromthe available labor pool.  As wecontinue to expand our call center network, the ability to attract and retainqualified senior management, technical personnel, operators and other skilledemployees is extremely important to the operation of our business.  If we are unable to attract and retainqualified individuals, or we are required to pay significantly higher wages andother benefits to such individuals, or if our call center staff is unionized,it could adversely affect our business operations.  We find it more difficult to recruit and retain qualifiedindividuals during periods of low unemployment and, therefore, may be subjectto increasing pressure to offer higher wages and other benefits during suchperiods.  In our call center hiring, wemay also feel the effects of the telecommunications industry in general, whichhas widespread union membership among its operators and other workers.

 

*If we are unable to use and protect our intellectualproperty, we may be unable to provide some of our Enhanced Directory Assistanceand information services or profitably operate our business.*

 

We regard aspects of ourEnhanced Directory Assistance and information services and their features andprocesses to be proprietary.  If we areunable to use and protect our intellectual property, we may be unable toprovide some of our Enhanced Directory Assistance and information services orprofitably operate our business.  To alimited extent, we rely on a combination of trade secret, patent and otherintellectual property law, nondisclosure agreements and other protectivemeasures to protect our intellectual property. However, these measures may be difficult and costly to meaningfullyenforce.  In addition, attempts toenforce our intellectual property rights may bring into question the validityof these rights.  Litigation withrespect to patents or other intellectual property rights can result insubstantial costs and diversion of management attention and other resources.

 

*We may need additional capital in the future, and it may notbe available on acceptable terms.*

 

We may require morecapital in the future to fund our operations, finance investments in equipmentand infrastructure needed to maintain and expand our call center and networkcapabilities, enhance and expand the range of services and features we offer,respond to competitive pressures and potential opportunities, such asinvestments, acquisitions and international expansion and new productinitiatives and growth strategies.  Wecannot be certain that additional financing will be available on termsfavorable to us or at all.  The terms ofavailable financing

 

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may place limits on ourfinancial and operating flexibility.  Ifadequate funds are not available on acceptable terms, we may be forced toreduce our operations or abandon expansion opportunities.

 

*If we expand our business into international markets, wewill encounter risks which could adversely affect us.*

 

We have operated only inthe United States; however, an element of our business strategy is to continueto explore international business opportunities.  We anticipate accepting calls inbound to the United States in2003.  If we expand into one or moreinternational markets, we will encounter significant risks anduncertainties.  These risks anduncertainties include increased operational difficulties arising from, amongother things:

 

•                  Our ability toattract sufficient business or locate a suitable partner or joint venturecandidate to enable us to overcome logistical and economic barriers to entry;

 

•                  Our ability andcost to gather sufficient information content and listings data, properlymodify our features and services to meet applicable standards, and hire andtrain personnel;

 

•                  Fluctuations inforeign currency exchange rates; and

 

•                  Political,regulatory and economic developments and cultural differences.

 

*Our common stock price is volatile.*

 

The market price of ourcommon stock has experienced volatility and is likely to continue to experiencesignificant fluctuations in response to a number of factors.  These factors include, among others, thefollowing:

 

•                  Announcements ofextensions, expirations or changes in our contracts and the opening of new callcenters to support such activity;

 

•                  Announcementsrelating to material events concerning our customers;

 

•                  Actual oranticipated variations in our results of operations;

 

•                  Changes infinancial estimates by securities analysts;

 

•                  Obsolescence oftechnologies that we or our customers use;

 

•                  Introductions ofnew technologies, products or features;

 

•                  New productinitiatives and growth strategies; and

 

•                  General marketconditions.

 

From January 1, 2002through December 31, 2002, our common stock price fluctuated from a low of$4.49 per share to a high of $30.80 per share and has on several daysfluctuated more than 10%.  Similarmarket fluctuations have affected the market prices of equity securities ofmany telecommunications companies and other public companies generally.  These trading prices and valuations maychange significantly and arbitrarily. In addition, broad market factors affecting telecommunications ortechnology stocks may adversely affect the market price of our commonstock.  General economic, political andmarket conditions, including interest rate changes and recession, may alsoadversely affect our stock price.

 

*Our results of operations could be impacted by a significantincrease in the rate of inflation.*

 

Inflation has nothistorically had a material affect on our business.  Operating expenses such as salaries, employee benefits andoccupancy costs are, however, subject to normal inflationary pressures whichcould adversely affect our operating results.

 

*Oregon law and provisions of our charter could make theacquisition of our company more difficult.*

 

We are authorized toissue up to 10,000,000 sharesof preferred stock, and the 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 law limit the ability ofparties who acquire a significant amount of voting stock to exercise controlover our company.  These provisions mayhave the effect of lengthening the time required for a person to acquirecontrol of our company through a proxy contest or the election of a majority ofthe board of directors and may deter efforts to obtain control of our company.

 

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

 

Substantially allof our liquid investments are invested in money market instruments, andtherefore, the fair market value of these investments is affected by changes inmarket interest rates.  However, theseinvestments were invested in overnight money market instruments at December 31,2002 and were redeemable on a daily basis. All of the underlying investments in the money market fund hadmaturities of three months or less.  Asa result, we believe the market risk arising from our holdings of financialinstruments is minimal.  A hypothetical1% fluctuation in interest rates would not have a material adverse effect onour financial position, results of operations or cash flows.

 

**ITEM 8.****                                   FINANCIALSTATEMENTS AND SUPPLEMENTARY INFORMATION.**

 

See pages 29 through 41.

 

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

 

None.

 

# **PART III**

 

**ITEM 10.**                            DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT.

 

The information requiredby Item 10 is incorporated by reference to the Proxy Statement for our 2003Annual Meeting, to be filed with the Securities and Exchange Commission within120 days of our fiscal year end, under the captions “Management” and “Nomineesand Directors.”

 

**ITEM 11.**                            EXECUTIVE COMPENSATION.

 

The information requiredby Item 11 is incorporated by reference to the Proxy Statement for our 2003Annual Meeting under the caption “Executive Compensation,” to be filed with theSecurities and Exchange Commission within 120 days of our fiscal year end.

 

**ITEM 12.**                            SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT.

 

The information requiredby Item 12 is incorporated by reference to the Proxy Statement for our 2003Annual Meeting under the caption “Principal Shareholders,” to be filed with theSecurities and Exchange Commission within 120 days of our fiscal year end.

 

**ITEM 13.****                              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.**

 

The information requiredby Item 13 is incorporated by reference to the Proxy Statement for our 2003Annual Meeting under the caption “Certain Relationships,” to be filed with theSecurities and Exchange Commission within 120 days of our fiscal year end.

 

**ITEM 14.****                            CONTROLSAND PROCEDURES**

 

Under the supervision andwith the participation of our Chief Executive Officer and Chief FinancialOfficer, we have evaluated our disclosure controls and procedures within 90days prior to the filing date of this report. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that such disclosure controls and proceduresare adequate and effective.  There havenot been any significant changes in our internal controls or in other factorsthat could significantly affect these controls subsequent to the date ofmanagement’s evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

We intend to review andevaluate the design and effectiveness of our disclosure controls and procedureson an ongoing basis and to improve our controls and procedures over time and tocorrect any deficiencies that we may discover in the future.  Our goal is to ensure that our seniormanagement has timely access to all material financial and non-financialinformation concerning our business. While we believe the present design of our disclosure controls andprocedures is effective to achieve our goal, future events affecting ourbusiness may cause us to significantly modify our disclosure controls andprocedures.

 

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# **PART IV**

 

**ITEM 15.****                            EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.**

 

**(a)(1)****                   FinancialStatements**

 

**                                               **Independent Auditors’ Report

 

                                                Statements of Income for each of theyears ended December 31, 2002, 2001 and 2000

 

                                                Balance Sheets at December 31, 2002 and2001

 

                                                Statements ofShareholders’ Equity for each of the years ended December 31, 2002, 2001 and2000

 

                                                Statements of Cash Flows foreach of the years ended December 31, 2002, 2001 and 2000

 

                                                Notes to FinancialStatements

 

**(a)(2)****                   Exhibits**

 

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

 

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

 

10.1                           Form ofEnhanced Directory Assistance Agreement (4)

 

10.11                     Lease Agreement between and amongMurray Scholls, LLC, Gramor Development Northwest, Inc. and the Company (2)

 

10.19                     StockPurchase Agreement between the Company and Sonera Media Holding B.V. dated asof November 8, 2000 (5)

 

10.20                     InvestmentAgreement between the Company and Sonera Media Holding B.V. dated as ofFebruary 2, 2001 (6)

 

10.21                     Registration Rights Agreementbetween the Company and Sonera Media Holding B.V. dated as of February 2, 2001(6)

 

10.22                     Commercial Lease Agreement betweenMurray Scholls, LLC and the Company (7)

 

10.23                     DeferredCompensation Plan Document (7)*

 

10.24                     Agreement for Enhanced DirectoryAssistance Services between Metro One and AT&T Wireless Services, Inc.dated December 1, 2000 (7)(9)

 

10.25                     1999 Employee Stock Purchase Plan(7)*

 

10.27                     1994 Stock Incentive Plan (8)*

 

10.28                     2003 Employment Agreement withTimothy A. Timmins*

 

 23.1                        Consent of Deloitte &Touche LLP, independent auditors

 

 99.1                        Certification Pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002

 

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*            Management contract orcompensatory plan

 

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(1)                                  Incorporatedherein by reference to the Company’s Registration Statement on Form S-1 datedAugust 22, 1996, File No. 333-05183.

 

(2)                                  Incorporatedherein by reference to the Company’s annual report on Form 10-K dated March 31,1999, Commission No. 0-27024.

 

(3)                                  Incorporatedherein by reference to the Company’s annual report on Form 10-KSB dated March31, 1998, Commission No.0-27024.

 

(4)                                  Incorporatedherein by reference to the Company’s Quarterly Report on Form 10-Q datedOctober 22, 1999, Commission No. 0-27024.

 

(5)                                  Incorporatedherein by reference to the Company’s Current Report on Form 8-K dated November20, 2000, Commission No. 0-27024.

 

(6)                                  Incorporatedherein by reference to the Company’s Current Report on Form 8-K dated February15, 2001, Commission No. 0-27024.

 

(7)                                  Incorporatedherein by reference to the Company’s annual report on Form 10-K dated April 2,2001, Commission No. 0-27024.

 

(8)                                  Incorporatedherein by reference to the Company’s Form S-8 dated February 12, 2002,Commission No. 0-27024.

 

(9)                                  Certainportions of Exhibit 10.24 are the subject of a request for confidentialtreatment and have been omitted from the Exhibit and have been filed separatelywith the Commission.

 

**(b) Reports Filed on Form 8-K**

 

No reports on Form 8-Kwere filed during the quarter ended December 31, 2002.

 

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SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Exchange Act, the registrant hasduly caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   |   |   |   |   |   | Metro One  Telecommunications, Inc. |
|--------|--------|--------|--------|--------|--------|-------------------------------------|
|   |   |   |   |   |   |                                |   |
|   |   |   |   |   |   | By:                                 | /s/ Timothy A. Timmins |   |
|   |   |   |   |   |   |                                | Timothy A. Timmins |
|   |   |   |   |   |   |                                | President and Chief  Executive Officer |

 

Date:     March28, 2003

 

 

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/ Timothy A. Timmins     |   |                            | President, Chief  Executive         |     | March 28, 2003 |
| Timothy A. Timmins         |   | Officer and Director            |                                |     |
|                       |   | (Principal Executive  Officer)  |                                |     |
|                       |   |                            |                                |     |
| /s/ Dale N. Wahl           |   |                            | Senior Vice President,              |     | March 28, 2003 |
| Dale N. Wahl               |   | Chief Financial Officer         |                                |     |
|                       |   | (Principal Financial  Officer)  |                                |     |
|                       |   |                            |                                |     |
| /s/ Duane C. Fromhart      |   |                            | Vice President, Finance             |     | March 28, 2003 |
| Duane C. Fromhart          |   | (Principal Accounting  Officer) |                                |     |
|                       |   |                            |                                |     |
| /s/ William D.  Rutherford |   |                            | Chairman of the Board  of Directors |     | March 28, 2003 |
| William D. Rutherford      |   |                            |                                |     |
|                       |   |                            |                                |     |
| /s/ Aimo Olkkonen          |   |                            | Director                            |     | March 28, 2003 |
| Aimo Olkkonen              |   |                            |                                |     |
|                       |   |                            |                                |     |
| /s/ Roger L. Pringle       |   |                            | Director                            |     | March 28, 2003 |
| Roger L. Pringle           |   |                            |                                |     |
|                       |   |                            |                                |     |
| /s/ James M. Usdan         |   |                            | Director                            |     | March 28, 2003 |
| James M. Usdan             |   |                            |                                |     |
|                       |   |                            |                                |     |
| /s/ David A. Williams      |   |                            | Director                            |     | March 28, 2003 |
| David A. Williams          |   |                            |                                |     |
|                            |        |                                 |                                     |          |  |  |  |  |  |  |  |  |

 

25

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#### **CERTIFICATIONPURSUANT TO RULE 15d-14 OF THE SECURITIES EXCHANGE ACT 0F 1934, AS AMENDED AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

#### **CERTIFICATIONS**

#### ** **

I, Timothy A. Timmins,certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Metro One Telecommunications, Inc;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)             Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              Presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalent function):

 

a)              Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this annual report whether ornot there were significant changes in the internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 

Date:                 March 28,2003

 
|   | /s/  Timothy A. Timmins |   |
|--------|------------------------------|--------|
|   | Timothy A. Timmins           |
|   | President, Chief Executive   |
|   | Officer and Director         |

#### ** **

26

----

 

#### **CERTIFICATIONPURSUANT TO RULE 15d-14 OF THE SECURITIES EXCHANGE ACT 0F 1934, AS AMENDED AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

#### **CERTIFICATIONS**

 

I, Dale N. Wahl, certifythat:

 

1.               I have reviewedthis annual report on Form 10-K of Metro One Telecommunications, Inc;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)             Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              Presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this annual report whether ornot there were significant changes in the internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 

Date:                 March 28,2003

 
|   | /s/  Dale N. Wahl   |
|--------|--------------------------|
|   | Dale N. Wahl             |
|   | Senior Vice President,   |
|   | Chief Financial  Officer |

 

27

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INDEPENDENT AUDITORS’ REPORT

 

To The Board of Directorsand Shareholders of

Metro OneTelecommunications, Inc.

Beaverton, Oregon

 

 

We have audited theaccompanying balance sheets of Metro One Telecommunications, Inc. as ofDecember 31, 2002 and 2001 and the related statements of income, shareholders’equity, and cash flows for each of the three years in the period ended December31, 2002.  These financial statementsare the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America.  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, suchfinancial statements present fairly, in all material respects, the financialposition of Metro One Telecommunications, Inc. as of December 31, 2002 and2001, and the results of its operations and its cash flows for each of thethree years in the period ended December 31, 2002, in conformity withaccounting principles generally accepted in the United States of America.

 

 

DELOITTE & TOUCHE LLP

Portland, Oregon

February7, 2003

 

28

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**Metro One Telecommunications, Inc.**

**Statements of Income****  (Inthousands, except per share amounts)**

 
|                                  |   | **Years  ended December 31,** |    |
|---------------------------------------|--------|-------------------------------|---------|
|                                  |   | **2002**                      |    | **2001** |   | **2000** |   |
|                                  |   |                          |    |   |   |   |   |
| Revenues                              |   | $                             | 257,951 |   | $ | 233,318 |   | $ | 156,981 |   |
|                                  |   |                          |    |   |   |   |   |
| Costs  and expenses:                  |   |                          |    |   |   |   |   |
| Direct  operating                     |   | 144,164                       |    | 131,851 |   | 97,438 |   |
| General  and administrative           |   | 72,461                        |    | 65,422 |   | 46,112 |   |
|                                  |   | 216,625                       |    | 197,273 |   | 143,550 |   |
|                                  |   |                          |    |   |   |   |   |
| Income  from operations               |   | 41,326                        |    | 36,045 |   | 13,431 |   |
|                                  |   |                          |    |   |   |   |   |
| Other  income, net                    |   | 978                           |    | 1,388 |   | 195 |   |
| Interest  and loan fees               |   | (10                           | )       | (895 | ) | (3,206 | ) |
|                                  |   |                          |    |   |   |   |   |
| Income  before income taxes           |   | 42,294                        |    | 36,538 |   | 10,420 |   |
| Income  tax expense                   |   | 16,165                        |    | 8,116 |   | 678 |   |
| Net  income                           |   | $                             | 26,129  |   | $ | 28,422 |   | $ | 9,742 |   |
|                                  |   |                          |    |   |   |   |   |
| Net  income per common share:         |   |                          |    |   |   |   |   |
| Basic                                 |   | $                             | 1.06    |   | $ | 1.20 |   | $ | .56 |   |
| Diluted                               |   | $                             | 1.04    |   | $ | 1.15 |   | $ | .54 |   |
|                                  |   |                          |    |   |   |   |   |
| Weighted  average shares outstanding: |   |                          |    |   |   |   |   |
| Basic                                 |   | 24,576                        |    | 23,589 |   | 17,520 |   |
| Diluted                               |   | 25,078                        |    | 24,812 |   | 18,185 |   |

 

The accompanying notesare an integral part of these financial statements

 

29

----

 

**Metro One Telecommunications, Inc.**

**BalanceSheets**** (In thousands)**

 
|                                                                                                                                                 |   | **December  31,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                                                                 |   | **2002**          |    | **2001** |   |
|                                                                                                                                                 |   |              |    |   |   |
| **Assets**                                                                                                                                           |   |              |    |   |   |
|                                                                                                                                                 |   |              |    |   |   |
| Current  assets:                                                                                                                                     |   |              |    |   |   |
| Cash  and cash equivalents                                                                                                                           |   | $                 | 76,528  |   | $ | 53,692 |   |
| Restricted  cash                                                                                                                                     |   | 3,348             |    | 900 |   |
| Accounts  receivable                                                                                                                                 |   | 31,321            |    | 32,794 |   |
| Prepaid  costs and other current assets                                                                                                              |   | 6,498             |    | 4,907 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Total  current assets                                                                                                                                |   | 117,695           |    | 92,293 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Furniture,  fixtures and equipment, net                                                                                                              |   | 71,668            |    | 69,066 |   |
| Goodwill                                                                                                                                             |   | 4,432             |    | 4,432 |   |
| Intangible  assets                                                                                                                                   |   | 4,023             |    | 3,281 |   |
| Other  assets                                                                                                                                        |   | 871               |    | 687 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Total  assets                                                                                                                                        |   | $                 | 198,689 |   | $ | 169,759 |   |
|                                                                                                                                                 |   |              |    |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                       |   |              |    |   |   |
|                                                                                                                                                 |   |              |    |   |   |
| Current  liabilities:                                                                                                                                |   |              |    |   |   |
| Accounts  payable                                                                                                                                    |   | $                 | 1,366   |   | $ | 1,276 |   |
| Accrued  liabilities                                                                                                                                 |   | 1,054             |    | 6,180 |   |
| Accrued  payroll and related costs                                                                                                                   |   | 11,570            |    | 11,090 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Total  current liabilities                                                                                                                           |   | 13,990            |    | 18,546 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Deferred  tax liabilities                                                                                                                            |   | 8,789             |    | 3,591 |   |
| Other  long-term liabilities                                                                                                                         |   | 521               |    | 253 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Total  liabilities                                                                                                                                   |   | 23,300            |    | 22,390 |   |
|                                                                                                                                                 |   |              |    |   |   |
| 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, 24,682 and 24,463 shares issued and outstanding  at December 31, 2002 and 2001, respectively |   | 119,425           |    | 117,534 |   |
| Retained  earnings                                                                                                                                   |   | 55,964            |    | 29,835 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Shareholders’  equity                                                                                                                           |   | 175,389           |    | 147,369 |   |
|                                                                                                                                                 |   |              |    |   |   |
| Total  liabilities and shareholders’ equity                                                                                                     |   | $                 | 198,689 |   | $ | 169,759 |   |

 

The accompanying notesare an integral part of these financial statements

 

30

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**Metro One Telecommunications, Inc.**

**Statements of Shareholders’ Equity****  (Inthousands)**

 
|                                   |   | **Shareholders’  Equity** |   |
|----------------------------------------|--------|--------------------------------|--------|
|                                   |   | **Common  Stock**              |   | **Retained Earnings****(Accumulated  Deficit)** |   | **Shareholders’  Equity** |   |
|                                   |   | **Shares**                     |   | **Amount** |   |   |   |
|                                   |   |                           |   |   |   |   |   |   |   |
| Balances  at December 31, 1999         |   | 17,121                         |   | $ | 40,308 |   | $ | (8,329 | ) | $ | 31,979 |   |
|                                   |   |                           |   |   |   |   |   |   |   |
| Employee stock options  exercised, net |   | 587                            |   | 3,426 |   | — |   | 3,426 |   |
| Employee stock  purchase plan          |   | 39                             |   | 257 |   | — |   | 257 |   |
| Net  income                            |   | —                         |   | — |   | 9,742 |   | 9,742 |   |
|                                   |   |                           |   |   |   |   |   |   |   |
| Balances  at December 31, 2000         |   | 17,747                         |   | 43,991 |   | 1,413 |   | 45,404 |   |
|                                   |   |                           |   |   |   |   |   |   |   |
| Issuance of common  stock, net         |   | 6,000                          |   | 64,607 |   | — |   | 64,607 |   |
| Shares issued in  business combination |   | 155                            |   | 3,200 |   | — |   | 3,200 |   |
| Employee stock options  exercised      |   | 510                            |   | 3,300 |   | — |   | 3,300 |   |
| Tax benefit from stock  plans          |   | —                         |   | 1,730 |   | — |   | 1,730 |   |
| Employee stock  purchase plan          |   | 51                             |   | 706 |   | — |   | 706 |   |
| Net  income                            |   | —                         |   | — |   | 28,422 |   | 28,422 |   |
|                                   |   |                           |   |   |   |   |   |   |   |
| Balances  at December 31, 2001         |   | 24,463                         |   | 117,534 |   | 29,835 |   | 147,369 |   |
|                                   |   |                           |   |   |   |   |   |   |   |
| Employee stock options  exercised      |   | 91                             |   | 594 |   | — |   | 594 |   |
| Tax benefit from stock  plans          |   | —                         |   | 498 |   | — |   | 498 |   |
| Employee stock  purchase plan          |   | 128                            |   | 799 |   | — |   | 799 |   |
| Net  income                            |   | —                         |   | — |   | 26,129 |   | 26,129 |   |
|                                   |   |                           |   |   |   |   |   |   |   |
| Balances  at December 31, 2002         |   | 24,682                         |   | $ | 119,425 |   | $ | 55,964 |   | $ | 175,389 |   |

 

The accompanyingnotes are an integral part of these financial statements

 

31

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**Metro One Telecommunications, Inc.**

**Statementsof Cash Flows**** (In thousands)**

 
|                                                                               |   | **Years  ended December 31,** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                               |   | **2002**                      |   | **2001** |   | **2000** |   |
|                                                                               |   |                          |   |   |   |   |   |
| Cash  flows from operating activities:                                             |   |                          |   |   |   |   |   |
| Net  income                                                                        |   | $                             | 26,129 |   | $ | 28,422 |   | $ | 9,742 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                          |   |   |   |   |   |
| Depreciation  and amortization                                                     |   | 18,794                        |   | 15,824 |   | 10,465 |   |
| Loss  on disposal of fixed assets                                                  |   | 398                           |   | 176 |   | 220 |   |
| Deferred  income taxes                                                             |   | 5,325                         |   | 1,775 |   | (96 | ) |
| Tax  benefit from employee stock plans                                             |   | 498                           |   | 1,730 |   | — |   |
| Changes  in certain assets and liabilities:                                        |   |                          |   |   |   |   |   |
| Accounts  receivable                                                               |   | 1,473                         |   | 3,765 |   | (21,202 | ) |
| Prepaid  costs and other assets                                                    |   | (3,022                        | )      | (2,727 | ) | (2,543 | ) |
| Accounts  payable and other liabilities                                            |   | (4,288                        | )      | 897 |   | 8,764 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Net  cash provided by operating activities                                         |   | 45,307                        |   | 49,862 |   | 5,350 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Cash  flows from investing activities:                                             |   |                          |   |   |   |   |   |
| Capital  expenditures                                                              |   | (21,416                       | )      | (27,966 | ) | (27,168 | ) |
| Acquisition  of business                                                           |   | —                        |   | (3,388 | ) | — |   |
| Maturity  of short-term investments                                                |   | —                        |   | — |   | 400 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Net  cash used in investing activities                                             |   | (21,416                       | )      | (31,354 | ) | (26,768 | ) |
|                                                                               |   |                          |   |   |   |   |   |
| Cash  flows from financing activities:                                             |   |                          |   |   |   |   |   |
| Cash  restricted to secure letter of credit                                        |   | (2,448                        | )      | (900 | ) |   |   |
| Net  (repayment of) proceeds from line of credit                                   |   | —                        |   | (4,750 | ) | 4,750 |   |
| Proceeds  from issuance of debt                                                    |   | —                        |   | — |   | 16,637 |   |
| Repayment  of debt                                                                 |   | —                        |   | (34,242 | ) | (6,577 | ) |
| Repayment  of capital lease obligations                                            |   | —                        |   | — |   | (176 | ) |
| Proceeds  from issuance of common stock, net                                       |   | —                        |   | 64,607 |   | — |   |
| Proceeds  from exercise of stock options and employee stock purchases              |   | 1,393                         |   | 4,006 |   | 3,683 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Net  cash (used in) provided by financing activities                               |   | (1,055                        | )      | 28,721 |   | 18,317 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Net  increase (decrease) in cash and cash equivalents                              |   | 22,836                        |   | 47,229 |   | (3,101 | ) |
|                                                                               |   |                          |   |   |   |   |   |
| Cash  and cash equivalents, beginning of year                                      |   | 53,692                        |   | 6,463 |   | 9,564 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Cash  and cash equivalents, end of year                                            |   | $                             | 76,528 |   | $ | 53,692 |   | $ | 6,463 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Supplemental  disclosure of cash flow information:                                 |   |                          |   |   |   |   |   |
| Cash  paid for interest                                                            |   | $                             | 11     |   | $ | 993 |   | $ | 3,130 |   |
| Cash  paid for income taxes                                                        |   | 12,358                        |   | 4,395 |   | 366 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Summary  of non-cash investing and financing activities:                           |   |                          |   |   |   |   |   |
| Issuance of 155 shares  of common stock in business combination                    |   | $                             | — |   | $ | 3,200 |   | $ | — |   |

 

The accompanying notesare an integral part of these financial statements

 

32

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**Metro One Telecommunications, Inc.**

**Notes to Financial Statements**

 

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

 

***Nature of Operations. ***We provide Enhanced Directory Assistanceservices to telecommunications carriers and their customers.  Revenues are derived principally throughfees charged to telecommunications carriers. We operate call centers located in many metropolitan areas throughoutthe United States.

 

***Cash and Cash Equivalents.* **Cash and cash equivalents include cashdeposits in banks and highly liquid investments with maturity dates of threemonths or less at the date of acquisition.

 

***Major Customers.* **In each of the years ended December 31, 2002, 2001 and 2000,thirteen customers accounted for substantially all revenue and accountsreceivable reported.  Our three largestcustomers accounted for approximately 33%, 33% and 24% of revenue in 2002.  Our three largest customers accounted forapproximately 32%, 30% and 23% of revenue in 2001.   Our three largest customers accounted for approximately 31%, 29%and 21% of revenue in 2000.  In 2002 andhistorically, we have not incurred significant losses related to our accountsreceivable, thus, we maintain no allowance for uncollectible accounts.

 

***Significant Event.***  Our contract with Sprint PCS expired onDecember 31, 2002.  In October 2002,Sprint PCS indicated to us that it would not be signing a new contract upon expirationof the existing contract.  Sprint PCSaccounted for approximately 33% and 32%, of our revenues in 2002 and 2001,respectively.  In December 2002, weagreed to a transition arrangement with Sprint PCS, pursuant to which we willcontinue to handle its subscribers’ calls subsequent to December 31, 2002 withdifferent phase-out periods for different markets and a complete transition bythe middle of 2003.  The phase-outperiods are governed by a mutually agreed upon schedule; however, givenuncertainties beyond our control and knowledge, we are unable to predict theexact timing of the Sprint PCS transition. It is likely that the expiration of the Sprint PCS contract will have anadverse effect on our financial position and future operating results, as wellas our operations, although it is not possible to determine the exact timing,nature or magnitude at this time.

 

***Furniture, Fixtures and Equipment. ***Furniture, fixtures and equipment arestated at cost and are depreciated over their estimated useful lives of threeto seven years using the straight-line method. Leasehold improvements are amortized over the lesser of the remaininglease term or the useful life.  Expensesfor repairs and maintenance are expensed as incurred.

 

***Goodwill.***  Purchased goodwill, which represents the excess of cost over thefair value of net assets acquired in a business combination, was amortized on astraight-line basis, over its estimated economic life, though December 31,2001.  As discussed below under “RecentAccounting Pronouncements,” we adopted SFAS No. 142, “Goodwill and OtherIntangible Assets,” as of January 1, 2002. Under SFAS No. 142, we evaluate goodwill for impairment annually andwhenever events or changes in circumstances indicate the carrying amount ofgoodwill may not be recoverable.  If ourevaluation indicates that the fair value of our business is less than itscarrying value, we will write down the related goodwill to its implied fairvalue.

 

***Intangible Assets.***  Intangible assets include patents, patents pendingand trademarks.  These assets arecarried at cost less accumulated amortization and are amortized over theirestimated useful lives of three to ten years beginning at the time the relatedpatent or trademark is granted. Accumulated amortization related to intangible assets was $634,000 and$302,000 at December 31, 2002 and 2001, respectively.  The related amortization expense was $377,000, $210,000 and$31,000 for the years ended December 31, 2002, 2001 and 2000,respectively.  The estimated aggregateamortization expense related to intangible assets for the five years subsequentto 2002 is shown below.   We have notincluded any amounts related to amortization of costs of patents or trademarkscurrently pending but not yet granted.

 

| **Year Ending**December 31, |   | **Estimated**amortization  expense |   |
|-----------------------------|--------|------------------------------------|--------|
|                        |   | **(In  thousands)**                |   |
| 2003                        |   | $                                  | 417    |   |
| 2004                        |   | 410                                |   |
| 2005                        |   | 402                                |   |
| 2006                        |   | 384                                |   |
| 2007                        |   | 370                                |   |
|                             |        |                                    |        |  |

 

33

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***Impairment of Long-lived and Intangible Assets.***  We evaluate the carrying value of long-livedassets for possible impairment as events or changes arise indicating that suchassets should be reviewed.  If an assetis determined to be impaired, the loss is measured as the amount by which thecarrying value of the asset exceeds its fair value.  We prepare an estimate of future undiscounted cash flows expectedto result from the use of the asset and its eventual disposition to determineits fair value.

 

***Fair Value of Financial Instruments.***  The carrying value of cash and cash equivalents,restricted cash, accounts receivable, accounts payable , accruedliabilities  and accrued payroll andrelated costs approximate fair value due to their short-term maturities.

 

***Deferred Income Taxes.***  Deferred income taxes are provided fortemporary differences between the amounts of assets and liabilities forfinancial and tax reporting purposes. Deferred tax assets are reduced by a valuation allowance when it isestimated to be more likely than not that some portion of the deferred taxassets will not be realized.

 

***Revenue Recognition. ***Under existing contracts with telecommunicationscarriers, we record revenue for the number of calls processed at the agreedupon price per call, calculated on a monthly basis.  Revenue per call may vary based on monthly volumes achieved.  Revenue is recognized as services areprovided.

 

***Net Income Per Share.***  We report basic and diluted net income pershare in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 128, “Earnings per Share”.  Basic netincome per share is calculated based on the weighted average number of commonshares outstanding during each period. Diluted net income per share is calculated based on these same sharesplus dilutive potential shares issuable upon assumed exercise of outstandingstock options based on the treasury stock method.

 

***Stock-Based Compensation.***  We have elected to continue to account forstock options according to Accounting Principles Bulletin (“APB”) No. 25,“Accounting for Stock Issued to Employees.” Accordingly, no compensation cost has been recognized in the financialstatements related to stock options issued under our Stock Incentive Plan (the“Plan”).  If compensation cost on stockoptions granted in 2002, 2001 and 2000 under this Plan had been determinedbased on the fair value of the options granted as of the grant date in a methodconsistent with that described in SFAS No. 123, “Accounting for Stock-BasedCompensation,” our net income and earnings per share would have been changed tothe pro forma amounts indicated below for the years ended December 31:

 
|                                     |   | **2002**                                      |   | **2001** |   | **2000** |   |
|------------------------------------------|--------|-----------------------------------------------|--------|----------|--------|----------|--------|
|                                     |   | **(In thousands, except per  share amounts)** |   |
| Net income, as  reported                 |   | $                                             | 26,129 |     | $      | 28,422   |   | $ | 9,742 |   |
| Stock-based  compensation expense        |   | (4,250                                        | )      | (2,804   | )      | (995     | )      |
| Net income, pro forma                    |   | $                                             | 21,879 |     | $      | 25,618   |   | $ | 8,747 |   |
|                                     |   |                                          |   |     |   |     |   |
| Diluted earnings per  share, as reported |   | $                                             | 1.04   |     | $      | 1.15     |   | $ | 0.54 |   |
| Stock-based  compensation impact         |   | (.17                                          | )      | (.12     | )      | (.06     | )      |
| Diluted earnings per  share, pro forma   |   | $                                             | .87    |     | $      | 1.03     |   | $ | 0.48 |   |

 

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

 

The fair value of each option grant was estimated onthe date of grant using the Black-Scholes option-pricing model with thefollowing assumptions for the years ending December 31:

 
|                                           |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                           |   |     |   |     |   |     |   |
| Dividend yield                                 |   | 0.0      | %      | 0.0      | %      | 0.0      | %      |
| Risk free interest  rate                       |   | 4.1      | %      | 4.4      | %      | 5.0      | %      |
| Expected volatility                            |   | 82.8     | %      | 87.0     | %      | 75.4     | %      |
| Expected life in years                         |   | 4.0      |   | 4.0      |   | 4.0      |   |
|                                           |   |     |   |     |   |     |   |
| Weighted-average fair value of options granted |   | $        | 13.92  |     | $      | 15.59    |   | $ | 3.95 |   |
|                                                |        |          |        |          |        |          |        |  |  |  |

 

34

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***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 effect 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.

 

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

 

From time to time,in the normal course of our business, we issue standby letters of credit andbank guarantees.  At December 31, 2002,we had one letter of credit outstanding in the amount of $3,348,000 related toour workers’ compensation program.  Theletter of credit is secured by a certificate of deposit for the same amount andis recorded as restricted cash.  Thiscommitment expires on April 1, 2003 and is typically renewed on an annualbasis.

 

***Recent Accounting Pronouncements.***   In June 2001, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 142, “Goodwill and Other IntangibleAssets.”  This new statement addressesfinancial accounting and reporting for goodwill and other intangible assets.Under this new standard, goodwill and other intangible assets that are deemedto have an indefinite life are no longer amortized. However, goodwill and otherintangible assets with indefinite lives will be tested for impairment on anannual basis by applying a fair value based test.  We adopted SFAS No. 142 as of January 1, 2002 and thereforeceased amortization of goodwill.  Otherthan cessation of amortization of goodwill, the adoption of SFAS No. 142 had noimpact on our financial position, results of operations or cash flows for theyear ended December 31, 2002.  Goodwillamortization for the twelve months ended December 31, 2001 was $518,000.  During the fourth quarter of 2002, wecompleted an impairment test on goodwill and determined that there was noimpairment.

 

In August 2001, the FASBissued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.”  SFAS No. 144 establishes asingle accounting model for long-lived assets to be disposed of and replacesSFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed of” and APB No. 30, “Reporting Results ofOperations — Reporting the Effects of Disposal of A Segment of Business.”  We adopted SFAS No. 144 effective January 1,2002.  The adoption of SFAS No. 144 hadno impact on our financial position, results of operations or cash flows.

 

In July 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  The statement requiresthat a liability for a cost associated with an exit or disposal activity be recognizedwhen the liability is incurred.  Underprevious guidance, a liability for an exit cost was recognized at the date ofan entity’s commitment to an exit plan. The provisions of the statement are effective for exit or disposalactivities that are initiated after December 31, 2002.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transitionand Disclosure,” which amends FASB Statement No. 123, “Accounting forStock-Based Compensation.”  SFAS No. 148provides alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  It also amends the disclosure requirementsof SFAS No. 123 to require more prominent and frequent disclosure in financialstatements about the effects of stock-based compensation.  We have chosen to continue to account forstock-based compensation using the intrinsic value method prescribed by APB No.25 and related interpretations.  SFASNo. 148 is effective for fiscal years ended after December 15, 2002.  Accordingly, we have adopted the disclosureprovisions of SFAS No. 148 in our financial reports for the year ended December31, 2002.  As the adoption of this statementinvolves disclosure only, we do not expect a material impact on our financialposition, results of operations or cash flows.

 

In December 2002, theFASB issued Financial Interpretation (‘FIN”) No. 45, “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”  FinancialInterpretation No. 45 elaborates on the existing disclosure requirements formost guarantees, including loan guarantees such as standby letters ofcredit.  It also clarifies that at thetime a company issues a guarantee, the company must recognize an initialliability for the fair value, or market value, of the obligations it assumesunder that guarantee and must disclose that information in its interim andannual financial statements.  FinancialInterpretation No. 45 is to be applied prospectively to guarantees issued ormodified after December 31, 2002.  Thedisclosure requirements in this interpretation are effective for financialstatements of interim or annual periods ending after December 31, 2002.  We have adopted the disclosure provisions ofFIN 45.  We believe the adoption of thisstatement will not have a material impact on our financial position, results ofoperations or cash flows.

 

35

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In January 2003, the FASBissued FIN No. 46, “Consolidation of Variable Interest Entities.”  Variable interest entities have beencommonly referred to as special-purpose entities or off-balance sheetstructures.  The purpose of FIN No. 46is to improve financial reporting by enterprises involved with variableinterest entities by requiring consolidation of such entities.  FIN No. 46 is to be applied immediately tovariable interest entities created after January 31, 2003.  The consolidation requirements apply toolder entities in the first fiscal year or interim period beginning after June15, 2003.  Certain of the disclosurerequirements apply in all financial statements issued after January 31, 2003,regardless of when the variable interest entity was established.  We believe the adoption of this statement willnot have a material impact on our financial position, results of operations orcash flows.

 

***Reclassification. ***Certainbalances in the 2001 and 2000 financial statements have been reclassified toconform to 2002 presentations.  Suchreclassifications had no effect on reported net income.

 

**2.****              Acquisition**

 

In February 2001, wecompleted the purchase of a company involved in developing web-based dataextraction and processing technology. The transaction has been recorded usingthe purchase method of accounting.  Thepurchase price has been allocated to the assets acquired, which consistedprimarily of proprietary technology, intangibles and goodwill.  Pro forma financial information is notpresented as the impact on our results of operations was not material.

 

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

 

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

 
|                                          |   | **December  31,**   |    |
|-----------------------------------------------|--------|---------------------|---------|
|                                          |   | **2002**            |    | **2001** |   |
|                                          |   | **(In  thousands)** |    |
| Equipment                                     |   | $                   | 101,198 |   | $ | 86,914 |   |
| Furniture  and fixtures                       |   | 14,788              |    | 11,991 |   |
| Leasehold  improvements                       |   | 7,211               |    | 6,436 |   |
|                                          |   |                |    |   |   |
|                                          |   | 123,197             |    | 105,341 |   |
| Accumulated  depreciation                     |   | (51,529             | )       | (36,275 | ) |
|                                          |   |                |    |   |   |
| Total  furniture, fixtures and equipment, net |   | $                   | 71,668  |   | $ | 69,066 |   |

 

**4.****              CreditFacilities**

 

***Loan Agreements. *** At various times during 2001, we hadequipment financing loan arrangements with an equipment financing lender.  The arrangements provided us with borrowingcapacity to fund the expansion of our call center network and other equipmentneeds.  The arrangements provided for fixedor floating rate options and all assets purchased pursuant to the arrangementswere pledged as collateral.  Individualborrowings under the arrangements had terms of 48 months each, and prepaymentof outstanding borrowings was allowable 12 months after the funding dates, or,with certain restrictions, at any time prior, for a 1% fee.  Outstanding individual borrowings boreinterest at fixed rates ranging from 8.10% to 10.09%.  These facilities were paid in full as of March 31, 2001 (see Note6).

 

***Line of Credit.***  During December 1999, we entered into a lineof credit agreement with a commercial bank that replaced certain prioragreements.  The agreement consisted ofa $10 million revolving line of credit bearing interest based on the bank’sprime rate and our debt to cash flow ratio. The line was secured by all accounts receivable and was subject to anunused facility fee and various financial and restrictive covenants.  The line of credit was paid in full as ofJanuary 31, 2001 and the facility expired at December 31, 2001 with no amountsoutstanding (see Note 6).

 

36

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

 

We lease operatingfacilities and equipment under operating leases with unexpired terms of one toeight years.  Rental expense foroperating leases was approximately $9,355,000, $7,496,000 and $5,418,000 for2002, 2001 and 2000, respectively.

 

Minimum annual rentalsfor the five years subsequent to 2002 and in the aggregate thereafter are asfollows:

 

| **Year Ending**December 31,   |   | **Annual lease payments** |   |
|-------------------------------|--------|---------------------------|--------|
|                          |   | **(In thousands)**        |   |
| 2003                          |   | $                         | 8,812  |   |
| 2004                          |   | 8,197                     |   |
| 2005                          |   | 6,988                     |   |
| 2006                          |   | 5,177                     |   |
| 2007                          |   | 3,619                     |   |
| Thereafter                    |   | 2,796                     |   |
|                          |   |                      |   |
| Total  minimum lease payments |   | $                         | 35,589 |   |

 

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

 

***Significant transactions.***  On January 31, 2001, our shareholdersapproved the issuance and sale to Sonera Media Holding B.V. of 6,000,000 sharesof common stock for a net amount of approximately $64,600,000, whichrepresented approximately 25.5% of our outstanding common stock after the issuance.  At that time, Sonera Media Holding B.V. wasa wholly-owned subsidiary of Sonera Corporation, a publicly tradedtelecommunications company organized in Finland.  This transaction was completed in February 2001.  During February and March 2001, we paid alloutstanding debt with a portion of the proceeds from this transaction.  In August 2002, the shares were transferredto Sonera Holding B.V., another wholly-owned subsidiary of Sonera Corporation.  In December 2002, Sonera Corporation mergedwith Telia AB to form TeliaSonera AB, which is the leading mobile operator andfixed voice and data provider in Scandinavia.

 

On May 16, 2001, theBoard of Directors approved a 50% stock dividend, thereby effecting athree-for-two stock split, distributing approximately 8,100,000 shares on June29, 2001.  All share and per share datapresented in the table above and elsewhere in this report have been adjusted togive effect to the stock dividend.

 

***Preferred Stock.***  We have authorized 10,000,000 shares ofpreferred stock for issuance.  Our boardof directors has the authority to issue one or more series of preferred sharesand the authority to fix and determine the rights and preferences of suchshares.  No preferred shares were issuedor outstanding as of December 31, 2002.

 

***Common Stock Options.***  We have a Stock Incentive Plan (the “Plan”),approved by the shareholders, which provides for the award of incentive stockoptions to key employees and the award of non-qualified stock options, stocksales and grants to employees, outside directors, independent contractors andconsultants.  As of December 31, 2002,1,370,045 shares of common stock were reserved for issuance under thePlan.  It is intended that the Plan willbe used principally to attract and retain key employees.

 

The option price pershare of an incentive stock option may not be less than the fair market valueof a share of common stock as of the date such option is granted.  The option price per share of anon-qualified stock option may be at a price established by the board ofdirectors or a committee thereof established for purposes of administering theplan, which price generally equals the fair market value of a share of commonstock as of the date such option is granted. 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 of eachoption may not exceed ten years. Payment for shares purchased pursuant to options may be made at the optionof the board of directors, in cash or by delivery of shares of common stockhaving a market value equal to the exercise price of the options.

 

37

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A summary of the status of our stock option plan as ofDecember 31, and changes during the years ending on those dates is as follows:

 
|                                                            |   | **2002**                                     |   | **2001**                            |   | **2000**   |   |
|-----------------------------------------------------------------|--------|----------------------------------------------|--------|-------------------------------------|--------|------------|--------|
|                                                            |   | **Shares**                                   |   | **Weighted-  Average  Exer. Price** |   | **Shares** |   | **Weighted-  Average  Exer. Price** |   | **Shares** |   | **Weighted-  Average  Exer. Price** |   |
|                                                            |   | **(In thousands, except per share amounts)** |   |
|                                                            |   |                                         |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding  at beginning of year                               |   | 2,203                                        |   | $                                   | 12.16  |       | 2,056  |   | $ | 6.75 |   | 2,315 |   | $ | 6.12 |   |
| Granted                                                         |   | 379                                          |   | 22.15                               |   | 668        |   | 24.43 |   | 510 |   | 8.67 |   |
| Exercised                                                       |   | (91                                          | )      | 6.52                                |   | (510       | )      | 6.47 |   | (587 | ) | 5.84 |   |
| Forfeited                                                       |   | (69                                          | )      | 16.54                               |   | (11        | )      | 9.81 |   | (182 | ) | 6.98 |   |
|                                                            |   |                                         |   |                                |   |       |   |   |   |   |   |   |   |
| Outstanding  at end of year                                     |   | 2,422                                        |   | $                                   | 13.81  |       | 2,203  |   | $ | 12.16 |   | 2,056 |   | $ | 6.75 |   |
|                                                            |   |                                         |   |                                |   |       |   |   |   |   |   |   |   |
| Options  exercisable at year-end                                |   | 1,781                                        |   |                                |   | 1,448      |   |   |   | 1,509 |   |   |   |
| Weighted-average  fair value of options exercisable at year end |   | $                                            | 10.81  |                                |   |       | $      | 9.15 |   |   |   | $ | 6.28 |   |   |   |
|                                                                 |        |                                              |        |                                     |        |            |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

The followingtable summarizes information about stock options outstanding and exercisableunder the Plan at December 31, 2002:

 
|                          |              | **Outstanding**                               |   | **Exercisable**                                         |   |
|-------------------------------|-------------------|-----------------------------------------------|--------|---------------------------------------------------------|--------|
| **Range of  Exercise Prices** |              | **Number  of  Options**                       |   | **Weighted-Average  Remaining  Contractual Life (yrs)** |   | **Weighted-Average  Exercise Price** |   | **Number  of  Options** |   | **Weighted-Average  Exercise Price** |   |
|                          |              | **(In  thousands, except per share amounts)** |   |
| $                             | 5.37 – 8.00  |                                          | 1,080  |                                                    | 4.16   |   | $ | 6.11 |   | 1,035 |   | $ | 6.04 |   |
| 8.16 – 12.00             |              | 406                                           |   | 7.27                                                    |   | 9.35 |   | 337 |   | 9.28 |   |
| 14.85 – 23.00            |              | 562                                           |   | 8.21                                                    |   | 22.64 |   | 314 |   | 22.36 |   |
| 25.50 – 38.00            |              | 374                                           |   | 8.98                                                    |   | 27.58 |   | 95 |   | 29.99 |   |
| $                             | 5.37 – 38.00 |                                          | 2,422  |                                                    | 6.37   |   | $ | 13.81 |   | 1,781 |   | $ | 10.81 |   |
|                               |                   |                                               |        |                                                         |        |  |  |  |  |  |  |  |  |  |  |

 

In 1999, our stockholdersapproved the Metro One Telecommunications, Inc. 1999 Employee Stock PurchasePlan (the “ESPP”).  The purpose of theESPP is to attract and retain qualified employees essential to our success, andto provide such persons with an incentive to perform in our best interests. TheESPP allows 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 thelower of the stock price at the beginning or ending of each purchaseperiod.  As of December 31, 2002, 16,000shares of common stock were reserved for issuance under the ESPP.  Under the ESPP, during 2002, employeespurchased approximately 128,000 shares at an average price of $6.24 per share.  During 2001, employees purchasedapproximately 51,000 shares at an average price of $13.69 per share.

 

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

 

Included in other incomeand expense are certain items that do not relate directly to current ongoingbusiness activity.  Included in thisclassification for the year ended December 31, 2002 is interest income of$960,000 and other miscellaneous non-operating income and expenses, none ofwhich were significant, netting to $18,000 of income.  For the year ended December 31, 2001, other income and expenseconsisted primarily of interest income of $1,337,000 and other insignificantmiscellaneous non-operating income and expense items netting to $51,000.  For the year ended December 31, 2000, otherincome and expense consisted primarily of interest income of $301,000 offset byother insignificant miscellaneous non-operating income and expense itemsnetting to $106,000.

 

38

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**8.****                          IncomeTaxes**

 

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

 
|               |   | **2002**            |   | **2001** |   | **2000** |   |
|--------------------|--------|---------------------|--------|----------|--------|----------|--------|
|               |   | **(In  thousands)** |   |
| Current:           |   |                |   |     |   |     |   |
| Federal            |   | $                   | 8,201  |     | $      | 5,671    |   | $ | 96 |   |
| State              |   | 2,639               |   | 670      |   | 678      |   |
|               |   | 10,840              |   | 6,341    |   | 774      |   |
| Deferred:          |   |                |   |     |   |     |   |
| Federal            |   | 5,460               |   | 1,775    |   | (96      | )      |
| State              |   | (135                | )      | —   |   | —   |   |
|               |   | 5,325               |   | 1,775    |   | (96      | )      |
|               |   |                |   |     |   |     |   |
| Total tax  expense |   | $                   | 16,165 |     | $      | 8,116    |   | $ | 678 |   |

 

Income tax expensediffers from the amount that would result from applying the U.S. statutory rateto income before taxes.  Areconciliation of this difference is as follows:

 
|                                        |   | **December  31,** |   |
|---------------------------------------------|--------|-------------------|--------|
|                                        |   | **2002**          |   | **2001** |   | **2000** |   |
|                                        |   |              |   |   |   |   |   |
| Federal  statutory rate                     |   | 35.0              | %      | 34.0 | % | 34.0 | % |
| State income  taxes, net of federal benefit |   | 3.9               |   | 3.0 |   | 6.6 |   |
| Net operating  loss carryforwards           |   | (0.0              | )      | (7.0 | ) | (34.8 | ) |
| Federal and  state tax credits              |   | (1.5              | )      | (6.0 | ) | — |   |
| Other                                       |   | 0.8               |   | (1.8 | ) | 0.7 |   |
|                                        |   |              |   |   |   |   |   |
| Effective tax  rate                         |   | 38.2              | %      | 22.2 | % | 6.5 | % |

 

The reconciliationreflects permanent items that impact income tax expense.  Items that increase income tax expenseinclude state income taxes and various non-deductible expenses, whereas itemsthat decrease income tax expense include net operating loss carryforwards andvarious federal and state tax credits.

 

Net deferred taxassets and liabilities are included in the following balance sheet line items:

 
|                                    |   | **December  31,**   |   |
|-----------------------------------------|--------|---------------------|--------|
|                                    |   | **2002**            |   | **2001** |   |
|                                    |   | **(In  thousands)** |   |
| Prepaid costs  and other current assets |   | $                   | 1,881  |   | $ | 2,008 |   |
| Deferred tax  liabilities               |   | (8,789              | )      | (3,591 | ) |
|                                    |   |                |   |   |   |
| Net deferred tax  liabilities           |   | $                   | (6,908 | ) | $ | (1,583 | ) |

 

39

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The temporarydifferences and carryforwards that give rise to deferred tax assets andliabilities are as follows:

 
|                                       |   | **December  31,**   |   |
|--------------------------------------------|--------|---------------------|--------|
|                                       |   | **2002**            |   | **2001** |   |
|                                       |   | **(In  thousands)** |   |
| Deferred tax  assets:                      |   |                |   |   |   |
| Net operating  loss carryforwards          |   | $                   | 569    |   | $ | 827 |   |
| Expenses not  currently deductible         |   | 2,234               |   | 1,136 |   |
| Tax credit  carryforwards                  |   | 979                 |   | 2,307 |   |
|                                       |   | 3,782               |   | 4,270 |   |
| Deferred tax  liabilities:                 |   |                |   |   |   |
| Accumulated  depreciation and amortization |   | (10,690             | )      | (5,853 | ) |
|                                       |   |                |   |   |   |
| Net deferred tax  liabilities              |   | $                   | (6,908 | ) | $ | (1,583 | ) |

 

At December 31, 2002, wehad approximately $1,626,000 of net operating loss carryforwards expiringduring the years 2004 to 2021. Ownership changes as defined by section 382 of the Internal Revenue Codecould limit the amount of net operating loss carryforwards used in any one yearor in the aggregate.

 

**9.****                          NetIncome Per Share**

 

Basic net incomeper share is based on the weighted average number of common sharesoutstanding.  Diluted net income pershare reflects the potential dilution that could occur if securities or othercontracts to issue common stock were exercised or converted into commonstock.  There were no adjustments to netincome for the calculation of both basic and diluted net income per share forall periods.

 

The calculation ofweighted-average outstanding shares is as follows:

 
|                                                          |   | **Average  Shares** |   |
|---------------------------------------------------------------|--------|---------------------|--------|
|                                                          |   | **2002**            |   | **2001** |   | **2000** |   |
|                                                          |   | **(In  thousands)** |   |
| Weighted average  common shares                               |   |                |   |   |   |   |   |
| outstanding  (used in computing Basic net income per share)   |   | 24,576              |   | 23,589 |   | 17,520 |   |
| Potential common  shares                                      |   | 502                 |   | 1,223 |   | 665 |   |
|                                                          |   |                |   |   |   |   |   |
| Weighted average  common shares                               |   |                |   |   |   |   |   |
| outstanding  (used in computing Diluted net income per share) |   | 25,078              |   | 24,812 |   | 18,185 |   |

 

Options topurchase approximately 909,000, 32,000 and 85,000 shares of common stock wereoutstanding at December 31, 2002, 2001 and 2000, respectively, but were notincluded in the computation of diluted net income per share because theireffect would be anti-dilutive.

 

All common shares havebeen restated for a 50% stock dividend which resulted in a three-for-two stocksplit effective June 29, 2001.

 

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

 

We have a deferredcompensation savings plan for the benefit of our eligible employees.  The plan permits certain voluntary employeecontributions to be excluded from the employees’ current taxable income underthe provisions of Internal Revenue Code Section 401(k).  Each employee becomes eligible toparticipate in the savings plan six months following the initial date ofemployment.  The employee must alsocomplete at least 500 hours of service in any twelve-month period.  Under the plan, we can make discretionarycontributions to the plan as approved by the board of directors.

 

Participants’ interest incompany contributions to the plan vest over a four-year period.  We made contributions of approximately $201,000,$159,000 and $83,000 during 2002, 2001 and 2000, respectively.

 

40

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**Supplemental Information**

**Quarterly Financial Data (Unaudited)**

 
|                                |   | **Quarter  ended**                           |   |
|-------------------------------------|--------|----------------------------------------------|--------|
|                                |   | **March 31**                                 |   | **June 30** |   | **September  30** |   | **December  31** |   |
|                                |   | **(In  thousands except per share amounts)** |   |
| 2002                                |   |                                         |   |   |   |   |   |   |   |
| Revenues                            |   | $                                            | 61,765 |   | $ | 67,853 |   | $ | 66,172 |   | $ | 62,161 |   |
| Direct operating  expense           |   | 35,250                                       |   | 37,518 |   | 37,133 |   | 34,262 |   |
| General and  administrative expense |   | 18,013                                       |   | 18,504 |   | 17,167 |   | 18,777 |   |
| Income from  operations             |   | 8,502                                        |   | 11,831 |   | 11,872 |   | 9,122 |   |
| Net income                          |   | 5,432                                        |   | 7,471 |   | 7,389 |   | 5,837 |   |
| Basic net income  per share         |   | .22                                          |   | .30 |   | .30 |   | .24 |   |
| Diluted net  income per share       |   | .22                                          |   | .30 |   | .30 |   | .24 |   |
|                                |   |                                         |   |   |   |   |   |   |   |
| 2001                                |   |                                         |   |   |   |   |   |   |   |
| Revenues                            |   | $                                            | 50,216 |   | $ | 59,162 |   | $ | 60,868 |   | $ | 63,072 |   |
| Direct operating  expense           |   | 28,778                                       |   | 32,875 |   | 35,194 |   | 35,005 |   |
| General and  administrative expense |   | 14,489                                       |   | 16,869 |   | 16,975 |   | 17,091 |   |
| Income from  operations             |   | 6,949                                        |   | 9,419 |   | 8,700 |   | 10,976 |   |
| Net income                          |   | 5,003                                        |   | 7,760 |   | 7,575 |   | 8,083 |   |
| Basic net income  per share         |   | .22                                          |   | .32 |   | .31 |   | .33 |   |
| Diluted net  income per share       |   | .22                                          |   | .31 |   | .30 |   | .32 |   |

 

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