**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-Q**





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


**SECURITIES
      EXCHANGE ACT OF 1934**





**For
      the Quarterly Period Ended September 30, 2008**





**Commission
      File Number** **000-51010**





**MOBILEPRO
      CORP.**


(Exact
      name of registrant as specified in its charter)





**DELAWARE**
            **87-0419571**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)**6701
                Democracy Boulevard, Suite 202, Bethesda, MD**
            **20817**(Address
                of principal executive offices)
            (Zip
                Code)





**(301)
      571-3476**


**(** Registrant’s
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) filed all reports required to be filed
      by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange
      Act”) during the past 12 months (or for such shorter period that the registrant
      was required to file such reports), and (2) has been subject to such filing
      requirements for the past 90 days. Yes x No
o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See
      definition of “large accelerated filer”, “accelerated filer” and “smaller
      reporting company in Rule 12b-2 of the Exchange Act (check one):




Large accelerated filer o
            Accelerated filer o
            Non-accelerated filer o
            Smaller reporting company x(Do
                not check if smaller
              reporting
                company)




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o
      No x





Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      equity, as of the latest practicable date: As of November 7, 2008, the Company
      had 938,264,653 outstanding shares of its common stock, $0.001 par value per
      share.









**TABLE
      OF CONTENTS**





**ITEM
                NUMBER AND CAPTION**
            **PAGE****PART
                I**
            **FINANCIAL
                INFORMATION**
            3ITEM
                1.
            CONDENSED
                CONSOLIDATED FINANCIAL STATEMENTS
            3NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            8ITEM
                2.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
                CONDITION
            27ITEM
                3.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            40ITEM
                4T.
            CONTROLS
                AND PROCEDURES
            40**PART
                II**
            **OTHER
                INFORMATION**
            43ITEM
                1.
            LEGAL
                PROCEEDINGS
            43ITEM
                1A.
            RISK
                FACTORS
            45ITEM
                2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            50ITEM
                3.
            DEFAULTS
                UPON SENIOR SECURITIES
            51ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            51ITEM
                5.
            OTHER
                INFORMATION
            51ITEM
                6.
            EXHIBITS
            51**SIGNATURES**
            53




-
          2
          -




**PART
        I**
 **FINANCIAL
        INFORMATION**
  **Item
          1. Financial Statements**
 **MOBILEPRO
        CORP. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **SEPTEMBER
        30 AND MARCH 31, 2008**
  **ASSETS****September
                    30,**
                
                **March
                    31,****2008**
                
                **2008****(Unaudited)**
                
                **(Audited)****CURRENT
                    ASSETS**Cash
                    and cash equivalents
                
                $
                1,413,434
                
                $
                1,011,396Restricted
                    cash
                
                
                80,000
                
                
                556,397Accounts
                    receivable, net
                
                
                280,920
                
                
                231,362Notes
                    receivable
                
                
                859,128
                
                
                1,065,000Prepaid
                    expenses and other current assets
                
                
                179,779
                
                
                123,759Assets
                    of companies held for sale
                
                
                27,723,152
                
                
                28,021,141**Total
                    Current Assets**
                
                
                30,536,413
                
                
                31,009,055**FIXED
                    ASSETS, NET OF ACCUMULATED DEPRECIATION**
                
                
                166,741
                
                
                257,655**OTHER
                    ASSETS**Notes
                    receivable, long-term
                
                
                1,565,000
                
                
                1,800,000Deferred
                    financing fees
                
                
                123,980
                
                
                -Investments
                    and other assets
                
                
                367,301
                
                
                324,243**Total
                    Other Assets**
                
                
                2,056,281
                
                
                2,124,243**TOTAL
                    ASSETS**
                
                $
                32,759,435
                
                $
                33,390,953
 The
          accompanying notes are an integral part of the condensed consolidated financial
          statements.
  -
              3
              -




**MOBILEPRO
        CORP. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **SEPTEMBER
        30 AND MARCH 31, 2008**
 **(CONTINUED)**
  **LIABILITIES
                    AND STOCKHOLDERS' EQUITY****September
                    30,**
                
                **March
                    31,****2008**
                
                **2008****(Unaudited)**
                
                **(Audited)****CURRENT
                    LIABILITIES**Notes
                    payable and convertible debentures
                
                $
                13,391,102
                
                $
                13,253,736Accounts
                    payable and accrued expenses
                
                
                3,064,963
                
                
                3,177,037Deferred
                    revenue
                
                
                600,000
                
                
                600,000Liabilities
                    of companies held for sale
                
                
                8,559,376
                
                
                9,663,144**Total
                    Current Liabilities**
                
                
                25,615,441
                
                
                26,693,917**STOCKHOLDERS'
                    EQUITY**Preferred
                    stock, $0.001 par value, 20,035,425 shares authorized,35,378
                    shares issued and outstanding at September 30 and March 31,
                    2008
                
                
                35
                
                
                35Common
                    stock, $0.001 par value, 1,500,000,000 shares authorized, 852,764,653
                    and775,821,796
                    shares issued and outstanding at September 30 and March 31,
                    2008
                
                
                852,765
                
                
                775,822Additional
                    paid-in capital
                
                
                101,641,948
                
                
                101,554,026Accumulated
                    deficit
                
                
                (95,350,754
                )
                
                (95,632,847
                )**Total
                    Stockholders' Equity**
                
                
                7,143,994
                
                
                6,697,036**TOTAL
                    LIABILITIES AND STOCKHOLDERS' EQUITY**
                
                $
                32,759,435
                
                $
                33,390,953


The
      accompanying notes are an integral part of the
      condensed consolidated financial statements.




-
          4
          -




**MOBILEPRO
        CORP. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(Unaudited)**
  **For
                    the Three Months Ended**
                
                **For
                    the Six Months Ended****Seprember
                    30,**
                
                **Seprember
                    30,****2008**
                
                **2007**
                
                **2008**
                
                **2007****REVENUES**
                
                $
                860,569
                
                $
                4,197,406
                
                $
                933,996
                
                $
                10,165,226**OPERATING
                    COSTS AND EXPENSES******Cost
                    of services (exclusive of depreciation and amortization)
                
                
                1,080
                
                
                2,185,248
                
                
                2,160
                
                
                5,750,034Payroll,
                    professional fees and related expenses (exclusive of stock
                    compensation)
                
                
                341,569
                
                
                2,638,326
                
                
                757,778
                
                
                6,228,459Office
                    rent and expenses
                
                
                41,724
                
                
                228,040
                
                
                77,644
                
                
                380,413Other
                    general and administrative expenses
                
                
                84,630
                
                
                239,955
                
                
                185,269
                
                
                625,198Write-down
                    in carrying value of notes receivable
                
                
                300,000
                
                
                -
                
                
                300,000
                
                
                -Depreciation
                    and amortization
                
                
                45,456
                
                
                491,524
                
                
                90,913
                
                
                1,208,705Stock
                    compensation
                
                
                25,706
                
                
                434,569
                
                
                49,675
                
                
                635,122**Total
                    Operating Costs and Expenses**
                
                
                840,165
                
                
                6,217,662
                
                
                1,463,439
                
                
                14,827,931**OPERATING
                    INCOME (LOSS)**
                
                
                20,404
                
                
                (2,020,256
                )
                
                (529,443
                )
                
                (4,662,705
                )**INTEREST
                    AND OTHER EXPENSE, NET**
                
                
                (329,772
                )
                
                (52,999
                )
                
                (475,195
                )
                
                (705,024
                )**LOSS
                    ON SALE OF ASSETS**
                
                
                -
                
                
                (2,800,206
                )
                
                -
                
                
                (2,778,906
                )**EQUITY
                    IN NET LOSS OF MICROLOG CORPORATION**
                
                
                (65,326
                )
                
                -
                
                
                (100,333
                )
                
                -**LOSS
                    FROM CONTINUING OPERATIONS**
                
                
                (374,694
                )
                
                (4,873,461
                )
                
                (1,104,971
                )
                
                (8,146,635
                )**DISCONTINUED
                    OPERATIONS**Income
                    (loss) from operations of discontinued operations
                
                
                204,016
                
                
                (219,783
                )
                
                485,926
                
                
                (1,935,274
                )Gain
                    (loss) on sale of discontinued operation
                
                
                901,138
                
                
                (7,517,516
                )
                
                901,138
                
                
                (7,517,516
                )**INCOME
                    (LOSS) FROM DISCONTINUED OPERATIONS**
                
                
                1,105,154
                
                
                (7,737,299
                )
                
                1,387,064
                
                
                (9,452,790
                )**NET
                    INCOME (LOSS) APPLICABLE TO COMMON SHARES**
                
                $
                730,460
                
                $
                (12,610,760
                )
                $
                282,093
                
                $
                (17,599,425
                )**INCOME
                    (LOSS) PER SHARE, BASIC AND DILUTED**Continuing
                    operations
                
                $
                (0.0005
                )
                $
                (0.0063
                )
                $
                (0.0014
                )
                $
                (0.0106
                )Discontinued
                    operations
                
                
                0.0014
                
                
                (0.0100
                )
                
                0.0018
                
                
                (0.0124
                )**NET
                    INCOME (LOSS) PER SHARE, BASIC AND DILUTED**
                
                $
                0.0009
                
                $
                (0.0163
                )
                $
                0.0004
                
                $
                (0.0230
                )**WEIGHTED
                    AVERAGE NUMBER OF COMMON****SHARES
                    OUTSTANDING**
                
                
                802,323,970
                
                
                775,103,810
                
                
                789,145,293
                
                
                764,933,385


The
        accompanying notes are an integral part of the
        condensed consolidated financial statements.
  -
            5
            -


**MOBILEPRO
        CORP. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
  **For
                    the Six Months Ended****September
                    30,****2008**
                
                **2007****CASH
                    FLOWS FROM OPERATING ACTIVITIES**Net
                    income (loss)
                
                $
                282,093
                
                $
                (17,599,425
                )(Income)
                    loss from discontinued operations
                
                
                (1,387,064
                )
                
                9,452,790Loss
                    from continuing operations
                
                
                (1,104,971
                )
                
                (8,146,635
                )**Items
                    that reconcile net income (loss) to net cash provided
                    by****(used
                    in) operating activities:**Depreciation
                    and amortization
                
                
                90,913
                
                
                1,208,705Noncash
                    interest expense
                
                
                255,556
                
                
                196,293Amortization
                    of deferred financing fees
                
                
                53,134
                
                
                -Stock
                    compensation
                
                
                49,675
                
                
                635,122Equity
                    in net loss of Microlog Corporation
                
                
                100,333
                
                
                -Write-down
                    in carrying value of notes receivable
                
                
                300,000
                
                
                -Loss
                    on sale of payphone assets
                
                
                -
                
                
                2,778,906Other
                    noncash charges
                
                
                -
                
                
                239,404**Changes
                    in assets and liabilities**Decrease
                    in restricted cash
                
                
                476,397
                
                
                -(Increase)
                    decrease in accounts receivable
                
                
                (49,558
                )
                
                671,915Decrease
                    in notes receivable
                
                
                140,872
                
                
                -(Increase)
                    in other current assets
                
                
                (56,020
                )
                
                (507,387
                )(Increase)
                    in other assets
                
                
                (143,390
                )
                
                (16,117
                )Increase
                    (decrease) in accounts payable and accrued expenses
                
                
                6,476
                
                
                (1,519,311
                )Operating
                    activities of discontinued operations
                
                
                413,064
                
                
                337,3331,637,452
                
                
                4,024,863**Net
                    cash provided by (used in) operating activities**
                
                
                532,481
                
                
                (4,121,772
                )**CASH
                    FLOWS FROM INVESTING ACTIVITIES**Proceeds
                    from sale of payphone assets
                
                
                -
                
                
                3,248,741Capital
                    expenditures, net
                
                
                -
                
                
                (333,066
                )Proceeds
                    from sale of investments
                
                
                -
                
                
                277,426Investing
                    activities of discontinued operations
                
                
                -
                
                
                1,713,478**Net
                    cash provided by investing activities**
                
                
                -
                
                
                4,906,579**CASH
                    FLOWS FROM FINANCING ACTIVITIES**Borrowings/(payments)
                    of debt, net
                
                
                (3,000
                )
                
                (1,920,830
                )Deferred
                    financing fees
                
                
                (177,114
                )
                
                -Financing
                    activities of discontinued operations
                
                
                (186,946
                )
                
                (244,676
                )**Net
                    cash (used in) financing activities**
                
                $
                (367,060
                )
                $
                (2,165,506
                )


The
      accompanying notes are an integral part of the
      condensed consolidated financial statements.




-
          6
          -




**MOBILEPRO
        CORP. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(CONTINUED)**
 **(Unaudited)**
  **For
                    the Six Months Ended****September
                    30,****2008**
                
                **2007****NET
                    INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**
                
                $
                165,421
                
                $
                (1,380,699
                )**CASH
                    AND CASH EQUIVALENTS - BEGINNING OF PERIOD**
                
                
                2,075,117
                
                
                3,430,844**CASH
                    AND CASH EQUIVALENTS - END OF PERIOD**
                
                
                2,240,538
                
                
                2,050,145**LESS
                    CASH AND CASH EQUIVALENTS OF DISCONTINUED
                    OPERATIONS**
                
                
                (827,104
                )
                
                (1,252,879
                )**CASH
                    AND CASH EQUIVALENTS OF CONTINUING OPERATIONS**
                
                $
                1,413,434
                
                $
                797,266**SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOW****INFORMATION:**Cash
                    paid during the period for interest
                
                $
                617,441
                
                $
                717,428Income
                    taxes paid
                
                $
                -
                
                $
                -**SUPPLEMENTAL
                    DISCLOSURE OF NONCASH****ACTIVITIES:**Issuance
                    of new convertible debenture to YA Global
                
                $
                13,391,175
                
                $
                -Retirement
                    of convertible debentures issued to YA Global
                
                $
                (13,168,944
                )
                $
                -Issuance
                    of warrants with new convertible debenture
                
                $
                (10,390
                )
                $
                -Convertible
                    preferred stock of United Systems Access, Inc.
                
                $
                -
                
                $
                5,763,893Notes
                    receivable
                
                $
                -
                
                $
                2,000,000Payment
                    of debentures and accrued interest with common stock
                
                $
                (104,800
                )
                $
                (1,967,908
                )


The
      accompanying notes are an integral part of the
      condensed consolidated financial statements.




-
          7
          -




**MOBILEPRO
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2008**


**(Unaudited)**




**NOTE
      1-** **ORGANIZATION**





**Overview**





MobilePro
      Corp., incorporated under the laws of the State of Delaware in July 2000, is
      a
      holding company with subsidiaries in the pay telephone and online gaming
      industries and an affiliate in the software industry. Although classified as
      discontinued operations, we still own an integrated telecommunications business.
      We previously owned broadband wireless, telecommunications and integrated data
      communications services companies which delivered a comprehensive suite of
      voice
      and data communications services, including local exchange, long distance,
      enhanced data, Internet, cellular, and wireless broadband services to end user
      customers. We previously operated in three industry segments - voice services,
      Internet services and wireless networks. Together with its consolidated
      subsidiaries, Mobilepro Corp. is hereinafter referred to as “Mobilepro” or the
“Company”.





The
      Company’s voice services segment has included the operations of CloseCall
      America, Inc. (“CloseCall”), a Stevensville, Maryland-based competitive local
      exchange carrier (a “CLEC”), Davel Communications, Inc. (“Davel”), a Cleveland,
      Ohio-based independent payphone provider, and American Fiber Network, Inc.
      (“AFN”), a CLEC based in Overland Park, Kansas. The Company’s Internet services
      segment has included DFW Internet Services, Inc. (“DFW”, doing business as
      Nationwide Internet), an Irving, Texas-based Internet services provider, its
      acquired Internet service provider subsidiaries, and InReach Internet, Inc.
      (“InReach”), an Internet service provider based in Stockton, California. The
      Company’s municipal wireless networks operations were conducted primarily by a
      wholly owned subsidiary, NeoReach, Inc. (“NeoReach”), and its subsidiary, Kite
      Networks, Inc. (“Kite Networks”, formerly known as NeoReach Wireless, Inc.). The
      wireless networks segment also included the operations of the Company’s
      subsidiary, Kite Broadband, LLC (“Kite Broadband”), a broadband wireless service
      provider. Both Kite Networks and Kite Broadband were based in Ridgeland,
      Mississippi. The corporate segment has included our Internet gaming subsidiary,
      ProGames Network, Inc. (“ProGames”), that we founded in December
      2005.





On
      June
      30, 2007, the Company entered into a Purchase Agreement (the “USA Agreement”)
      with United Systems Access, Inc. (“USA”), pursuant to which USA agreed to
      acquire all of the outstanding shares of CloseCall and AFN (the Company’s “CLEC
      Business”, which was previously included in the voice services business segment)
      and all of the outstanding shares of DFW and InReach (together these companies
      have comprised the Company’s Internet services provider business segment, or
“ISP Business”). The sale of the ISP Business was completed on July 18, 2007.
      The sale of the CLEC Business was subject to the receipt of verification of
      certain regulatory approvals, which was originally expected to be obtained
      by
      the end of calendar year 2007. On January 14, 2008, the Company received notice
      from USA purporting to terminate the USA Agreement with respect to the sale
      of
      the CLEC Business, but provided that USA remained interested in discussing
      terms
      upon which it would purchase the CLEC Business (see Note 3). USA was unable
      to
      complete the purchase on terms acceptable to the Company and, as a result of
      this default, the Company subsequently terminated the sale of its CLEC Business
      to USA.





On
      July
      8, 2007, the Company entered into a Purchase Agreement (the “Gobility
      Agreement”) with Gobility, Inc. (“Gobility”), pursuant to which Gobility
      acquired all of the outstanding shares of NeoReach and Kite Networks, and all
      of
      the outstanding membership interests in Kite Broadband (together these companies
      have comprised the Company’s wireless networks business segment, or “Wireless
      Networks”). As further discussed below, Gobility is in default with respect to
      its obligation to obtain funding and to pay amounts due under certain equipment
      obligations and leases for which the Company is a co-obligor. The Company is
      currently cooperating with Gobility in its efforts to sell the assets of Kite
      Networks in order to satisfy these obligations (see Note 3).





On
      June
      30, 2007, Davel sold approximately 730 operating payphones to an unaffiliated
      payphone operator. On September 7, 2007, Davel sold an additional 21,405
      payphones to Sterling Payphones, LLC (“Sterling”). Sterling also assumed certain
      liabilities of Davel. Effective September 30, 2007, Davel sold an additional
      300
      payphones (see Note 3). Following these transactions, Davel’s remaining
      operations have been significantly reduced. Davel’s remaining operations are
      being continued and Davel is pursuing the recovery of certain claims including
      the AT&T Corporation (“AT&T”), Sprint Communications Company, LP
      (“Sprint”) and Qwest Communications Company, Inc. (“Qwest”) claims described in
      Note 8.




-
          8
          -





**Going
      Concern Uncertainty**





The
      Company has historically lost money. The Company’s accumulated deficit at
      September 30, 2008 was $95,350,754. Although the Company had net income of
      $282,093 in the six months ended September 30, 2008, it had a loss from
      continuing operations of $1,104,971. In the fiscal years ended March 31, 2008,
      2007 and 2006, the Company sustained net losses of $18,361,602, $45,898,288
      and
      $10,176,407, respectively. Over these periods, most of the acquired businesses
      of Mobilepro experienced declining revenues. Although restructuring measures
      reduced other operating expenses, the Company was unable to sufficiently reduce
      the corresponding costs of services. In addition, the Company funded the
      start-up and operations of the municipal wireless networks and online gaming
      businesses without these companies achieving profitability. The Company was
      able
      to generate $532,481 of cash from operating activities during the six months
      ended September 30, 2008. Cash flow from operations was primarily due to cash
      generated by its CLEC Business and $810,215 of receipts relating to claims
      involving over-billings by certain telecommunications carriers of Davel in
      violation of regulatory rulings (“Regulatory Receipts”), including $718,314
      received from Qwest in the second fiscal quarter (see Note 8). The amount of
      cash used in operations during the fiscal year ended March 31, 2008 was
      $3,558,996.





Because
      the cash required to fund the continuing operating losses and to complete the
      build-out of planned municipal wireless networks exceeded the Company’s
      available capital, the Company signed agreements to sell substantial portions
      of
      its operations to several unaffiliated buyers (see Note 3). The Company is
      also
      seeking a buyer for its CLEC Business. If the Company is successful in doing
      so,
      it will use the expected proceeds to retire the amounts owed under the
      convertible debenture issued to YA Global Investments, L.P. (“YA Global”, f/k/a
      Cornell Capital Partners, L.P) and other obligations of the Company.





Notwithstanding
      expected cash flow deficits, the Company has significant claims against third
      parties which, if successful, could be used by the Company to fund its
      obligations and/or pay all or a portion of the amounts due to YA Global (see
      Note 8). Claims against third parties include litigation against AT&T,
      Sprint and Qwest for non-payment of dial around compensation to the Davel
      entities, portions of amounts claimed from telecommunications carriers for
      regulatory receipts, and contractual claims for damages in connection with
      the
      sale of the CLEC and Wireless Networks Businesses. However, there can be no
      assurance that the Company will be able to prevail in its claims against third
      parties, that the amount awarded will be material, or that such amounts, if
      any,
      can be collected by the Company.





The
      Company’s financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and settlement of liabilities
      and
      commitments based on recorded amounts for the foreseeable future. If
      the
      Company is unable to permanently eliminate the cash requirements represented
      by
      the Wireless Networks Business, and/or fails to sell the CLEC Businesses to
      USA
      or a new buyer on terms that are acceptable to the Company, the Company will
      not
      have the ability to continue as a going concern without additional capital
      and/or collections of significant amounts on claims against third parties.
      The
      condensed consolidated financial statements do not include any adjustments
      that
      might result from the outcome of this uncertainty.





**NOTE
      2-** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





**Condensed
      Consolidated Financial Statement Presentation**





The
      condensed consolidated financial statements include the accounts of the Company
      and its subsidiaries. All significant inter-company accounts and transactions
      have been eliminated in consolidation. Certain prior-period financial statement
      balances have been reclassified to conform to the September 30, 2008
      presentation.





The
      preparation of financial statements in conformity with generally accepted
      accounting principles in the United States of America requires management to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities, the disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenue and expenses during
      the reporting periods. Actual results could differ from those
      estimates.




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          9
          -





These
      financial statements are unaudited and have been prepared by the Company
      pursuant to the rules and regulations of the Securities and Exchange Commission
      regarding interim financial reporting. Accordingly, they do not include all
      of
      the information and footnotes required by generally accepted accounting
      principles for complete financial statements. These financial statements should
      be read in conjunction with the financial statements, and notes thereto,
      included in the Company’s Annual Report on Form 10-K for the fiscal year ended
      March 31, 2008. In the opinion of management, the comparative financial
      statements for the periods presented herein include all adjustments that are
      normal and recurring, and that are necessary for a fair presentation of results
      for the interim periods. The results of operations for the six months ended
      September 30, 2008 are not necessarily indicative of the results that will
      be
      achieved for the fiscal year ending March 31, 2009.





**Companies
      Held for Sale**





The
      assets and liabilities of the CLEC Business and the remaining net liabilities
      of
      the Wireless Networks Business are summarized and classified as “held for sale”
in the accompanying condensed consolidated balance sheets at September 30 and
      March 31, 2008. The operating results of these businesses and the operating
      results of the ISP Business, which was sold in the second quarter of fiscal
      year
      2008, are included in discontinued operations in the accompanying condensed
      consolidated statements of operations for the six months ended September 30,
      2007. For the six months ended September 30, 2008, discontinued operations
      includes the operating results of the CLEC Business and the gain and net
      interest cost of the remaining assets and liabilities of the Wireless Networks
      Business.





**Impact
      of Recent Accounting Standards**





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
      interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the
      accounting for uncertainty in income tax positions. FIN 48 requires that the
      Company recognize in the consolidated financial statements the impact of a
      tax
      position that is more likely than not to be sustained upon examination based
      on
      the technical merits of the position. The provisions of FIN 48 were effective
      for the Company on April 1, 2007. Adoption of FIN 48 did not have a material
      effect on the consolidated financial statements.




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      (“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value,
      establishes a framework and gives guidance regarding the methods used for
      measuring fair value, and expands disclosures about fair value measurements.
      The
      provisions of SFAS No. 157 are effective for financial statements issued for
      the
      Company’s fiscal year beginning April 1, 2008 (April 1, 2009 with respect to
      certain non-financial assets and liabilities), and interim periods within such
      fiscal years. The adoption of SFAS No. 157 for financial assets and
      liabilities in the first quarter of the current fiscal year did not have a
      material effect on the Company’s financial position or results of operations as
      the Company does not have any material financial assets or liabilities measured
      at fair value.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities,” which provides companies with an
      option to report selected financial assets and liabilities at fair value. The
      objective is to reduce both complexity in accounting for financial instruments
      and the volatility in earnings caused by measuring related assets and
      liabilities differently. The provisions of SFAS No. 159 are effective for
      financial statements issued for the Company’s fiscal year beginning April 1,
      2008. The Company did not elect to measure its financial instruments or any
      other items at fair value as permitted by SFAS No. 159. Therefore, the
      adoption of FAS No. 159 did not have a material effect on the Company’s
      financial position or results of operations.





In
      December 2007, the FASB issued SFAS No. 141R, “Business Combinations.”
SFAS No. 141R modifies the accounting for business combinations by requiring
      that acquired assets and assumed liabilities be recorded at fair value,
      contingent consideration arrangements be recorded at fair value on the date
      of
      the acquisition and preacquisition contingencies will generally be accounted
      for
      in purchase accounting at fair value. The pronouncement also requires that
      transaction costs be expensed as incurred, acquired research and development
      be
      capitalized as an indefinite-lived intangible asset and the requirements of
      SFAS
      No. 146, “Accounting for Costs Associated with Exit or Disposal
      Activities,” be met at the acquisition date in order to accrue for a
      restructuring plan in purchase accounting. SFAS No. 141R is required to be
      adopted prospectively effective for the Company’s fiscal year beginning April 1,
      2009. The Company does not expect SFAS No. 141R to have a significant impact
      on
      the Company’s consolidated financial statements.




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          10
          -




In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
      in Consolidated Financial Statements — an amendment of ARB No. 51.” SFAS
      No. 160 modifies the reporting for noncontrolling interests in the balance
      sheet and minority interest income (expense) in the statement of operations.
      The
      pronouncement also requires that increases and decreases in the noncontrolling
      ownership interest amount be accounted for as equity transactions. SFAS
      No. 160 is required to be adopted prospectively, with limited exceptions,
      effective for the fiscal year beginning April 1, 2009. The Company does not
      expect SFAS No. 160 to have a significant impact on the Company’s consolidated
      financial statements.





In
      March 2008, the FASB issued SFAS No. 161, “Disclosures about
      Derivative Instruments and Hedging Activities — an amendment of FASB Statement
      No. 133.” SFAS No. 161 modifies existing requirements to include
      qualitative disclosures regarding the objectives and strategies for using
      derivatives, fair value amounts of gains and losses on derivative instruments
      and disclosures about credit-risk-related contingent features in derivative
      agreements. The pronouncement also requires the cross-referencing of derivative
      disclosures within the financial statements and notes thereto. The requirements
      of SFAS No. 161 are effective for the Company’s interim and annual fiscal
      periods beginning on April 1, 2009. The Company does not expect SFAS No. 161
      to
      have a significant impact on the Company’s consolidated financial statements or
      related disclosures.





**Cash
      and Cash Equivalents**





The
      Company considers all highly liquid debt instruments and other short-term
      investments with an initial maturity of three months or less to be cash or
      cash
      equivalents. The Company maintains cash and cash equivalents with financial
      institutions that exceed the limit of insurability under the Federal Deposit
      Insurance Corporation. However, due to management’s belief in the financial
      strength of its financial institutions, management does not believe the risk
      of
      keeping deposits in excess of federal deposit limits to be a material
      risk.





**Restricted
      Cash**





The
      Company is required to maintain letters of credit collateralized by cash as
      additional security for the performance of obligations under certain service
      agreements. Restricted cash at March 31, 2008 also includes $206,397 that was
      held in escrow to indemnify Sterling for possible claims that could arise in
      connection with the sale of Davel’s payphones on September 7, 2007 (see Note 3).
      On September 12, 2008 the remaining balance of the escrow account and accrued
      interest was transferred to unrestricted cash. The cash collateral is restricted
      and is not available for the Company’s general working capital needs. The
      letters of credit expire at various dates through March 2010.





**Revenue
      Recognition**





The
      Company has derived a material portion of its revenues through the provision
      of
      local telephone, long distance, and wireless calling, and Internet access
      services to subscribers. The Company recognizes revenue related to these
      telecommunications services when such services are rendered and collection
      is
      reasonably assured; it defers revenue for services that the Company bills in
      advance. Revenue related to service contracts covering future periods is
      deferred and recognized ratably over the periods covered by the
      contracts.





A
      material amount of the Company’s revenues was also generated from the use of
      Davel’s payphones. Davel derives its payphone revenue from two principal
      sources: coin calls and non-coin calls. Revenue related to all calls, including
      dial-around compensation and operator service revenue, is recognized in the
      periods that the customers place the calls. Any variations between recorded
      amounts of revenue and actual cash receipts are accounted for at the time of
      receipt.





Non-coin
      operator service calls are handled by independent operator service providers.
      These carriers assume billing and collection responsibilities for
      operator-assisted calls originating on Davel’s payphone network and pay
      commissions to Davel based upon gross revenue. Davel recognizes revenue related
      to operator service calls in amounts equal to the commissions that it is
      entitled to receive in the periods that the services are rendered.




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          11
          -





Davel
      also recognizes revenue related to non-coin dial-around calls that are initiated
      from a Company payphone in order to gain access to a specific long distance
      company or to make a standard toll free call. Revenue related to such
      dial-around calls is recognized initially based on estimates. The inter-exchange
      carriers have historically paid for fewer dial-around calls than are actually
      made and the collection period for dial-around revenue is generally four to
      six
      months, but can be in excess of one year. Most dial-around receivable amounts
      are received early in each calendar quarter from an industry clearinghouse
      organization, one quarter in arrears. For example, Davel was entitled to receive
      its dial-around receipts related to the quarter ended June 30, 2007 in October
      2007, allowing it to adjust the second calendar quarter dial-around receivable
      amount included in the balance sheet at September 30, 2007 based on the actual
      collection experience. Davel’s estimate of revenue for the most recent calendar
      quarter is based on the historical analysis of calls placed and amounts
      collected. These analyses are updated on a periodic basis. Recorded amounts
      of
      revenue may be adjusted based on actual receipts and/or the subsequent revision
      of prior estimates. Total
      dial-around revenue amounts for the three and six months ended September 30,
      2008 were $28,605 and $45,291, respectively. The
      amounts for the corresponding periods of the prior year were $931,202 and
      $2,176,919, respectively.





**Accounts
      Receivable**





The
      Company conducts business and may extend credit to customers based on an
      evaluation of the customers’ financial condition, generally without requiring
      collateral. Exposure to losses on receivables is expected to vary by customer
      due to the financial condition of each customer. The Company monitors exposure
      to credit losses and maintains allowances for anticipated losses considered
      necessary under the circumstances and based to a significant extent on recent
      historical overall account write-off experience. The Company had allowances
      for
      doubtful accounts of $886,975 and $993,356 at September 30 and March 31, 2008,
      respectively, relating to accounts receivable other than dial-around
      compensation amounts, which were included in assets of companies held for sale
      in the accompanying consolidated balance sheets.





Dial-around
      receivable amounts included in the condensed consolidated balance sheets at
      September 30, 2008 and March 31, 2008 were $29,605 and $45,692, respectively.
      During all periods presented, credit losses, to the extent identifiable, were
      generally within management’s overall expectations.





**Notes
      Receivable**





Notes
      Receivable consist of a $2,000,000 note receivable from USA, as amended, with
      a
      remaining principal balance of $859,128 and $1,000,000 at September 30 and
      March
      31, 2008, respectively, and $1,865,000 of notes receivable that the Company
      received in connection with Gobility’s sale of the Longmont, Colorado wireless
      network (see Note 3). In July 2008, the Company revised the payment terms
      relating to the USA note and received principal and interest payments totaling
      $200,000. The remaining principal balance and accrued interest at 12% per annum
      is due on December 29, 2008. This note and accrued interest of $19,187 and
      $19,852 at September 30 and March 31, 2008, respectively, are included in
      current assets of continuing operations in the accompanying condensed
      consolidated balance sheets.





The
      $1,865,000 of notes receivable from DHB Networks, LLC (“DHB”), the purchaser of
      the Longmont, Colorado wireless network, consist of four notes. The notes
      generally provide for quarterly payments of interest only at 9% for the first
      three years beginning September 1, 2008 plus equal quarterly principal payments
      of $141,050 commencing March 1, 2011. The notes and any unpaid interest are
      due
      in March 2015. The notes are guaranteed by the chief executive officer and
      principal owner of DHB.





In
      October 2008, the Company revised the payment terms on the DHB notes and
      received or will receive $12,500 towards the interest that was due in September
      2008. The remaining unpaid interest accrued through November 30, 2008 will
      be
      capitalized. Thereafter, interest is payable quarterly beginning February 28,
      2009 at a new rate of 10% per annum. The maturity and principal payments dates
      have not changed. The Company also wrote down the carrying value of the notes
      by
      $300,000 in the quarter ended September 30, 2008 in recognition of the current
      financial condition of DHB. These notes receivable and accrued interest are
      included in assets of continuing operations in the condensed consolidated
      balance sheets.





**Fair
      Value of Financial Instruments**





The
      carrying amounts reported in the condensed consolidated balance sheets for
      cash
      and cash equivalents, accounts receivable and accounts payable approximate
      fair
      value because of the immediate or short-term maturity of these financial
      instruments.




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          12
          -




**Deferred
      Financing Fees**





The
      Company incurred financing costs of $177,114 in connection with refinancing
      of
      the secured convertible debenture issued to YA Global on June 30, 2008. These
      costs, representing primarily legal and other fees to be paid in cash, are
      included in other assets of continuing operations at September 30, 2008 and
      will
      be amortized to interest expense through the maturity date of the debentures
      on
      May 1, 2009. Total financing fees charged to interest expense of continuing
      operations for the three and six months ended September 30, 2008 was $53,134.
      At
      September 30, 2008, the unamortized balance of deferred financing fees included
      in the condensed consolidated balance sheets was $123,980.





**Accounting
      for Stock Options and Warrants**





Effective
      April 1, 2006, the Company adopted SFAS 123R, “Share Based Payments,” relating
      to stock-based compensation issued to employees, including options, warrants,
      restricted share plans, performance-based awards, stock appreciation rights,
      stock purchase plans and other stock-based awards. Under SFAS 123R, compensation
      cost is recorded in the financial statement based on the fair value of the
      award
      on the date of grant and is recognized as compensation expense over the period
      in which the award vests. The Company uses the Black-Scholes pricing model
      to
      determine the fair value of options and warrants.





**Property,
      Plant and Equipment**





Depreciation
      expense is computed using the straight-line method during the estimated useful
      life of each asset. The amounts of depreciation related to continuing operations
      and included in the condensed consolidated statements of operations for the
      three and six months ended September 30, 2008 were $45,456 and $90,913,
      respectively. The amounts for the corresponding periods of the prior year were
      approximately $406,746 and $993,020 respectively.





In
      accordance with FASB Statement No. 144, “Accounting for the Impairment or
      Disposal of Long-Lived Assets”, furniture and equipment and other long-lived
      assets included in assets of companies held for sale are not depreciated or
      amortized while such assets are classified as held for sale.





**Advertising
      Contracts**




CloseCall
      uses print, signage, radio and television advertising to market services to
      customers of certain local professional sports teams. Advertising programs
      include the use of long-term contracts. Upon the negotiation of such a contract,
      the Company records the cost of the advertising program as an asset, and
      amortizes the balance to operating expenses over the life of the contract.
      At
      September 30 and March 31, 2008, assets of companies held for sale included
      prepaid expenses of $2,317 and $137,749, respectively, related to such
      contracts. The corresponding contract liability is paid typically in
      installments. At September 30 and March 31, 2008, liabilities of companies
      held
      for sale included accounts payable and accrued expenses of $36,985 and $171,375,
      respectively, that are payable under such contracts.





**Goodwill
      and Long-Lived Assets**





At
      September 30 and March 31, 2008, $20,531,278 of goodwill is included in assets
      of companies held for sale in the Company’s condensed consolidated balance
      sheets. Generally accepted accounting principles require that the Company assess
      the fair value of goodwill amounts relating to acquired entities at least
      annually in order to identify any impairment in the values. However, on a
      quarterly basis, management is alert for events or circumstances that would
      indicate that, more likely than not, the fair value amounts of goodwill for
      reporting segments have been reduced below the corresponding carrying amounts.
      If there is a determination that the fair value of an acquired entity is less
      than the corresponding net assets amount, including goodwill, an impairment
      loss
      would be identified and recorded at that time. As of March 31, 2008, the Company
      evaluated the carrying value of goodwill and determined that no adjustment
      for
      impairment was required. There were also no asset impairment charges recorded
      in
      the three and six months ended September 30, 2008 and 2007.




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          13
          -




**Customer
      Location Contracts**





Intangible
      assets previously included amounts paid to property location owners in
      connection with payphone installation contracts, which were sold in conjunction
      with the sale of a majority of Davel’s payphones in September 2007. These other
      assets were amortized on a straight-line basis over their estimated useful
      lives
      based on contract terms (generally 5 years). Amortization expense related to
      location contracts of $84,778 and $215,685 is included in operating costs and
      expenses of continuing operations for the three and six months ended September
      30, 2007, respectively.





**Accounts
      Payable and Accrued Liabilities**





The
      accounts payable and accrued liabilities of continuing operations consisted
      of
      the following at the indicated dates:




**September
                  30,**
                **2008**
              
              **March
                  31,****2008**Accounts
                  payable
              
              $
              716,915
              
              $
              768,175Accrued
                  restructuring costs
              
              
              100,218
              
              
              100,218Accrued
                  compensation
              
              
              267,188
              
              
              252,874Accrued
                  interest expense
              
              
              132,453
              
              
              167,371Other
                  accrued liabilities
              
              
              1,848,189
              
              
              1,888,399Totals
              
              $
              3,064,963
              
              $
              3,177,037




**Income
      Taxes**





The
      Company has adopted the provisions of SFAS No. 109, “Accounting for Income
      Taxes”. The statement requires an asset and liability approach for financial
      accounting and reporting for income taxes, and the recognition of deferred
      tax
      assets and liabilities for the temporary differences between the financial
      reporting bases and tax bases of the Company’s assets and liabilities at enacted
      tax rates expected to be in effect when such amounts are realized or settled.
      Because of its history of losses, the Company has not had any material federal
      or state income tax obligations. No provision for income taxes was required
      in
      the three months and six months ended September 30, 2008 and 2007 because of
      net
      operating loss carryforwards generated by the Company.




**NOTE
      3-** **DISPOSITION
      OF BUSINESSES**





**Sale
      of the ISP and CLEC Businesses**





On
      June
      30, 2007, the Company entered into a Purchase Agreement with USA, pursuant
      to which USA agreed to acquire all of the outstanding shares of CloseCall,
      AFN,
      DFW and InReach. The USA Agreement was subsequently amended to extend the
      closing date for the sale of the ISP Business, which was completed on July
      18,
      2007. The closing for the CLEC Business was expected to occur following receipt
      of the necessary regulatory approvals. Until the closing, USA agreed to manage
      the CLEC Business pursuant to a management agreement entered into with USA
      (the
“USA Management Agreement”).





On
      January 14, 2008, the Company received notice from USA purporting to terminate
      the USA Agreement with respect to the sale of the CLEC Business, but provided
      that USA remained interested in discussing terms upon which it would complete
      the purchase. The Company has been in communications with USA and disputes
      the
      validity of the claims alleged for the purported termination, which include
      the
      alleged failure to obtain certain regulatory and contractual approvals and
      the
      alleged breach of certain representations and warranties set forth in the USA
      Agreement. The Company believes the purported termination was in bad faith
      and
      intends to pursue any and all legal and equitable remedies available to it
      against USA. Despite the on-going discussions with USA, the Company re-assumed
      operating control of AFN and CloseCall and terminated the agreement to sell
      the
      CLEC Business to USA in the fourth quarter of the fiscal year ended March 31,
      2008.




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          14
          -





Under
      the
      USA Agreement, the total purchase price for the ISP and CLEC Businesses was
      $27,663,893 consisting of $21.9 million in cash and 8,100 shares of convertible
      preferred stock of USA (the “USA Preferred”) with a fair value of $5,763,893.
      The 8,100 shares of USA Preferred, received as an advanced payment towards
      the
      purchase of the CLEC Business, are convertible into 7.5% of the outstanding
      common stock of USA and could be redeemed for $8.1 million in cash, at the
      option of the Company, anytime following the third anniversary of the closing
      of
      the CLEC Business (the “Put Option”). Prior to that time, USA had the option to
      redeem all of the unconverted USA Preferred for $12,960,000. The fair value
      of
      the USA preferred was originally based on the present value of the $8.1 million
      Put Option discounted at an interest rate of 10%. Through December 31, 2007,
      the
      discount on the USA preferred of $2,336,107 was being accreted to income through
      the estimated date the Put Option was to become exercisable using the interest
      method. During the second and third quarters of the fiscal year ended March
      31,
      2008, the Company recorded and included as an offset to interest expense
      $244,198 of income relating to the discount. Following the termination of the
      sale of the CLEC Business to USA in the fourth quarter of fiscal 2008, the
      value
      of the USA Preferred was considered impaired. The Company discontinued the
      accretion of the discount and wrote-off the carrying value of the USA Preferred
      against the liability recorded for the advanced proceeds from USA. The net
      difference in carrying values of $56,442 was recorded as a reduction in the
      loss
      on sale of discontinued operations in the fourth quarter of the fiscal year
      ended March 31, 2008.





Upon
      the
      closing of the sale of the ISP Business on July 18, 2007, the Company received
      $2.5 million in cash, a $2 million note, which was originally payable upon
      the
      earlier of the closing of the CLEC Business or January 1, 2008, and the 8,100
      shares of USA Preferred. The remaining cash proceeds of $17,400,000 were to
      be
      paid by USA at the time of the CLEC closing. Until that time, USA was required
      to cause the managed companies to make monthly payments of interest on this
      balance at a rate of 7.75% directly to YA Global, two months in arrears. The
      Company received the monthly payments due through January 1, 2008, which
      payments have been applied to principal and interest on the Secured Debenture
      and Amended Debenture. The Company initially recorded these payments as an
      offset to interest expense in the amount of $616,985 through December 31, 2007.
      In the fourth quarter of fiscal year 2008, the Company reversed this amount
      that
      was previously credited to interest expense.





On
      January 3, 2008, the Company entered into an amendment to the $2,000,000
      promissory note due from USA. USA made payments of $500,000 each on January
      4
      and January 11, 2008 with the remaining balance of $1,000,000, together with
      accrued interest at the rate of 7.75%, due on the earlier of the date of the
      closing of the sale of the CLEC Business or March 31, 2008. Of the $1,000,000
      of
      payments, the Company received $125,000 and the remaining $875,000 was used
      to
      pay principal and interest on the convertible debentures due to YA Global.
      USA
      did not pay the remaining principal balance of $1,000,000 or the accrued
      interest due on March 31, 2008. In July 2008, the Company revised the payment
      terms relating to the USA note and received principal and interest payments
      totaling $200,000. The remaining principal balance and accrued interest at
      12%
      per annum is due on December 29, 2008.





The
      loss
      incurred in connection with the sale of the ISP Business, before the adjustment
      for the termination of the sale of the CLEC Business in the fourth quarter
      of
      fiscal year 2008, of $2,481,227 is included in the loss on sale of discontinued
      operations in the three months and six months ended September 30,
      2007.




**Sale
      of the Wireless Networks Business**





On
      July
      8, 2007, the Company entered into a Purchase Agreement with Gobility, pursuant
      to which Gobility acquired all of the outstanding shares of Neoreach, and
      indirectly Kite Networks, and all of the outstanding membership interests in
      Kite Broadband. The purchase price was $2.0 million, paid in the form of a
      debenture that is convertible into shares of Gobility common stock (the
“Gobility Debenture”) at a rate of $5.00 per share, or such lower price, if
      Gobility issues common stock or securities convertible into common stock at
      a
      price that is less than $5.00 per share. Unless converted, the Gobility
      debenture is due July 8, 2009 with annual interest at 8%.




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          15
          -





Under
      the
      terms of the Gobility Debenture, Gobility was required to raise at least $3.0
      million in cash no later than August 15, 2007. Prior to closing, the Company
      received a reliance letter from Wingfield Corporation, N.V. (“Wingfield”), a
      Brussels, Belgium-based merchant bank, stating that such financing was
      forthcoming. To date, Gobility has not obtained financing from Wingfield or
      any
      other source and is in default with respect to the Gobility Debenture. As a
      result of this default, the Company has the right but not the obligation to
      repurchase the Wireless Networks Business with the surrender of the Gobility
      Debenture and the payment of nominal additional consideration. In addition
      to
      its inability to obtain the required financing, Gobility has been unable to
      fund
      its operations including the payment of amounts due under a series of capital
      equipment leases and other equipment-related obligations. Because the equipment
      leases and other equipment purchases were co-signed by Mobilepro, if Kite
      Networks fails to pay the leases, absent any other defenses it may have, the
      Company could be obligated to pay the debt. As a result of these defaults by
      Gobility, the Company has written off the $2.0 million Gobility Debenture and
      has recorded the capital leases and equipment-related obligations as liabilities
      in connection with the sale. The Company has also recorded the certificates
      of
      deposits securing the lease obligations.





The
      Company is currently cooperating with Gobility in its efforts to sell the assets
      of Kite Networks in order to pay off the obligations relating to the leases
      and
      other equipment. In September 2007, the Company was required to make lease
      payments totaling $64,165. On March 10, 2008, Gobility sold the assets of the
      wireless network in Longmont, Colorado, and the Company received the related
      proceeds in the form of promissory notes from the purchaser totaling $1,800,000.
      In addition, the Company entered into a forbearance agreement with the principal
      equipment vendor and agreed to pay the $1,591,978 equipment obligation, with
      interest at the prime rate, and a related lease obligation in the principal
      amount of $149,749. In March 2008, the Company also satisfied the terms of
      one
      of the leases relating to the Tempe, Arizona wireless network with an aggregate
      principal balance of $318,595, plus accrued interest, by paying $93,000 in
      cash
      and having the $250,000 certificate of deposit that secured the lease applied
      thereto. As a result of the sale to Gobility and these transactions, the Company
      recorded a net loss on the sale of its Wireless Networks Business of $3,433,843
      that was reported in the loss on sale of discontinued operations for the fiscal
      year ended March 31, 2008. Of this amount, the Company recognized a loss of
      $5,036,289 in the second fiscal quarter and a $1,602,446 reduction in the loss
      relating to the sale of the Longmont, Colorado wireless network that was
      recorded in the fourth quarter of the fiscal year ended March 31, 2008.





On
      August
      1, 2008, the Company executed a promissory note and release with Data Sales
      Co.,
      Inc. (“Data Sales”) in the principal amount of $330,000. The note is in full
      satisfaction of a $1,231,138 lease obligation for which the Company was a
      co-borrower with Kite Networks and reflects the impact of a sale of certain
      uninstalled wireless equipment by Data Sales to an unaffiliated third party
      purchaser that was consummated in July 2008. The Company recorded a gain of
      $901,138, or $0.0011 per share, in its fiscal second quarter as a result of
      the
      transaction.





The
      Company continues to cooperate with Gobility in its efforts to sell the
      remaining assets of Kite Networks. In the event Gobility is unsuccessful in
      its
      attempts to sell the remaining assets and satisfy the lease obligations, the
      Company, subject to any defenses it might have, could be required to make the
      payments on the remaining leases. At September 30, 2008, the amounts recorded
      on
      the balance sheet as liabilities of companies held for sale relating to the
      capital lease obligations, accrued interest, and the note payable and equipment
      obligation were $2,421,632, $368,703 and $1,768,511, respectively. The Company
      has also recorded the certificates of deposits securing the lease obligations
      in
      the aggregate amount of $937,664 as assets of companies held for sale in the
      accompanying consolidated balance sheets.





**Discontinued
      Operations**





The
      Company has sold its Wireless Networks and ISP Businesses and continues to
      market its CLEC Business. Revenues, operating costs and expenses, and other
      income and expense attributable to the Wireless Networks, ISP and CLEC
      Businesses have been aggregated to a single line, loss from discontinued
      operations, in the condensed consolidated statements of operations for all
      periods presented. The Company has no income taxes due to operating losses
      incurred for tax purposes. No interest expense, other than amounts relating
      to
      the capital leases or other debt recorded by the discontinued businesses, has
      been allocated to discontinued operations.





The
      revenues and the net income (loss) of discontinued operations were as follows:




**Three
                      Months Ended September 30,****2008**
                  
                  **2007**Revenues
                  
                  $
                  8,054,407
                  
                  $
                  9,779,097Income
                      (loss) from discontinued operations before disposal
                  
                  $
                  204,016
                  
                  $
                  (219,783
                  )Gain
                      (loss) on disposal
                  
                  
                  901,138
                  
                  
                  (7,517,516
                  )Income
                      (loss) from discontinued operations
                  
                  $
                  1,105,154
                  
                  $
                  (7,737,299
                  )




-
          16
          -




**Six
                  Months Ended September 30,****2008**
              
              **2007**Revenues
              
              $
              15,710,594
              
              $
              24,789,298Income
                  (loss) from discontinued operations before disposal
              
              $
              485,926
              
              $
              (1,935,274
              )Gain
                  (loss) on disposal
              
              
              901,138
              
              
              (7,517,516
              )Income
                  (loss) from discontinued operations
              
              $
              1,387,064
              
              $
              (9,452,790
              )




Assets
      and liabilities associated with the Wireless Networks, ISP and CLEC Businesses
      have been segregated from continuing operations and presented separately as
      assets of companies held for sale and liabilities of companies held for sale
      in
      the condensed consolidated balance sheets at September 30 and March 31, 2008.
      The major classifications of such assets and liabilities were as follows:




**September
                30,**
              **2008**
            
            **March
                31,**
              **2008**Cash
                and cash equivalents
            
            $
            827,104
            
            $
            1,063,721Restricted
                cash
            
            
            1,294,502
            
            
            1,425,165Accounts
                receivable, net
            
            
            2,964,261
            
            
            2,718,933Prepaid
                expenses and other current assets
            
            
            951,873
            
            
            1,125,926Fixed
                assets, net
            
            
            540,123
            
            
            539,047Goodwill,
                net of impairment
            
            
            20,531,278
            
            
            20,531,278Customer
                contracts and relationships, net
            
            
            524,111
            
            
            508,424Other
                assets
            
            
            89,900
            
            
            108,647Assets
                of companies held for sale
            
            $
            27,723,152
            
            $
            28,021,141




Accounts
                payable and accrued expenses
            
            $
            3,618,734
            
            $
            3,675,162Deferred
                revenue
            
            
            623,832
            
            
            701,638Notes
                payable and capital lease and equipment obligations
            
            
            4,316,810
            
            
            5,286,344Liabilities
                of companies held for sale
            
            $
            8,559,376
            
            $
            9,663,144




**Sale
      of Payphones**





The
      Company completed a series of transactions to sell a majority of Davel’s
      payphones in order to provide cash for operating purposes and to retire
      additional amounts owed to YA Global under the convertible debentures. On June
      30, 2007, we completed the sale of approximately 730 operating payphones to
      an
      unaffiliated payphone operator and received over $200,000 in cash proceeds.
      A
      gain in the amount of $10,640 was recognized in connection with this transaction
      in the quarter ended June 30, 2007.





On
      September 7, 2007, Davel sold approximately 21,405 payphones to Sterling. Under
      the terms of the sale agreement, the Company received $50,000 in cash and
      $1,839,821 in cash was paid to YA Global to reduce the amount of principal
      and
      interest owed under the outstanding convertible debentures. Pursuant to the
      sale
      agreement, proceeds in the amount of $850,832 were used for the direct payment
      of certain related liabilities and broker fees and $1,200,000 of proceeds was
      used for the funding of escrow accounts established for the payment of key
      vendor obligations and indemnification claims. Sterling also assumed certain
      other liabilities of Davel. Effective September 30, 2007, Davel sold an
      additional 300 payphones for approximately $85,000. After these sales, Davel’s
      remaining operations have been significantly reduced. Davel’s remaining
      operations are being continued and Davel is pursuing the recovery of certain
      claims including the AT&T, Sprint and Qwest claims described in Note
      8.  A
      net
      loss of $2,800,206 was included in the loss from continuing operations in the
      second quarter of the fiscal year ended March 31, 2008 in connection with these
      transactions.




-
          17
          -





**NOTE
      4-** **INVESTMENTS**





During
      the year ended March 31, 2005, the Company provided certain management services
      to two emerging technology firms. As consideration, the Company received a
      non-affiliate equity interest in each firm. These investments were recorded
      in
      the amounts of $300,000 and $150,000, respectively, approximating the value
      of
      the services provided. The shares of common stock held by the Company are
      considered to be available-for-sale securities. If a decline in the fair value
      of these securities is judged by management to be other than temporary, the
      cost
      basis of the securities would be written down to fair value at that time. During
      the second and third quarters of the fiscal year ended March 31, 2008, the
      Company received $277,426 and $84,077, respectively, from the sale of a portion
      of the shares and wrote down the carrying value of the remaining shares. The
      Company recognized a loss of $93,094 in the second quarter and a gain of $11,507
      in the third quarter of fiscal 2008 relating to these transactions. The carrying
      value of the common stock included in other assets of continuing operations
      at
      March 31, 2008 was $6,910. In the three months ended June 30, 2008, the Company
      wrote off the remaining carrying value of the shares.




The
      Company received advanced proceeds, primarily in the form of an investment
      in
      8,100 shares of the USA Preferred, in connection with the sale of the ISP and
      CLEC Businesses in the second quarter of the fiscal year ended March 31, 2008
      (see Note 3). The fair value of the USA Preferred of $5,763,893, net of a
      $2,336,107 discount, was initially recorded and portions of the discount in
      the
      amounts of $96,465 and $147,733 were accreted to income in the second and third
      quarters of fiscal year 2008, respectively. Following the termination of the
      sale of the CLEC Business to USA in the fourth quarter of the 2008 fiscal year,
      the value of the convertible preferred stock was considered impaired and was
      written-off against the liability recorded for the advance from USA. The
      difference between the carrying values of the asset and liability of $56,442
      was
      recorded as a reduction in the loss on sale of discontinued operations reported
      in the consolidated statements of operations during the fourth quarter of the
      fiscal year ended March 31, 2008.





On
      January 5, 2008, the Company entered into an agreement to purchase 2,666,667
      shares of the outstanding common stock of Microlog Corporation (“Microlog”) from
      TFX Equities, Inc. (“TFX”) for $1,000 in cash (the “Microlog Agreement”). The
      Company also received from TFX $2,000,000 of 10% subordinated notes, due from
      Microlog on January 5, 2011, that are convertible into Microlog common stock
      at
      a price of $0.10 per share, warrants to purchase 100 shares of Series A
      convertible preferred stock of Microlog, and warrants to purchase 750,000 shares
      of Microlog common stock at an exercise price of $0.10 per share in connection
      with the Microlog Agreement. In addition, the Company invested $250,000 in
      cash
      directly in Microlog in exchange for a 10% subordinated note with a face value
      of $250,000, due January 5, 2011, that is convertible into Microlog common
      stock
      at a price of $0.10 per share.





The
      Company currently owns approximately 30% of the outstanding common stock of
      Microlog and accounts for its investment using the equity method of accounting.
      If all of the warrants and convertible securities issued by Microlog were
      exercised or converted to common stock, the Company would own approximately
      70%
      of the outstanding common stock on a fully diluted basis. Microlog is a
      Germantown, MD based government contractor that develops, sells and installs
      software for integrated voice response and web-based customer contact systems
      in
      the healthcare industry. Microlog’s common stock is traded on the “Pink Sheets”
under the symbol “MLOG”. The market value of the Company’s investment in the
      common stock of Microlog at September 30, 2008 was $453,333.





In
      January 2008, the Company also entered into a management agreement to provide
      financial, legal and administrative services to Microlog at a rate of $8,800
      per
      month. The accompanying consolidated statements of operations include revenues
      of $26,400 and $52,800 related to this management agreement and $56,250 and
      $112,500 of interest income related to notes receivable from Microlog for the
      three months and six months ended September 30, 2008, respectively. There were
      no comparable amounts for the corresponding periods of the prior year. At
      September 30 and March 31, 2008, the carrying value of the investment and
      amounts due from Microlog of $321,884 and 256,917, respectively, are included
      in
      investments and other assets of continuing operations in the accompanying
      condensed consolidated balance sheets.




-
          18
          -




**NOTE
      5-** **DEBT**





**Debt
      Maturities**





A
      summary
      of the balances owed under the debentures and other notes payable of continuing
      operations at September 30, 2008 and March 31, 2008 was as follows:





**September
                  30,**
              
              **March
                  31,****2008**
              
              **2008**Convertible
                  Debenture issued to YA Global
              
              $
              13,286,375
              
              $
              -Amended
                  Debenture issued to YA Global
              
              
              -
              
              
              11,006,823Secured
                  Debentures issued to YA Global
              
              
              -
              
              
              2,162,121Other
                  notes payable
              
              
              112,000
              
              
              115,00013,398,375
              
              
              13,283,944Less:
                  Unamortized debt discounts
              
              
              (7,273
              )
              
              (30,208
              )Less:
                  Amounts due within one year
              
              
              (13,391,102
              )
              
              (13,253,736
              )Long-term
                  portion of debt
              
              $
              -
              
              $
              -





Based
      on
      the current terms of the YA Global debenture and other notes payable, as
      amended, the entire balance of debt at September 30, 2008 will become due for
      payment in the twelve-month period ending September 30, 2009.





**The
      Convertible Debenture Agreement**





Effective
      June 30, 2008, the Company issued a secured convertible debenture to YA Global
      (the “Convertible Debenture’) with an aggregate principal balance of
      $13,391,175, replacing the Amended Debenture and the Secured Debenture described
      below. The Convertible Debenture provides for monthly payments of interest
      at
      12% with the remaining principal balance due on May 1, 2009. Accordingly, the
      entire principal balance of the Convertible Debenture has been classified as
      a
      current liability at September 30, 2008 in the Company’s condensed consolidated
      balance sheets. YA Global may convert any portion of the unpaid principal and
      interest into shares representing up to 4.99% of the Company’s common stock at
      the lesser of $0.04973 per share or the average of the two lowest volume
      weighted average prices during the five trading days immediately preceding
      the
      conversion date. If certain conditions are met, the Company has the option
      to
      pay up to 4.5% of the total interest due in common stock at the applicable
      conversion price on the day immediately prior to the interest payment date.
      The
      conversion price is subject to adjustment if the Company is deemed to have
      issued shares at a price that is lower than the effective conversion price
      on
      the date such shares are issued. The Convertible Debenture is secured by
      substantially all of the assets of the Company.





During
      the three months ended September 30, 2008, the Company issued 76,942,857 shares
      of common stock in satisfaction of $104,800 in principal relating to the
      Convertible Debenture. Subsequent to September 30, 2008, YA Global converted
      an
      additional $36,075 of principal into 85,500,000 shares of common stock. Such
      shares are tradable by YA Global pursuant to Rule 144 of the Securities Act
      of
      1933 (the “Securities Act”).





In
      connection with the issuance of the Convertible Debenture, the Company granted
      to YA Global a seven-year warrant to purchase 25,000,000 shares of its common
      stock at an exercise price of $0.04973 per share, which expires on June 30,
      2015. In addition, the outstanding warrants previously granted to YA Global
      to
      purchase 15,000,000 share of common stock at $0.20 per share and 10,000,000
      shares of common stock at $0.174 per share were repriced and are now exercisable
      at a price of $0.04973 per share. The Convertible Debenture was recorded in
      the
      accounts net of an unamortized debt discount of $10,390 reflecting the fair
      value of the related warrants on the date of issuance or repricing. The discount
      amounts are being amortized as charges to interest expense over the remaining
      term of the Convertible Debenture.





**The
      Secured Debenture Agreement**





On
      August
      28, 2006, the Company entered into a financing agreement with YA Global that
      provided $7.0 million in debt financing with the proceeds received in a series
      of four closings (the “Secured Debenture Agreement”). At each closing, the
      Company issued YA Global a 7.75% secured convertible debenture in the gross
      amount for the closing, convertible into shares of common stock at $0.174 per
      share. The Company received cash proceeds of $6,495,000, net of financing fees
      of $505,000. In addition, YA Global was issued warrants to purchase 10,000,000
      additional shares of common stock that expire on various dates in 2011 at an
      exercise price of $0.174 per share, as amended. As set forth above, the warrants
      were repriced on June 30, 2008 and are now exercisable at a price of $0.04973
      per share.




-
          19
          -





The
      debentures issued pursuant to the Secured Debenture Agreement were recorded
      in
      the balance sheet net of unamortized debt discounts reflecting the fair market
      values of the debentures on the dates of issuance after allocating a like amount
      of proceeds to the related warrants. The discount amounts were amortized as
      charges to interest expense over the terms of the related debentures.





Under
      conditions similar to those included in the Amended Debenture (see discussion
      below), the Company had the right to make any and all such principal and
      interest payments by issuing shares of its common stock to YA Global with the
      amount of such shares based upon the lower of $0.174 per share or 93% of the
      average of the two lowest daily volume weighted average per share prices of
      its
      common stock during the five days immediately following the scheduled payment
      date. Through March 31, 2007, the Company issued 42,598,498 shares of its common
      stock in satisfaction of $1,500,000 in principal and $198,654 in accrued
      interest. From April 1, 2007 through May 10, 2007, the Company issued an
      additional 78,091,157 shares of its common stock in satisfaction of $1,849,343
      in principal and $47,743 in accrued interest. The Company used cash to pay
      $29,836 in principal and $6,614 in interest on May 10, 2007. On July 18, 2007,
      the Company also paid $145,821 in principal and $265,678 in accrued interest
      from the proceeds of sale of the ISP Business. On September 7, 2007 and October
      19, 2007, the Company paid an additional $347,009 in principal and $68,493
      of
      interest from the proceeds of sale of Davel’s payphones. During the quarter
      ended December 31, 2007, the Company paid $42,117 in principal and $38,128
      of
      interest from the monthly interest payments received from USA on the $17.4
      million cash balance due at the time of the CLEC closing. In January 2008,
      the
      Company paid $865,393 of principal and $26,521 of interest from the payments
      received from USA relating to the $2,000,000 note receivable and the monthly
      interest payment.




Under
      the
      terms of the Secured Debenture Agreement, as amended through January 16, 2007,
      the Company agreed to make weekly principal payments of at least $125,000 in
      satisfaction of the remaining principal commencing February 1, 2008, with
      interest on the outstanding principal balance payable at the same time. The
      Company made a partial payment of $114,530 toward the amounts due on the Secured
      Debenture and Amended Debenture on February 1, 2008. The Company also made
      partial payments of interest on the debentures aggregating $200,000 on May
      2 and
      June 4, 2008. On June 30, 2008, the Company issued the Convertible Debenture
      in
      exchange for the Secured Debenture and Amended Debenture as described above.





**The
      Amended Debenture**





On
      June
      30, 2006, the Company entered into an amended secured convertible debenture
      in
      the amount of $15,149,650 with YA Global (the “Amended Debenture”), replacing
      the debenture that was previously outstanding (the “Debenture”). The Company had
      the right to make any and all principal and interest payments by issuing shares
      of its common stock to YA Global provided that all
      such shares may only be issued by the Company if such shares are tradable under
      Rule 144 of the Securities Act, are registered for sale under the Securities
      Act, or are freely tradable by YA Global without restriction. The value assigned
      to such shares was based upon the lower of $0.275 per share or 93% of the
      average of the two lowest daily volume weighted average per share prices of
      the
      Company’s common stock during the five days immediately following the scheduled
      payment date. YA Global had the right to convert all or any part of the unpaid
      principal and accrued interest owed under the Amended Debenture into shares
      of
      our common stock at a conversion price of $0.275 per share. The Amended
      Debenture was secured by a blanket lien on our assets. The Amended Debenture
      bore interest at an annual rate of 7.75%.





In
      connection with the issuance of the Debenture, the Company issued to YA Global
      a
      five-year warrant that expires on May 13, 2010, as modified, to purchase
      15,000,000 shares of its common stock at an exercise price of $0.20 per share
      (the “Warrant”). As indicated above, the Warrant was repriced on June 30, 2008
      and is now exercisable at a price of $0.04973 per share. In connection with
      the
      issuance of the Amended Debenture, YA Global was issued an additional warrant,
      as modified, to purchase 13,750,000 shares of the Company’s common stock at a
      purchase price of $0.20 per share (the “Additional Warrant”). This Additional
      Warrant expired in November 2007.





The
      face
      amount of the Amended Debenture was recorded initially in the balance sheet
      net
      of unamortized debt discount of $319,000. During the quarter ended December
      31,
      2006, the fair value of the Additional Warrant was recalculated based on its
      reset terms resulting in an increase to such value of $192,500. The net amount
      of the Amended Debenture reflects the fair market value after allocating
      additional proceeds in the amount of $192,500 to the Additional Warrant. The
      increased discount on the Amended Debenture was amortized as a charge to
      interest expense over the term of the Amended Debenture.




-
          20
          -





Through
      March 31, 2007, the Company issued 50,578,702 shares of its common stock in
      satisfaction of $2,500,000 in principal and $681,827 in accrued interest. On
      May
      10, 2007, the Company issued 4,510,933 shares of its common stock in
      satisfaction of $70,822 in principal. On July 18, 2007, the Company also paid
      $247,005 in principal and $216,181 in accrued interest from the proceeds of
      sale
      of the ISP Business. On September 7, 2007, the Company paid an additional
      $1,325,000 in principal and $116,853 of interest from the proceeds of sale
      of
      Davel’s payphones. During the quarter ended December 31, 2007, the Company paid
      $196,313 of interest from the monthly interest payments received from USA on
      the
      $17.4 million cash balance due at the time of the CLEC closing. In January
      2008,
      the Company paid $98,157 of interest from the payments received from USA
      relating to the $2,000,000 note receivable and the monthly interest
      payment.





Under
      the
      terms of the Amended Debenture, as revised through January 16, 2008, the Company
      agreed to make weekly scheduled principal payments of at least $250,000
      commencing February 1, 2008 with interest on the outstanding principal balance
      payable at the same time. The Company made a partial payment of $114,530 toward
      the amounts due on the Secured Debenture and Amended Debenture on February
      1,
      2008. The Company also made partial payments of interest on the debentures
      aggregating $200,000 on May 2 and June 4, 2008. On June 30, 2008, the Company
      issued the Convertible Debenture in exchange for the Secured Debenture and
      Amended Debenture as described above.




**Availability
      of Registered Shares**





The
      Company filed a registration statement on Form S-3 on October 12, 2006 covering
      the resale of a total of 404,474,901 shares of the Company’s common stock by
      various selling stockholders, including 55,089,635 shares that may be issued
      to
      YA Global under the Amended Debenture, 120,689,655 shares related to convertible
      debentures issued under the Secured Debenture Agreement, and 38,750,000 shares
      related to the corresponding stock warrants. This registration statement was
      declared effective by the SEC, enabling the Company’s use of common stock to
      make installment payments to YA Global under the various debentures. As of
      May
      10, 2007, the Company has issued all of the approximately 175,779,000 shares
      covered by the registration statement relating to the convertible debentures.
      At
      September 30, 2008, the total principal balance payable to YA Global under
      the
      Convertible Debenture was $13,286,375.





**The
      Debentures - Interest Expense**





For
      the
      three and six months ended September 30, 2008, the amounts of interest expense
      related to the debentures issued to YA Global, and included in the accompanying
      condensed consolidated statements of operations based on the stated interest
      rates, were $409,203 and $664,063, respectively. The amounts for the
      corresponding periods of the prior year were $289,909 and $611,105,
      respectively.





Interest
      expense amounts included in the accompanying condensed consolidated statements
      of operations for the current and prior year periods also included total debt
      discount amortization related to the debentures issued to YA Global.
      Amortization amounts were $3,117 and $33,325, respectively, for the three months
      and six months ended September 30, 2008. The amounts for the corresponding
      periods of the prior year were $38,152 and $193,841, respectively. Interest
      expense also included $53,134 for amortization of deferred financing fees
      related to the Convertible Debenture for both the three months and six months
      ended September 30, 2008. There was no comparable expense in the corresponding
      periods of the prior year.





The
      discounts provided to YA Global in connection with the issuance of shares of
      common stock in satisfaction of principal and interest payments due under the
      convertible debentures were charged to interest expense. The amount of such
      interest expense included in both the three months ended June 30, 2007 and
      the
      six months ended September 30, 2007 was $148,550.





**Notes
      Payable to YA Global**





In
      May
      2007, the Company borrowed $1,100,000 from YA Global under a one-year promissory
      note with annual interest at a rate of 12% for the first six months of its
      term
      and an annual rate of 15% thereafter. This promissory note and the related
      accrued interest were repaid in July 2007 from the proceeds of sale of the
      ISP
      Business. Interest expense was $7,223 and $25,315 for the three months and
      six
      months ended September 30, 2007.




-
          21
          -




**Capital
      Leases of Discontinued Operations**





The
      Company remains the co-obligor on certain capital leases and equipment
      obligations of Kite Networks that were assumed by Gobility under the terms
      of
      the Gobility Agreement. The lease terms range from 24 to 36 months. As a result
      of Gobility’s default under the Gobility Agreement as described in Note 3,
      including their failure to make the monthly lease payments, the Company
      continues to be liable for these capital leases and equipment obligations.





The
      Company continues to cooperate with Gobility in its efforts to sell the
      remaining assets of Kite Networks. In the event Gobility is unsuccessful in
      its
      attempts to sell the remaining assets and satisfy the lease obligations, the
      Company could be required to make the payments on the remaining leases. As
      discussed in Note 8, Harborside Investments III LLC, one of the lessors, filed
      a
      lawsuit against the Company to collect amounts due under its lease. Other
      leasing companies could also accelerate the payment date and demand immediate
      payment of the outstanding balances from the Company as a result of the default
      in lease payments by Gobility. The Company could also be subject to late payment
      penalties and interest at the default rate.





The
      outstanding principal amounts of the capital leases, equipment obligation and
      accrued interest are included in liabilities of companies held for sale at
      September 30 2008 and March 31, 2008 in the accompanying condensed consolidated
      balance sheets. The Company has also recorded the certificates of deposits
      securing the lease obligations in the aggregate amount of $937,664, which are
      available to offset a portion of the capital lease liabilities, as assets of
      companies held for sale in the accompanying condensed consolidated balance
      sheets. At September 30, 2008, a summary of the future scheduled payments based
      on the original terms of the capital leases and the note payable, equipment
      and
      interest obligations were as follows:




Lease
                  payments due in the twelve months ending --September
                  30, 2009
              
              $
              2,661,777September
                  30, 2010
              
              
              250,8982,912,675Less
                  - interest portions
              
              
              (491,043
              )Capital
                  leases - principal portions
              
              
              2,421,632Equipment
                  obligation
              
              
              1,451,978Note
                  payable
              
              
              316,533Accrued
                  interest on capital leases and other obligation
              
              
              368,703Total
                  liabilities
              
              $
              4,558,846




The
      equipment obligation provides for monthly principal payments of $20,000, plus
      interest at the prime rate, with additional principal payments due on a
      quarterly basis based on the scheduled payments due on the notes receivable
      from
      the purchaser of the Longmont, Colorado wireless network. The remaining unpaid
      principal balance and accrued interest is due and payable on September 7, 2010.
      The annual scheduled maturities of the equipment obligation are $351,477 and
      $1,100,501 for the twelve months ended September 30, 2009 and 2010,
      respectively.





As
      discussed in Note 3, on August 1, 2008, the Company executed a promissory note
      and release in the principal amount of $330,000 in full satisfaction of
      $1,231,138 of the lease obligations. The note requires twenty-three monthly
      payments of $10,000 and accrues interest at the rate of twelve percent. The
      remaining unpaid principal balance and accrued interest is due and payable
      on
      July 31, 2010. The Company recorded a gain of $901,138, or $0.0011 per share,
      in
      its fiscal second quarter as a result of the transaction.




**NOTE
      6-** **STOCKHOLDERS’
      EQUITY**




**Common
      Stock Transactions in the Six Months Ended September 30,
      2008**





In
      the
      six months ended September 30, 2008, the Company issued 76,942,857 shares of
      its
      common stock in satisfaction of $104,800 in principal owed to YA Global relating
      to the Convertible Debenture. Subsequent to September 30, 2008, the Company
      issued 85,500,000 additional shares of common stock in satisfaction of $36,075
      in principal owed to YA Global




-
          22
          -





**Common
      Stock Transactions in the Six Months Ended September 30, 2007**





In
      the
      six months ended September 30, 2007, the Company issued 82,602,090 shares of
      its
      common stock in satisfaction of $1,920,164 in principal and $47,743 in accrued
      interest owed to YA Global relating to the convertible debentures.





In
      September 2007, the Company issued 742,188 shares of common stock, valued at
      $118,750 in settlement of an obligation to an officer of one of the Company’s
      subsidiaries.





**Stock
      Options and Warrants**





The
      stockholders of the Company have approved the issuance of 30,000,000 shares
      of
      common stock in connection with stock options granted pursuant to the 2001
      Equity Performance Plan (the “2001 Plan”). In addition, the Company has issued
      options and warrants to purchase common stock to key personnel pursuant to
      specific authorization of the board of directors outside the scope of the 2001
      Plan. The following tables summarize the stock option activity and the warrant
      activity for the six months ended September 30, 2008:




**Weighted-**
                **Average****Stock
                  Options --**
              
              **Number
                  of Options**
              
              **Exercise**
                **Price**Outstanding
                  - March 31, 2008
              
              
              1,656,000
              
              $
              0.2200Granted
              
              
              -
              
              $
              -Exercised
              
              
              -
              
              $
              -Cancelled
              
              
              -
              
              $
              -Outstanding
                  - June 30, 2008
              
              
              1,656,000
              
              $
              0.2200Granted
              
              
              -
              
              $
              -Exercised
              
              
              -
              
              $
              -Cancelled
              
              
              -
              
              $
              -Outstanding
                  - September 30, 2008
              
              
              1,656,000
              
              $
              0.2200Exercisable
                  - September 30, 2008
              
              
              1,656,000
              
              $
              0.2200




**Stock
                  Warrants --**
              
              
              
              **Weighted-Average****Number
                  of Warrants**
              
              **Exercise**
                **Price**Outstanding
                  - March 31, 2008
              
              
              123,938,968
              
              $
              0.1362Granted
              
              
              61,850,000
              
              $
              0.0212Exercised
              
              
              -
              
              $
              -Cancelled
              
              
              (7,000,000
              )
              $
              0.1593Outstanding
                  - June 30, 2008
              
              
              178,788,968
              
              $
              0.0757Granted
              
              
              -
              
              $
              -Exercised
              
              
              -
              
              $
              -Cancelled
              
              
              -
              
              $
              -Outstanding
                  - September 30, 2008
              
              
              178,798,638
              
              $
              0.0757Exercisable
                  - September 30, 2008
              
              
              131,643,134
              
              $
              0.1011




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          23
          -


On
      May
      28, 2008, the Company granted warrants to purchase 36,850,000 shares of common
      stock at an exercise price of $0.0016 per share to certain officers, directors
      and management personnel. The warrants expire ten years from the date of grant.
      Half of the warrants to purchase 20,000,000 shares of common stock granted
      to
      Jay Wright, Chief Executive Officer, vest on June 30, 2009 with the other half
      vesting on June 30, 2010. The warrants to purchase 1,500,000 shares of common
      stock granted to Donald Sledge, Director, vest on August 31, 2010. The remaining
      warrants vest on June 30, 2009. On May 28, 2008, the Company also canceled
      warrants to purchase 5,000,000 shares of common stock at an exercise price
      of
      $0.22 per share previously granted to Mr. Wright.





Options
      to purchase common stock that are awarded pursuant to the terms of the 2001
      Plan
      expire ten years from the date of grant. The options typically vest over two
      to
      three year periods according to a defined schedule set forth in the individual
      stock option agreement. Certain portions of the stock options vested based
      on
      the achievement of individual and Company objectives. Warrants to purchase
      shares of common stock vest over periods that range from twelve to thirty-six
      months. The vesting of warrants awarded to certain of the Company’s officers was
      set to occur upon the achievement of individual and/or Company objectives.
      Warrants typically expire on the ten-year anniversary of the date of grant.





Effective
      April 1, 2006, the Company adopted SFAS 123R, “Share Based Payments,” relating
      to stock based compensation issued to employees. The amounts of compensation
      expense included in continuing operations in the accompanying condensed
      consolidated statements of operations for the three and six months ended
      September 30, 2008 were $25,706 and $49,675, respectively. The amounts for
      the
      corresponding periods of the prior year were $434,569 and $635,122,
      respectively.





The
      fair
      value of each option is estimated on the date of grant using the Black-Scholes
      option-pricing model with the following assumptions used for grants during
      the
      six months ended September 30, 2008 and 2007:




**2008**
            
            **2007**Dividend
                yield
            
            
            -
            %
            
            -
            %Expected
                volatility
            
            
            70
            %
            
            60
            %Risk-free
                interest rate
            
            
            3.00
            %
            
            4.00
            %Expected
                term (in years)
            
            
            10.00
            
            
            10.00





In
      connection with the issuance of the Convertible Debenture on June 30, 2008,
      the
      Company granted to YA Global a seven-year warrant to purchase 25,000,000 shares
      of its common stock at an exercise price of $0.04973 per share which expires
      on
      June 30, 2015. In addition, the outstanding warrants previously granted to
      YA
      Global to purchase 15,000,000 share of common stock at $0.20 per share and
      10,000,000 shares of common stock at $0.174 per share were repriced and are
      now
      exercisable at a price of $0.04973 per share.




**NOTE
      7-** **BASIC
      AND DILUTED INCOME (LOSS) PER SHARE**





Basic
      income (loss) per share includes no dilution and is computed by dividing net
      income (loss) available to common stockholders by the weighted-average number
      of
      common shares outstanding for the period. Diluted income (loss) per share
      includes the potential dilution that could occur if securities or other
      contracts to issue common stock were exercised or converted into common stock.
      The effects of the assumed exercise of outstanding stock options and warrants
      and the assumed conversion of the convertible debentures for the three month
      and
      six month periods presented herein were anti-dilutive as the Company incurred
      losses from continuing operations in these periods.




**NOTE
      8-** **LITIGATION**





In
      addition to certain other litigation arising in the normal course of its
      business that we believe will not materially affect our financial position
      or
      operating results, we were involved with the following legal proceedings during
      the six months ended September 30, 2008.




-
          24
          -





1)
      At the
      time that we acquired Davel, there was existing litigation brought against
      Davel
      and other defendants regarding a claim associated with certain alleged patent
      infringement. Davel was named as a defendant in a civil action captioned Gammino
      v. Cellco Partnership d/b/a Verizon Wireless, et al., C.A. No. 04-4303 filed
      in
      the United States District Court for the Eastern District of Pennsylvania.
      The
      plaintiff claimed that Davel and other defendants allegedly infringed its patent
      involving the prevention of fraudulent long-distance telephone calls. The
      plaintiff was seeking monetary relief of at least $7,500,000. Davel did not
      believe that the allegations set forth in the complaint were valid, and
      accordingly, Davel filed a Motion for Summary Judgment with the United States
      District Court. On October 4, 2007 the United States District Court granted
      Davel’s Motion for Summary Judgment and the Court entered final judgment
      dismissing Plaintiff John R. Gammino’s claims for patent infringement. On
      November 1, 2007, Plaintiff filed his Notice of Appeal commencing an action
      in
      the United States Court of Appeal for the Federal District. In response, Davel
      filed its appellate brief on February 26, 2008. Notwithstanding the pending
      appellate proceeding, the parties entered into a Settlement Agreement in July
      2008 terminating the litigation and providing a mutual release of claims, which
      ended the pending litigation between the parties.




2) On
      April
      17, 2007, the Supreme Court of the United States issued an opinion in the case
      captioned Global Crossing Telecommunications, Inc. v. Metrophones
      Telecommunications, Inc. on Certiorari from the United States Court of Appeals
      for the Ninth Circuit (the "Ninth Circuit" and the "Metrophones Case"), No.
      05-705, in which it upheld the Ninth Circuit's decision that independent
      payphone providers have a private right of action to pursue recovery in federal
      court from telecommunication carriers who fail to pay dial around compensation.
      The ruling in the Metrophones Case impacts litigation that has been pending
      in
      federal district court against AT&T, Sprint and Qwest (the "Defendants") for
      non-payment of dial around compensation (the “District Court Litigation”). Davel
      Communications, Inc. and certain of Davel's subsidiaries (collectively, the
      "Davel Entities") are directly or indirectly plaintiffs in the District Court
      Litigation. Following the Supreme Court ruling in the Metrophones Case, AT&T
      and Sprint filed with the United States Supreme Court a Petition for a Writ
      of
      Certiorari No. 07-552 seeking review of the ruling of the United States Court
      of
      Appeals for the District of Columbia Circuit that the plaintiffs had standing
      in
      the District Court Litigation. On January 4, 2008 the United States Supreme
      Court granted the Petition for a Writ of Certiorari. The parties filed their
      respective briefs during the first calendar quarter of 2008, with the United
      States Supreme Court hearing oral arguments on April 21, 2008. On June 23,
      2008,
      the United Stated Supreme Court issued a ruling affirming the decision of the
      United States Court of Appeals. The recent ruling by the United States Supreme
      Court has permitted the District Court Litigation to move forward.





Although
      the District Court Litigation has been pending since 1999, the litigation
      remains in its preliminary phases. As a result, we cannot predict the likelihood
      of success on the merits, the costs associated with the pursuit of the claims,
      the timing of any recovery or the amount of recovery, if any. However, the
      industry representing a group of independent payphone providers, including
      the
      Davel Entities, has prevailed in a similar Federal Communications Commission
      administrative proceeding against another carrier for non-payment of dial-around
      compensation using a similar methodology which was accepted and pursuant to
      which the Federal Communications Commission assessed pre-judgment interest
      (the
      "Similar Litigation"). The Similar Litigation is being appealed to the U.S.
      Court of Appeals for the District of Columbia. Based upon our methodology in
      the
      Similar Litigation, we estimate that the amount in controversy for the Davel
      Entities against the Defendants extends well into the eight figures, but any
      recovery is conditioned on, among other things (i) prevailing on the merits
      at
      trial; (ii) having the Davel Entities' damages model and other claims approved
      in whole or in large part; (iii) prevailing on any appeals that the Defendants
      may make; and (iv) the continued solvency of the Defendants. As evidenced by
      the
      nine years that this litigation has been in process, the Defendants have shown
      an interest in stretching the duration of the litigation and have the means
      to
      do so. Although the Davel Entities could ultimately benefit (in an absolute
      sense, although not necessarily on a present value basis) from this delay in
      the
      event that pre-and/or post-judgment interest (awarded at 11.25% per annum in
      the
      Similar Litigation) is assessed against the Defendants and the potential award
      of attorneys' fees and/or other remedies (in addition to compensatory damages)
      if the Davel Entities prevail, such delay will result in a deferral of the
      receipt of any cash to the Davel Entities.





3)  Under
      the
      authority granted by the Management Agreement to USA, CloseCall America filed
      a
      complaint in the Circuit Court for Howard County, Maryland, against Skyrocket
      Communications, Inc. (“Skyrocket”) Case No. 13-C-07-70296 for breach of contract
      and unjust enrichment (the “Skyrocket Litigation”). CloseCall’s claim arose from
      an unpaid credit owing to CloseCall in the amount of $23,914, owed under a
      terminated technical support services agreement. In response thereto, Skyrocket
      filed a counter-claim alleging breach of contract and asserting damages in
      the
      amount of $1.5 million. In January 2008 Skyrocket filed an amended
      counter-complaint asserting an additional claim for intentional
      misrepresentation, seeking $5 million in actual damages and $5 million in
      punitive damages. Based upon our belief that the counter-claim and amended
      counter-claims are without merit, CloseCall filed a motion for summary judgment.
      The Court granted CloseCall’s motion on the amended counter-claim and dismissed
      Skyrocket’s claim for intentional misrepresentation. CloseCall intends to seek
      reconsideration of its motion for summary judgment on the counter-claim. It
      is
      expected that the matter will proceed to trial during the first calendar quarter
      of 2009. We believe that CloseCall has meritorious defenses to the alleged
      claims and we intend to vigorously defend CloseCall in this matter.
      Notwithstanding the foregoing, in the event that CloseCall is required to
      litigate the matter and its defenses were not successful, we believe that any
      potential exposure related to the claims alleged against CloseCall are not
      likely to be material.




-
          25
          -




4) On
      or
      about March 15, 2008 we were served with a summons and complaint in the Superior
      Court of New Jersey in Bergen County captioned Harborside Investments III LLC
      vs. MobilePro Corp. and Neoreach, Inc. The plaintiff alleges claims of breach
      of
      agreement and unjust enrichment arising out of an equipment lease agreement
      for
      wireless equipment and seeks damages in the amount of $976,361 (the “Harborside
      Litigation”). On or about April 28, 2008 the Company filed its answer, separate
      defenses and third party complaint against JTA Leasing Co., LLC. The Harborside
      Litigation is in its initial stages. Although we believe MobilePro has
      meritorious defenses to the alleged claims and we intend to vigorously defend
      ourselves in this matter we cannot predict the likelihood of success in the
      Harborside Litigation. The Company has recorded the liability for the estimated
      principal balance relating to this capital lease obligation and the related
      accrued interest which is included in liabilities of companies held for sale
      in
      the condensed consolidated balance sheets at September 30 and March 31, 2008.





5)
      On
      March 4, 2008 the Company filed a complaint in the Circuit Court of Madison
      County, Mississippi against Telava Networks, Inc. d/b/a Telava Wireless/Network,
      Inc. (“Telava”) asserting claims against Telava for breach of contract and
      tortuous breach of contract in connection with a June 2007 purchase agreement
      pursuant to which Telava agreed to purchase MobilePro’s interests in Kite
      Networks and the rest of our wireless business. The Company seeks recovery
      of
      all available damages including, but not limited to, actual, consequential
      general, expectancy and punitive damages. Telava filed a motion to remove the
      case to the United States District Court for the Southern District of
      Mississippi, Jackson Division after which it filed an answer denying the
      substantive claims made by MobilePro and asserting certain affirmative defenses
      to the claims. . On or about September 30, 2008 the parties entered into a
      joint
      stipulation of dismissal, without prejudice. The dismissal agreement ends the
      existing litigation while preserving the Company’s right to re-assert the claims
      at a later date if the Company so elects.





6)
      Davel
      and certain of its wholly owned subsidiaries have been plaintiffs in a complaint
      filed against Qwest Corporation (“Qwest” and the “Qwest Litigation”) in the
      United States District Court for the Western District of Washington alleging
      various claims concerning Qwest’s billings to the plaintiffs from 1997 to 2003
      for certain communication services from Qwest. The proceeding had previously
      been stayed through January 2008 to permit the Federal Communications Commission
      to issue a ruling that would provide the court guidance concerning the billing
      matters at issue in the Qwest Litigation. Despite the failure of the Federal
      Communications Commission to timely issue the guidance sought by the district
      court, on or about September 30, 2008 the parties entered into a Settlement
      Agreement to resolve the Qwest Litigation. The proceeds received as a result
      of
      the Settlement Agreement had previously been assigned to the former lenders
      of
      Davel pursuant to the acquisition and related agreements between the Company
      and
      former secured lenders of Davel. As a result of a modification to certain
      agreements between the Company and the former lenders in December 2007, the
      Company was permitted to retain $718,314 of the settlement proceeds.




7) Other
      Ongoing and Threatened Litigation




The
      Company is involved in other claims and litigation arising in the ordinary
      course of business, which it does not expect to materially affect its financial
      position or results of operations. The Company has been threatened by several
      former employees with litigation; however, to date, no litigation or other
      action has commenced which is material to the Company.




-
          26
          -




**Item
      2. Management's Discussion and Analysis of Results of Operations and Financial
      Condition.**





The
      following is a discussion and analysis of our results of operations for the
      three and six month periods ended September 30, 2008 and 2007, our financial
      condition at September 30, 2008 and factors that we believe could affect our
      future financial condition and results of operations. Historical results may
      not
      be indicative of future performance.





This
      discussion and analysis should be read in conjunction with our consolidated
      financial statements and the notes thereto included elsewhere in this Form
      10-Q.
      Our consolidated financial statements are prepared in accordance with Generally
      Accepted Accounting Principles in the United States (“GAAP”). All references to
      dollar amounts in this section are in United States dollars.





**Forward
      Looking Statements**





This
      Quarterly Report on Form 10-Q contains forward-looking statements that involve
      risks and uncertainties. The statements contained in this document that are
      not
      purely historical are forward-looking statements within the meaning of Section
      27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
      Act
      of 1934, including without limitation statements regarding our expectations,
      beliefs, intentions or strategies regarding our business, and the level of
      our
      expenditures and savings for various expense items and our liquidity in future
      periods. We may identify these statements by the use of words such as
“anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,”
“may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “will,”
“would” and other similar expressions. All forward-looking statements included
      in this document are based on information available to us on the date hereof,
      and we assume no obligation to update any such forward-looking statements,
      except as may otherwise be required by law. Our actual results could differ
      materially from those anticipated in these forward-looking
      statements.





**Background**





We
      are a
      holding company with subsidiaries in the pay telephone and online gaming
      industries and an affiliate in the software industry. Although classified as
      discontinued operations, we still own an integrated telecommunications business.
      We previously owned broadband wireless, telecommunications and integrated data
      communication services companies which delivered a comprehensive suite of voice
      and data communications services, including local exchange, long distance,
      enhanced data, Internet, wireless and broadband services to end user customers.
      At June 30, 2007, we marketed and sold our integrated communications services
      through nine branch offices in seven states and we serviced over 123,000 billed
      accounts representing over 211,000 equivalent subscriber lines including
      approximately 110,000 local and long-distance telephone lines, approximately
      38,000 dial-up lines, approximately 5,000 DSL lines, approximately 25,000 fixed
      and mobile wireless lines, approximately 6,000 cellular lines and the remaining
      are other Internet-related accounts. We owned and operated approximately 22,200
      payphones located predominantly in 44 states and the District of Columbia.
      Most
      of our subscribers have been residential customers.





Historically,
      our revenues had been generated through three of our four business
      reporting segments:





**Wireless
                Networks**
            Our
                broadband wireless network deployment efforts had been conducted
                by our
                wholly owned subsidiary, NeoReach, Inc., (“NeoReach”), and its subsidiary,
                Kite Networks, Inc. (“Kite Networks,” formerly, NeoReach Wireless, Inc.).
                This segment has also included the operations of Kite Broadband,
                LLC
                (“Kite Broadband”), a wireless broadband Internet service provider located
                in Ridgeland, Mississippi.**Voice Services**
            Our
                voice services segment has been led by CloseCall America, Inc.
                (“CloseCall”), a competitive local exchange carrier (“CLEC”, which is a
                term applied under the Telecommunications Act of 1996 to local telephone
                companies which compete with incumbent local telephone companies)
                based in
                Stevensville, Maryland; American Fiber Network, Inc. (“AFN”), a CLEC based
                in Overland Park, Kansas; and Davel Communications, Inc. (“Davel”), an
                independent payphone provider based in Cleveland, Ohio. CloseCall
                offers
                its customers a full array of telecommunications products and services
                including local, long-distance, 1-800-CloseCall anytime/anywhere
                calling,
                digital wireless, high-speed telephone (voice over IP), and dial-up
                and
                DSL Internet services. AFN is licensed to provide local access, long
                distance and/or Internet services throughout the United States. Davel
                was
                previously one of the largest independent payphone operators in the
                United
                States.




-
          27
          -




**Internet Services**
            Our
                Internet services segment included DFW Internet Services, Inc. (“DFW”,
                doing business as Nationwide Internet), an Internet services provider
                (“ISP”) based in Irving, Texas, its acquired Internet service provider
                subsidiaries and InReach Internet, Inc. (“InReach”), a full service ISP
                located in Stockton, California that we acquired on November 1, 2005.
                Our
                Internet services segment provided dial-up and broadband Internet
                access, web-hosting services, and related Internet services to business
                and residential customers in many states.**Corporate**
            Our
                corporate reporting segment serves as the holding company of the
                operating
                subsidiaries that are divided among the other three business reporting
                segments, provides senior executive and financial management, and
                performs
                corporate-level accounting, financial reporting, and legal functions.
                This
                segment also includes our Internet gaming subsidiary, ProGames Network,
                Inc. (“ProGames”) that we founded in December
                2005.





Prior
      to
      January 2004, we were a development stage company. Although we were incorporated
      approximately eight years ago, we have undergone a number of changes in our
      business strategy and organization. In June 2001, we focused our business on
      the
      integration and marketing of complete mobile information solutions to meet
      the
      needs of mobile professionals. In April 2002, we acquired NeoReach and shifted
      our focus toward solutions supporting the third generation wireless market
      that
      provides broadband to allow faster wireless transmission of data, such as the
      viewing of streaming video in real time. We shifted our business strategy again
      in December 2003 with a new management team, expanding significantly the scope
      of our business activity to include Internet access services, local and long
      distance telephone services and the ownership and operation of payphones. In
      2005, we began to invest in the business of deploying broadband wireless
      networks and providing wireless network access services in wireless access
      zones
      to be primarily located in municipality-sponsored areas. As indicated above,
      we
      entered these businesses primarily through acquisitions. We completed twenty-two
      (22) acquisitions during this period.





Mobilepro
      Corp. (“Mobilepro”) was incorporated under the laws of Delaware in July 2000
      and, at that time, was focused on the integration and marketing of complete
      mobile information solutions that satisfied the needs of mobile professionals.
      In June 2001, Mobilepro merged with and into CraftClick.com, Inc.
      (“CraftClick”), with CraftClick remaining as the surviving corporation. The name
      of the surviving corporation was subsequently changed to Mobilepro Corp. on
      July
      9, 2001. CraftClick had begun to cease its business operations in October 2000,
      and ultimately disposed of substantially all of its assets in February
      2001.





On
      March
      21, 2002, we entered into an Agreement and Plan of Merger with NeoReach, a
      private Delaware company, pursuant to which we merged a newly formed, wholly
      owned subsidiary into NeoReach in a tax-free transaction. The merger was
      consummated on April 23, 2002. As a result of the merger, NeoReach became a
      wholly owned subsidiary of Mobilepro.





DFW
      was
      the principal operating subsidiary within our Internet services division. On
      January 20, 2004, we acquired DFW. After that time, we acquired nine additional
      Internet service businesses that have operated as subsidiaries of DFW and,
      on
      November 1, 2005, we acquired the business of InReach.





On
      October 15, 2004, we closed our acquisition of CloseCall. One month later,
      we
      closed our acquisition of Davel. On June 30, 2005, we acquired AFN.





In
      June
      2005, we participated in the formation of Kite Broadband, a wireless broadband
      Internet service provider, resulting in an initial 51% ownership of this
      venture. On January 31, 2006, we acquired the remaining 49% of Kite Broadband
      and 100% of the outstanding common stock of Kite Networks, Inc.




-
          28
          -





On
      March
      31, 2006, we merged Kite Networks, Inc. with and into NeoReach Wireless, Inc.
      and changed the name of the combined entity to Kite Networks, Inc. (“Kite
      Networks”).





On
      July
      8, 2007 we sold our interests in Kite Broadband, Kite Networks and Neoreach.
      See
      discussion below concerning The Sale of the Wireless Business to
      Gobility.





On
      June
      30, 2007, the Company entered into an agreement to sell the CLEC and ISP
      Businesses to United Systems Access, Inc. (“USA”, and the “USA Agreement”). The
      closing of the ISP Businesses occurred on July 18, 2007. The closing of the
      sale
      of the CLEC Business to USA has not occurred. See discussion below concerning
      The Sale of the ISP and CLEC Businesses to USA Telecom.





During
      June and September 2007 the Company entered into a series of transactions to
      sell the majority of its pay telephones. See discussion below concerning the
      Sale of the Payphone Assets.





Our
      principal executive offices are located at 6701 Democracy Boulevard, Suite
      202,
      Bethesda, MD 20817 and our telephone number at that address is (301) 571-3476.
      We maintain a corporate Web site at www.mobileprocorp.com. We make available
      free of charge through our Web site our annual report on Form 10-K, quarterly
      reports on Form 10-Q, current reports on Form 8-K, and all amendments to those
      reports, as soon as reasonably practicable after we electronically file or
      furnish such material with or to the SEC. The contents of our Web site are
      not a
      part of this report. The SEC also maintains a Web site at www.sec.gov that
      contains reports, proxy statements, and other information regarding
      Mobilepro.





**Current
      Business Conditions**





Our
      acquisition strategy of the last four years was executed with one primary
      objective being the establishment of a viable telecommunications company with
      sufficient credibility to be considered for selection by cities for the
      deployment, ownership and management of broadband wireless networks. The
      effectiveness of our business plan execution was initially confirmed by the
      selection by Tempe, Arizona, of Kite Networks (formerly NeoReach Wireless)
      for
      its network. Subsequently, we were selected by several other cities for the
      deployment, ownership, and management of such networks and had substantially
      completed citywide wireless networks deployments in Farmers’ Branch, Texas, and
      Longmont, Colorado.





However,
      most of our acquired businesses experienced declining revenues. Although
      restructuring measures helped to control other operating expenses, we were
      unable to reduce the corresponding costs of services sufficiently to maintain
      profitability. In addition, we funded the start-up and operations of the
      municipal wireless networks and online gaming businesses without these companies
      achieving profitability.





As
      a
      result, our business has historically lost money. Our accumulated deficit at
      September 30, 2008 was $95,350,754. Although the Company had net income of
      $282,093 in the six months ended September 30, 2008, it had a loss from
      continuing operations of $1,104,971. In the fiscal years ended March 31, 2008,
      2007 and 2006, the Company sustained net losses of $18,361,602, $45,898,288
      and
      $10,176,407, respectively. The Company was able to generate $532,481 of cash
      from operating activities during the six months ended September 30, 2008. Cash
      flow from operations was primarily due to cash generated by its CLEC Business
      and $810,215 of receipts relating to claims involving over-billings by certain
      telecommunications carriers of Davel in violation of regulatory rulings
      (“Regulatory Receipts”), including $718,314 received from Qwest in the second
      fiscal quarter (see Item 1. - “Legal Proceedings”). The amount of cash used in
      operations during the fiscal year ended March 31, 2008 was $3,558,996. Future
      losses are likely to occur. Accordingly, we are likely to continue to experience
      liquidity and cash flow problems if we are unable to complete the planned sale
      of assets, to improve the Company’s operating performance, or to raise
      additional capital as needed and on acceptable terms.




-
          29
          -





To
      date,
      YA Global has been a significant source of capital for us, providing financing
      in several forms. During fiscal 2007, we borrowed funds under a series of
      convertible debentures. The total amount owed to YA Global under the debentures
      at March 31, 2007 was $18,149,650. In May 2007, we borrowed $1,100,000 from
      YA
      Global under a promissory note in order to help bridge our cash flow shortfall
      during the first quarter of fiscal year 2008. This promissory note and accrued
      interest were repaid in July 2007. Using shares of our common stock registered
      on Form S-3 in November 2006, we made principal and interest payments on the
      debentures that totaled $4,880,489 during the fiscal year ended March 31, 2007,
      and that totaled $1,967,908 from April 2007 through May 2007. However, the
      supply of registered shares available for the conversion of the debentures
      was
      exhausted. We made additional cash payments of principal and interest on the
      debentures that totaled $4,149,651 during the fiscal year ended March 31, 2008,
      primarily from the proceeds of the sale of the ISP Business and payphone assets
      discussed below. However, the Company was unable to make the weekly scheduled
      principal payments of $375,000 plus interest commencing February 1, 2008 and
      made partial payments of interest aggregating $200,000 on May 2 and June 4,
      2008. Effective
      June 30, 2008, the Company issued a secured convertible debenture to YA Global
      (the “Convertible Debenture”) with an aggregate principal balance of
      $13,391,175, replacing the former convertible debentures. The Convertible
      Debenture provides for monthly payments of interest at 12% with the remaining
      principal balance due on May 1, 2009. The Convertible Debenture continues to
      be
      secured by substantially all of the assets of the Company (see Note 5 to the
      condensed consolidated financial statements).





**The
      Sale of the Wireless Networks Business to Gobility**





The
      cash
      needs of Kite Networks had been substantially funded through borrowings by
      the
      Company from YA Global under a variety of debt instruments and over $5 million
      in equipment lease financing. Kite Networks had also been provided extended
      payment terms by certain significant equipment suppliers. However, we realized
      that sufficient funds were not available from these existing sources for Kite
      Networks to effectively continue the execution of its business plan. As a
      result, we commenced the search for capital as described below during the fourth
      quarter of the fiscal year 2007.





In
      December 2006, we engaged an investment banking firm to assist in evaluating
      strategic alternatives for the wireless networks business conducted by its
      Kite
      Networks and Kite Broadband subsidiaries. Efforts to secure investment capital
      for this business or to find a willing buyer resulted in the sale of the
      wireless networks business to Gobility, Inc. (“Gobility”) on July 8, 2007. The
      purchase price was $2.0 million, paid with a debenture convertible into shares
      of common stock of Gobility. However, under the terms of the debenture, Gobility
      was required to raise at least $3.0 million in cash no later than August 15,
      2007. This did not occur. As a result of this default by Gobility on the
      financing obligation under the debenture, we have the right but not the
      obligation to repurchase the wireless networks business with the surrender
      of
      the debenture and the payment of a nominal additional amount.





Gobility
      expected to raise capital for its operating purposes from Wingfield Corporation,
      N.V., a Brussels Belgium-based merchant bank, pursuant to a funding commitment
      letter that was presented to the Company at closing. Because this funding has
      not been obtained, Gobility has been unable to fund its operations including
      the
      payment of amounts due under a series of capital equipment leases and other
      equipment-related obligations. On the date of the sale to Gobility, the
      aggregate amount of this debt included in the balance sheet of Kite Networks
      was
      approximately $6,111,000. Because the equipment leases and other equipment
      purchases were co-signed by Mobilepro, if Kite Networks fails to pay the leases,
      the Company, subject to any defenses it may have, may be obligated to pay this
      debt. The Company could also be subject to late payment penalties and interest
      at the default rate.





The
      Company is currently cooperating with Gobility in its efforts to sell the assets
      of Kite Networks in order to pay off the obligations relating to the leases
      and
      other equipment. In September 2007, the Company was required to make lease
      payments totaling $64,165. On March 10, 2008, Gobility sold the assets of the
      wireless network in Longmont, Colorado, and the Company received the proceeds
      in
      the form of promissory notes totaling $1,800,000. In addition, the Company
      entered into a forbearance agreement with the principal equipment vendor and
      agreed to pay the $1,591,978 equipment obligation, with interest at the prime
      rate, and a related lease obligation in the principal amount of $149,749. In
      March 2008, the Company also satisfied the terms of one of the leases relating
      to the Tempe, Arizona wireless network with an aggregate principal balance
      of
      $318,595, plus accrued interest, by paying $93,000 in cash and having the
      $250,000 certificate of deposit that secured the lease applied thereto. As
      a
      result of the sale to Gobility and these transactions, the Company recorded
      a
      net loss on the sale of its Wireless Networks Business of $3,433,843 that was
      reported in the loss on sale of discontinued operations for the fiscal year
      ended March 31, 2008. Of this amount, the Company recognized a loss of
      $5,036,289 in the second fiscal quarter and a $1,602,446 reduction in the loss
      relating to the sale of the Longmont, Colorado wireless network that was
      recorded in the fourth quarter of the fiscal year ended March 31, 2008.




-
          30
          -





On
      August
      1, 2008, the Company executed a promissory note and release with Data Sales
      Co.,
      Inc. (“Data Sales”) in the principal amount of $330,000. The note is in full
      satisfaction of a $1,231,138 lease obligation for which the Company was a
      co-borrower with Kite Networks and reflects the impact of a sale of certain
      uninstalled wireless equipment by Data Sales to an unaffiliated third party
      purchaser that was consummated in July 2008. The Company recorded a gain of
      $901,138, or $0.0011 per share, in its fiscal second quarter as a result of
      the
      transaction.





The
      Company continues to cooperate with Gobility in its efforts to sell the
      remaining assets of Kite Networks. In the event Gobility is unsuccessful in
      its
      attempts to sell the remaining assets and satisfy the lease obligations, the
      Company, subject to any defenses it might have, could be required to make the
      payments on the remaining leases. At September 30, 2008, the aggregate amount
      recorded on the balance sheet as liabilities of companies held for sale relating
      to the capital lease obligations, accrued interest, notes payable and the
      equipment obligation was $4,558,846. The Company has also recorded the
      certificates of deposits securing the lease obligations in the aggregate amount
      of $937,664 as assets of companies held for sale in the Company’s condensed
      consolidated balance sheets.




**The
      Sale of the ISP and CLEC Businesses to USA Telecom**





In
      April
      2007, we announced that our Board of Directors had decided to explore potential
      strategic alternatives for the entire Company, and that it had received
      inquiries from potential buyers regarding the purchase of portions of its
      business. This initiative was undertaken with the goals of maximizing the value
      of our assets, returning value to our stockholders and eliminating the Company’s
      debt, particularly amounts owed to YA Global.





We
      received letters of interest regarding the acquisition of the CloseCall, AFN
      and
      the Internet service provider businesses (the “Wireline Businesses”) and several
      potential purchasers conducted due diligence activities. This process resulted
      in the execution of the agreement to sell the Wireline Businesses to USA. Under
      the USA Agreement, the total purchase price for the ISP and CLEC Businesses
      was
      $27,663,893 consisting of $21.9 million in cash and 8,100 shares of convertible
      preferred stock of USA (the “USA Preferred”). Pursuant to the USA Agreement, we
      closed the sale of the Internet service provider companies to USA on July 18,
      2007, and received cash proceeds of $2,500,000, a promissory note for $2,000,000
      and 8,100 shares of preferred stock of USA convertible into 7.5% of the fully
      diluted shares of USA’s common stock initially valued at $5,763,893.
      Simultaneously, we used $2,000,000 of this cash to pay down principal and
      accrued interest owed to YA Global under the promissory note and debentures.





The
      sale
      of CloseCall and AFN (the “CLEC Business”) required the receipt of certain state
      regulatory approvals before it could be completed. Pursuant to a management
      agreement that was signed in July 2007 (the “USA Management Agreement”), USA
      operated the CLEC Business, retained any cash provided by the operations of
      these companies and funded any cash requirements of the companies pending
      completion of the sale of these companies. In addition, USA was required to
      make
      debenture interest payments to YA Global on the Company’s behalf during the term
      of the USA Management Agreement based on an assumed principal balance of $17.4
      million at an interest rate of 7.75%.





Upon
      the
      close and pursuant to the terms of the USA Agreement, we expected to receive
      cash proceeds of $19.4 million, including payment of the $2.0 million promissory
      note. On January 3, 2008, the Company entered into an amendment to the
      $2,000,000 promissory note due from USA. USA made payments of $500,000 each
      on
      January 4 and January 11, 2008 with the remaining balance of $1,000,000,
      together with accrued interest at the rate of 7.75%, due on the earlier of
      the
      date of the closing of the sale of the CLEC Business or March 31, 2008. Of
      the
      $1,000,000 of payments, the Company received $125,000 and the remaining $875,000
      was used to pay principal and interest on the convertible debentures due to
      YA
      Global. USA did not pay the remaining principal balance of $1,000,000 or the
      accrued interest due on March 31, 2008. In July 2008, the Company revised the
      payment terms relating to the USA note and received principal and interest
      payments totaling $200,000. The remaining principal balance and accrued interest
      at 12% per annum is due on December 29, 2008.




-
          31
          -





On
      January 14, 2008, the Company received notice from USA purporting to terminate
      the USA Agreement with respect to the sale of the CLEC Business, but provided
      that USA remained interested in discussing terms upon which it would complete
      the purchase. The Company has been in communications with USA and disputes
      the
      validity of the claims alleged for the purported termination, which include
      the
      alleged failure to obtain certain regulatory and contractual approvals and
      the
      alleged breach of certain representations and warranties set forth in the USA
      Agreement. The Company believes the purported termination was in bad faith
      and
      intends to pursue any and all legal and equitable remedies available to it
      against USA. Despite the on-going discussions with USA, the Company re-assumed
      operating control of AFN and Close Call in January 2008 and terminated the
      USA
      Management Agreement and the sale of the CLEC Business. Following the
      termination of the sale of the CLEC Business to USA in the fourth quarter of
      fiscal 2008, the value of the USA Preferred was considered impaired. The Company
      discontinued the accretion of the discount and wrote-off the carrying value
      of
      the USA Preferred against the liability recorded for the advanced proceeds
      from
      USA. The net difference in carrying values of $56,442 was recorded as a
      reduction in the loss on sale of discontinued operations in the fourth quarter
      of the fiscal year ended March 31, 2008.





The
      Company expected to use the cash proceeds from the sale of the CLEC Business
      to
      retire the YA Global debentures plus any remaining amounts of accrued interest.
      If the sale of the CLEC Business is not sold to an alternative buyer on terms
      satisfactory to the Company, the Company may not have the ability to continue
      as
      a going concern without a significant restructuring of the YA Global debt.
      See
      Item 1A. below - Risk Factors - “Failure to Complete the Sale of the CLEC
      Businesses May Result in Our Inability to Retire the YA Global Debentures”.





**Discontinued
      Operations**





In
      connection with the activities summarized above, we have reclassified the assets
      and liabilities of the CLEC Business and the remaining assets and liabilities
      of
      the Wireless Networks Business as assets and liabilities related to companies
      held for sale in the condensed consolidated balance sheets at September 30
      and
      March 31, 2008. In addition, we have classified the results of operations of
      the
      CLEC, ISP, and Wireless Networks Businesses in discontinued operations in the
      condensed consolidated statements of operations for the three months and six
      months ended September 30, 2007. Discontinued operations include the results
      of
      operations for the CLEC Business and the costs associated with the remaining
      assets and liabilities of the Wireless Networks Business for the three months
      and six months ended September 30, 2008.





**Sales
      of Payphone Assets**





The
      Company completed a series of transactions to sell a majority of Davel’s
      payphones in order to provide cash for operating purposes and additional
      retirements of convertible debenture debt. On June 30, 2007, we completed the
      sale of approximately 730 operating payphones to an unaffiliated payphone
      operator and received over $200,000 in cash proceeds. A gain in the amount
      of
      $10,640 was recognized in connection with this transaction in the quarter ended
      June 30, 2007.





In
      September 2007, in three transactions, we completed the sale of approximately
      21,700 payphones to unaffiliated purchasers. After the direct payment of certain
      related liabilities and broker fees in the aggregate amount of approximately
      $851,000, and the funding of escrow accounts established for the payment of
      vendor obligations and indemnification claims in the aggregate amount of
      $1,200,000, proceeds of approximately $1,840,000 were used to retire convertible
      debenture debt of approximately $1,672,000 and related accrued interest of
      approximately $168,000. After these sales, Davel’s remaining operations have
      been significantly reduced. Davel’s remaining operations are being continued and
      Davel is pursuing the recovery of certain claims including the AT&T, Sprint
      and Qwest claims described in Item 1. - Legal Proceedings.  A
      net
      loss of $2,800,206 was included in the loss from continuing operations reported
      in the second quarter of the fiscal year ended March 31, 2008 in connection
      with
      these transactions.





**Critical
      Accounting Policies**




We
      consider the accounting policies related to the disposal of long-lives assets,
      discontinued operations, the valuation of goodwill and other intangible assets,
      transactions related to our debt and equity financing activity, and revenue
      and
      related cost recognition to be critical to the understanding of our results
      of
      operations. Critical accounting policies include the areas where we have made
      what we consider to be particularly subjective or complex judgments in making
      estimates and where these estimates can significantly impact our financial
      results under different assumptions and conditions. We prepare our financial
      statements in conformity with U.S. generally accepted accounting principles.
      As
      such, we are required to make certain estimates, judgments, and assumptions
      that
      we believe are reasonable based upon the information available. These estimates,
      judgments, and assumptions affect the reported amounts of assets and liabilities
      at the date of the financial statement and the reported amounts of revenue
      and
      expenses during the periods presented. Actual results could be different from
      these estimates.




-
          32
          -





**Impact
      of Recent Accounting Standards**





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
      interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the
      accounting for uncertainty in income tax positions. FIN 48 requires that the
      Company recognize in the consolidated financial statements the impact of a
      tax
      position that is more likely than not to be sustained upon examination based
      on
      the technical merits of the position. The provisions of FIN 48 were effective
      for the Company on April 1, 2007. Adoption of FIN 48 did not have a material
      effect on the consolidated financial statements.




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      (“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value,
      establishes a framework and gives guidance regarding the methods used for
      measuring fair value, and expands disclosures about fair value measurements.
      The
      provisions of SFAS No. 157 are effective for financial statements issued for
      the
      Company’s fiscal year beginning April 1, 2008 (April 1, 2009 with respect to
      certain non-financial assets and liabilities), and interim periods within such
      fiscal years. The adoption of SFAS No. 157 for financial assets and
      liabilities in the first quarter of the current fiscal year did not have a
      material effect on the Company’s financial position or results of operations as
      the Company does not have any material financial assets or liabilities measured
      at fair value.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities,” which provides companies with an
      option to report selected financial assets and liabilities at fair value. The
      objective is to reduce both complexity in accounting for financial instruments
      and the volatility in earnings caused by measuring related assets and
      liabilities differently. The provisions of SFAS No. 159 are effective for
      financial statements issued for the Company’s fiscal year beginning April 1,
      2008. The Company did not elect to measure its financial instruments or any
      other items at fair value as permitted by SFAS No. 159. Therefore, the
      adoption of FAS No. 159 did not have a material effect on the Company’s
      financial position or results of operations.





In
      December 2007, the FASB issued SFAS No. 141R, “Business Combinations.”
SFAS No. 141R modifies the accounting for business combinations by requiring
      that acquired assets and assumed liabilities be recorded at fair value,
      contingent consideration arrangements be recorded at fair value on the date
      of
      the acquisition and preacquisition contingencies will generally be accounted
      for
      in purchase accounting at fair value. The pronouncement also requires that
      transaction costs be expensed as incurred, acquired research and development
      be
      capitalized as an indefinite-lived intangible asset and the requirements of
      SFAS
      No. 146, “Accounting for Costs Associated with Exit or Disposal
      Activities,” be met at the acquisition date in order to accrue for a
      restructuring plan in purchase accounting. SFAS No. 141R is required to be
      adopted prospectively effective for the Company’s fiscal year beginning April 1,
      2009. The Company does not expect SFAS No. 141R to have a significant impact
      on
      the Company’s consolidated financial statements.




In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
      in Consolidated Financial Statements — an amendment of ARB No. 51.” SFAS
      No. 160 modifies the reporting for noncontrolling interests in the balance
      sheet and minority interest income (expense) in the statement of operations.
      The
      pronouncement also requires that increases and decreases in the noncontrolling
      ownership interest amount be accounted for as equity transactions. SFAS
      No. 160 is required to be adopted prospectively, with limited exceptions,
      effective for the fiscal year beginning April 1, 2009. The Company does not
      expect SFAS No. 160 to have a significant impact on the Company’s consolidated
      financial statements.





In
      March 2008, the FASB issued SFAS No. 161, “Disclosures about
      Derivative Instruments and Hedging Activities — an amendment of FASB Statement
      No. 133.” SFAS No. 161 modifies existing requirements to include
      qualitative disclosures regarding the objectives and strategies for using
      derivatives, fair value amounts of gains and losses on derivative instruments
      and disclosures about credit-risk-related contingent features in derivative
      agreements. The pronouncement also requires the cross-referencing of derivative
      disclosures within the financial statements and notes thereto. The requirements
      of SFAS No. 161 are effective for the Company’s interim and annual fiscal
      periods beginning on April 1, 2009. The Company does not expect SFAS No. 161
      to
      have a significant impact on the Company’s consolidated financial statements or
      related disclosures.





**Results
      of Operations and Financial Condition**




The
      results of continuing operations include the operating results of Mobilepro,
      Davel and ProGames. Due to the sale of a majority of Davel’s payphones in
      September 2007, the operating results for the periods reported in the current
      and prior fiscal years are not comparable. Results of discontinued operations
      include the operating results of the CLEC, ISP and Wireless Networks Businesses.
      The operating results of the first and second quarters of the current and prior
      years are not comparable due to the sale of the ISP and Wireless Networks
      Businesses in the second quarter of the fiscal year ending March 31,
      2008.




-
          33
          -





We
      realize that effective analysis of our operations with an approach of comparing
      results for a current period with the results of a corresponding prior period
      may not be helpful in understanding our financial condition and results of
      operation in light of the recent sale of certain of our subsidiaries. In order
      to analyze ourselves, we focus not only on achieving increasing amounts of
      net
      income and EBITDA, but emphasize the change of net income/(loss) per
      share.




**The
      Three Months Ended September 30, 2008 and 2007**





Consolidated
      revenues of continuing operations for the quarter ended September 30, 2008
      were
      $860,569 compared with revenues of $4,197,406 in the prior year quarter. Current
      quarterly revenues consist of management fees from Microlog Corporation
      (“Microlog”), an affiliate, and the revenues of ProGames and Davel. Davel’s
      revenues include  the
      current quarter adjustments to “dial-around” revenues (intercarrier compensation
      paid to us by the providers of 800 and other toll-free numbers at the rate
      of
      49.4 cents per call) that were generated by our communications services in
      prior
      quarters and $794,383 of Regulatory Receipts relating primarily to claims
      against Qwest Corporation and certain other telecommunication carriers (see
      Note
      8 to the condensed consolidated financial statements). As discussed above,
      in
      the second quarter of fiscal 2008, we sold most of our remaining operational
      payphones in a series of transactions including the sale of approximately 21,700
      payphones in September 2007. The operating results related to these assets
      are
      reflected in the condensed consolidated statement of operations through the
      sale
      dates. In the three months ended September 30, 2007, Davel derived most of
      its
      operating revenues from coin revenue and “dial-around” revenues generated by its
      payphones.





Cost
      of
      services (exclusive of depreciation and amortization) in the quarter ended
      September 30, 2008 was $1,080 compared to $2,185,248 in the second quarter
      of
      the prior fiscal year. This decline reflects the reduction in the number of
      payphones operated by Davel following the payphone sales described above.





The
      total
      operating costs and expenses of continuing operations for the quarter ended
      September 30, 2008, excluding the cost of services, depreciation and
      amortization, were $793,629 compared to $3,540,890 in the second quarter of
      the
      prior fiscal year, a decrease of $2,747,261. This was principally due to the
      elimination of the majority of Davel’s expenses following the sale of its
      payphone assets, which expenses declined by $2,301,345 compared to the second
      quarter of the prior fiscal year. The Company was also able to reduce operating
      costs through the reduction in payroll, professional fees and related expenses
      and a reduction in stock compensation expense. Payroll and professional fees
      declined as a result of reductions in personnel and reductions in legal fees
      relating to litigation and sales of the Company’s business units. Stock
      compensation expense decreased from $434,569 to $25,706 in the three months
      ended September 30, 2008 due to the vesting of options and warrants granted
      in
      prior years and a reduction in the fair value of current year grants. The
      reduction in operating costs and expenses was partially offset by a $300,000
      write down in the carrying value of notes receivable in three months ended
      September 30, 2008. The operating costs and expenses (excluding depreciation
      and
      amortization) of ProGames for the three months ended September 30, 2008 and
      2007
      were approximately $43,000 and $132,000, respectively reflecting reductions
      in
      personnel and other costs.





Depreciation
      and amortization expenses of continuing operations were $45,457 and $491,524
      in
      the quarters ended September 30, 2008 and 2007, respectively, representing
      the
      reductions in depreciation of the costs of deployed payphones and the
      amortization of payphone location contracts resulting from phone sales and
      removals.




Interest
        and other expense, net, was $329,772 for the quarter ended September 30,
        2008
        compared with $52,999 of expense in the corresponding quarter of the prior
        fiscal year. Interest expense in the three months ended September 30, 2008
        includes interest at 12% on the Convertible Debenture issued on June 30,
        2008,
        which replaced the 7.75% convertible debentures that were outstanding in
        the
        prior year. Interest and other expense, net in the three months ended September
        30, 2007 was offset by interest on the proceeds that were to be received
        from
        USA relating to the sale of the CLEC Business and the accretion of discount
        on
        the USA Preferred Stock. The major components of interest and other (income)
        expense for quarters ended September 30, 2008 and 2007 are presented in the
        following schedule.




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          34
          -




**Type
                  of Debt**
              
              **2008**
              
              **2007****Convertible
                  debentures (at stated rates)**
              
              $
              409,203
              
              $
              289,909**Convertible
                  debentures (debt discount amortization)**
              
              
              3,117
              
              
              38,152**Convertible
                  debenture (deferred financing fee amortization)**
              
              
              53,134
              
              
              -**Notes
                  payable to YA Global**
              
              
              -
              
              
              7,233**Notes
                  receivable - Microlog**
              
              
              (56,250
              )
              
              -**Other
                  notes receivable**
              
              
              (69,829
              )
              
              -**USA
                  interest on cash due at CLEC closing**
              
              
              -
              
              
              (277,089
              )**Accretion
                  of discount - USA Preferred Stock**
              
              
              -
              
              
              (96,465
              )**Other,
                  net**
              
              
              (9,603
              )
              
              91,259**Interest
                  and Other (Income) Expense, net**
              
              $
              329,772
              
              $
              52,999





The
      loss
      from continuing operations for the three months ended September 30, 2008 was
      $374,694, or $0.0005 per share, compared to a loss of $4,873,461, or $0.0063
      per
      share, in the prior year quarter. The current quarterly loss from continuing
      operations included a $65,326 loss representing our equity in the net loss
      of an
      affiliate, Microlog , an investment we acquired in January 2008. It also
      includes a loss of $79,494 for ProGames and income of $660,228 for Davel.
      Davel’s income is primarily due to the collection of $794,383 of regulatory
      receipts in the current quarter, as previously described above. The loss from
      continuing operations for the three months ended September 30, 2007 includes
      losses of $170,812 for ProGames and $3,698,883 for Davel, including a $2,800,206
      loss on the sale of certain payphone assets and related liabilities of Davel.





Revenues
      from discontinued operations were $8,054,407 in the current quarter, which
      relates to the Company’s CLEC Business. Second quarter revenues from
      discontinued operations last year were $9,779,097, which included $8,947,974
      relating to the CLEC Business and $831,123 relating to the ISP and Wireless
      Networks Businesses. The decline in revenues relating to the CLEC Business
      was
      primarily due to a reduction in the number of residential customers and to
      a
      lesser extent to reductions applicable to the bundling of services billed to
      customers. The decline in revenue was offset in part by an increase in software
      sales.





Income
      from discontinued operations for the three months ended September 30, 2008
      was
      $1,105,154, or $0.0014 per share, and includes the operating results of the
      CLEC
      Business and interest and other expenses relating to the remaining obligations
      of Kite Networks. The current quarterly income also includes a $901,138 gain
      on
      the sale of discontinued operations applicable to the settlement of one of
      the
      Kite Networks leases. The loss from discontinued operations for the three months
      ended September 30, 2007 was $7,737,229, or $0.0100 per share, which includes
      a
      $5,036,289 loss on the sale of the Wireless Networks Business and a $2,481,227
      loss on the sale of the ISP Business. Without the operating results and losses
      of the ISP and Wireless Networks Businesses, there would have been income of
      $25,651 relating to the CLEC business (including Kite interest) in the prior
      year quarter.




We
      reported net income of $730,460 for the quarter ended September 30, 2008, or
      $0.0009 per share, compared with a net loss of $12,610,760, or $0.0163 per
      share, for the quarter ended September 30, 2007.





**The
      Six Months Ended September 30, 2008 and 2007**





Consolidated
      revenues of continuing operations for the six ended September 30, 2008 were
      $933,996 compared with revenues of $10,165,226 in the corresponding period
      of
      the prior year. Current year-to-date revenues consist of management fees from
      Microlog, an affiliate, and the revenues of ProGames and Davel. Davel’s revenues
      include the current year adjustments to “dial-around” revenues (intercarrier
      compensation paid to us by the providers of 800 and other toll-free numbers
      at
      the rate of 49.4 cents per call) that were generated by our communications
      services in prior quarters and $810,215 of Regulatory Receipts relating
      primarily to claims against Qwest and certain other telecommunication carriers
      (see Note 8 to the condensed consolidated financial statements). As discussed
      above, in the second quarter of fiscal 2008, we sold most of our remaining
      operational payphones in a series of transactions including the sale of
      approximately 21,700 payphones in September 2007. The operating results related
      to these assets are reflected in the condensed consolidated statement of
      operations through the sale dates. In the six months ended September 30, 2007,
      Davel derived most of its operating revenues from coin revenue and “dial-around”
revenues generated by its payphones.




-
          35
          -




Cost
      of
      services (exclusive of depreciation and amortization) in the six months ended
      September 30, 2008 was $2,160 compared to $5,750,034 in the corresponding period
      of the prior fiscal year. This decline reflects the reduction in the number
      of
      payphones operated by Davel following the payphone sales described above.





The
      total
      operating costs and expenses of continuing operations for the six months ended
      September 30, 2008, excluding the cost of services, depreciation and
      amortization, were $1,370,366 compared to $7,869,192 in the corresponding period
      of the prior fiscal year, a decrease of $6,498,826. This was principally due
      to
      the elimination of the majority of Davel’s expenses following the sale of its
      payphone assets, which expenses declined by $5,402,314 compared to the
      corresponding period of the prior fiscal year. The Company was also able to
      reduce operating costs through the reduction in payroll, professional fees
      and
      related expenses and a reduction in stock compensation expense. Payroll and
      professional fees declined as a result of reductions in personnel, reductions
      in
      legal fees, and reductions in audit and consulting fees applicable to compliance
      with the Sarbanes-Oxley Act of 2002. Stock compensation expense decreased from
      $635,122 to $49,675 in the six months ended September 30, 2008 due to the
      vesting of options and warrants granted in prior years and a reduction in the
      fair value of current year grants. The operating costs and expenses (excluding
      depreciation and amortization) of ProGames for the six months ended September
      30, 2008 and 2007 were approximately $99,758 and $302,985, respectively
      reflecting reductions in personnel and other costs.





Depreciation
      and amortization expenses were $90,913 and $1,208,705 in the six months ended
      September 30, 2008 and 2007, respectively, representing the reductions in
      depreciation of the costs of deployed payphones and the amortization of payphone
      location contracts resulting from phone sales and removals.





Interest
      and other expense, net, was $475,195 for the six ended September 30, 2008
      compared with $705,024 of expense in the corresponding period of the prior
      fiscal year. During the prior year, we retired principal owed under the YA
      Global debentures in the amount of approximately $4,065,000 and the YA Global
      promissory note in the amount of $1,100,000 that we issued in May 2007. Interest
      expense in the six months ended September 30, 2008 includes interest at 12%
      on
      the Convertible Debenture issued on June 30, 2008, which replaced the 7.75%
      convertible debentures that were previously outstanding. Interest and other
      expense, net in the six months ended September 30, 2007 was offset by interest
      on the proceeds that were to be received from USA relating to the sale of the
      CLEC Business and the accretion of discount on the USA Preferred Stock. The
      major components of interest and other (income) expense for six ended September
      30, 2008 and 2007 are presented in the following schedule.




**Type
                  of Debt**
              
              **2008**
              
              **2007****Convertible
                  debentures (at stated rates)**
              
              $
              664,063
              
              $
              611,105**Convertible
                  debentures (debt discount amortization)**
              
              
              33,325
              
              
              193,841**Convertible
                  debentures (stock issuance discounts)**
              
              
              -
              
              
              148,550**Convertible
                  debenture (deferred financing fee amortization)**
              
              
              53,134
              
              
              -**Notes
                  payable to YA Global**
              
              
              -
              
              
              25,315**Notes
                  receivable - Microlog**
              
              
              (112,500
              )
              
              -**Other
                  notes receivable**
              
              
              (142,970
              )
              
              -**USA
                  interest on cash due at CLEC closing**
              
              
              -
              
              
              (277,089
              )**Accretion
                  of discount - USA Preferred Stock**
              
              
              -
              
              
              (96,465
              )**Other,
                  net**
              
              
              (19,857
              )
              
              99,767**Interest
                  and Other (Income) Expense, net**
              
              $
              475,195
              
              $
              705,024





The
      loss
      from continuing operations for the six months ended September 30, 2008 was
      $1,014,971, or $0.0014 per share, compared to a loss of $8,146,635, or $0.0106
      per share, in the corresponding period of the prior year. The current
      year-to-date loss included a $100,333 loss representing our equity in the net
      loss of an affiliate, Microlog, an investment we acquired in January 2008.
      It
      also includes a loss of $168,474 for ProGames and income of $511,214 for Davel.
      Davel’s income is primarily due to the collection of $810,215 of Regulatory
      Receipts as previously described above. The loss from continuing operations
      for
      the six months ended September 30, 2007 includes losses of $403,101 for ProGames
      and $5,204,044 for Davel, including a $2,778,906 loss on the sale of certain
      payphone assets and related liabilities of Davel.




-
          36
          -





For
      the
      six months ended September 30, 2008, revenues from discontinued operations
      were
      $15,710,594, which relates to the Company’s CLEC Business. Year-to-date revenues
      from discontinued operations last year were $24,789,298, which included
      $18,058,603 relating to the CLEC Business and $6,730,695 relating to the ISP
      and
      Wireless Networks Businesses. The decline in revenues relating to the CLEC
      Business was primarily due to a reduction in the number of residential customers
      and to a lesser extent to reductions applicable to the bundling of services
      billed to customers. The decline in revenue was offset in part by an increase
      in
      software sales.





Income
      from discontinued operations for the six months ended September 30, 2008 was
      $1,387,064, or $0.0018 per share, including income of $485,926 relating to the
      operating results of the CLEC Business and interest and other expenses relating
      to the remaining obligations of Kite Networks. The year-to-date income also
      includes a $901,138 gain on the sale of discontinued operations applicable
      to
      the settlement of one of the Kite Networks leases. The loss from discontinued
      operations for the six months ended September 30, 2007 was $9,452,790, or
      $0.0124 per share, which includes a $5,036,289 loss on the sale of the Wireless
      Networks Business and a $2,481,227 loss on the sale of the ISP Business. Without
      the operating results and losses of the ISP and Wireless Networks Businesses,
      there would have been income of $619,102 relating to the CLEC business
      (including Kite interest) in the six months ended September 30,
      2007.




We
      reported net income of $282,093 for the six months ended September 30, 2008,
      or
      $0.0004 per share, compared with a net loss of $17,599,425 for the quarter
      ended
      September 30, 2007, or $0.0230 per share.




**Liquidity
      and Capital Resources**





We
      have
      forecasted our operating cash requirements through the end of fiscal year 2009
      based on several important assumptions. We have not forecasted the use of cash
      that would be required to repay the capital lease obligations of the Wireless
      Networks Business in the event that Gobility fails to raise sufficient capital
      to fund these obligations. Mobilepro Corp. is co-obligor on certain capital
      leases of Kite Networks and has retained the lease obligations as liabilities
      of
      companies held for sale in its condensed consolidated balance sheets. The total
      principal balance of these leases was approximately $2,422,000 at September
      30,
      2008. The capital leases are secured by approximately $938,000 of certificates
      of deposits. Monthly lease payments on these capital leases total approximately
      $111,000. In addition, the Company was a co-purchaser of certain wireless
      network equipment obtained by Kite Networks. In March 2008, we entered into
      a
      forbearance agreement with this supplier and have agreed to make installment
      payments through September 2010. The amount owed to the supplier for the
      purchase of this equipment approximates $1,452,000 at September 30, 2008. On
      August 1, 2008, we executed a $330,000 promissory note payable to the lessor
      and
      were released from approximately $1,231,000 of the capital lease obligations
      as
      a result of the sale of certain uninstalled wireless equipment by the lessor.
      Our forecast takes into account the payments required under the equipment
      obligation and the promissory note. The certificates of deposit and the
      promissory note and equipment obligation are included in the Company’s condensed
      consolidated balance sheets at September 30, 2008 as assets and liabilities
      of
      companies held for sale, respectively.





We
      have
      also forecasted our operating cash requirements assuming we will be able to
      complete the sale of the CLEC Business. In the fourth quarter of fiscal 2008,
      the Company terminated the USA Agreement with respect to the sale of the CLEC
      Business (see “Sale of the ISP and CLEC Businesses” above). The Company expected
      to use the cash proceeds from the sale of the CLEC Businesses to retire the
      YA
      Global debentures plus the remaining amounts of accrued interest. If the CLEC
      Businesses is not sold to an alternative buyer, or if the Company is required
      to
      make payments on the capital leases of Kite Networks, the Company will not
      have
      the ability to continue as a going concern beyond the current fiscal year
      without additional financing or the collection of significant amounts on claims
      against third parties (see Item 1 - “Legal Proceedings”). Claims against third
      parties include litigation against AT&T Corporation (“AT&T”), Sprint
      Communications Company, LP (“Sprint”) and Qwest Communications, Inc. (“Qwest”)
      for non-payment of dial around compensation to the Davel Entities and portions
      of amounts claimed from telecommunications carriers for over-billing.





During
      the six months ended September 30, 2008, the balance of unrestricted cash and
      cash equivalents relating to continuing operations increased by $402,038 to
      $1,413,434. There was also a decrease in cash and cash equivalents of $236,617
      relating to discontinued operations.




-
          37
          -




Net
      cash
      provided by operations during the six months ended September 30, 2008 was
      $532,481, reflecting the funding of operating expenses incurred by Davel and
      the
      corporate segment, offset by $810,215 of Regulatory Receipts relating to claims
      against certain telecommunications carriers, and $413,064 of cash provided
      by
      operating activities of discontinued operations. There were decreases in
      restricted cash and collections of notes receivable of continuing operations
      totaling $617,269 that also contributed to the net cash provided by operations.
      Net cash provided by operations also reflects a $300,000 adjustment for the
      write down in the carrying value of certain notes receivable and $255,556 of
      non-cash interest expense, including $222,231 of interest added to the
      outstanding balance of the Convertible Debenture in connection with the
      refinancing of the debt due to YA Global as described below.





There
      was
      no cash used in or provided by investing activities in the six months ended
      September 30, 2008.





Our
      financing activities during the six months ended September 30, 2008 used net
      cash of $367,060, including $186,946 of cash used in discontinued operations.
      Cash used in financing activities includes $177,114 of financing costs incurred
      in connection with the refinancing of the YA Global debt on June 30, 2008 as
      described below. The financing activities of discontinued operations used
      $186,946 in cash to pay debt obligations, including the notes payable
      and equipment and capital lease obligations relating to the Wireless
      Networks Business.





Our
      history of net losses, our lack of a sufficient corporate credit history with
      significant suppliers and the uncertain payback associated with investments
      in
      municipal wireless networks has proved to be significant obstacles to overcome
      in our search for capital. Nevertheless, YA Global has continued to support
      the
      Company. On June 30, 2006, we issued an amended 7.75% secured convertible
      debenture in the amount of $15,149,650 to YA Global, replacing a convertible
      debenture with an outstanding principal amount of $15,000,000 (and accrued
      interest of approximately $149,650) that was issued to YA Global in May 2005.





On
      August
      28, 2006, the Company entered into a financing agreement with YA Global that
      provided $7.0 million in funding with the proceeds received upon the issuance
      of
      a series of secured, convertible debentures. At each closing, the Company issued
      YA Global a 7.75% secured convertible debenture in the principal amount for
      that
      closing, convertible into common stock at $0.174 per share and paid a
      transaction fee equal to 7% of the proceeds. On August 30, 2006, the first
      closing provided gross cash proceeds of $2,300,000. During the quarter ended
      December 31, 2006, additional gross cash proceeds of $3,525,000 were received.
      Pursuant to the final closing under this agreement, we received gross proceeds
      of $1,175,000 on February 1, 2007.





Using
      shares of our common stock registered on Form S-3 in November 2006 and as
      permitted by the terms of the debentures, the Company made principal and
      interest payments on the debentures issued to YA Global that totaled $4,880,489
      during the fiscal year ended March 31, 2007, and that totaled $1,967,908 from
      April 2007 through May 2007. However, the supply of registered shares available
      for the conversion of the debentures was exhausted. We made additional cash
      payments of principal and interest on the debentures that totaled $4,149,651
      during the fiscal year ended March 31, 2008, primarily from the proceeds of
      the
      sale of the ISP Business and payphone assets. However, the Company was unable
      to
      make the weekly scheduled principal payments of $375,000 plus interest
      commencing February 1, 2008. The Company made a partial payment of interest
      of
      $114,530 on February 1, 2008 and made additional payments of interest
      aggregating $200,000 on May 2 and June 4, 2008.





Effective
      June 30, 2008, the Company issued a secured convertible debenture to YA Global
      (the “Convertible Debenture’) with an aggregate principal balance of
      $13,391,175, replacing the former convertible debentures. The Convertible
      Debenture provides for monthly payments of interest at 12% with the remaining
      principal balance due on May 1, 2009. Accordingly, the entire principal balance
      of the Convertible Debenture has been classified as a current liability at
      September 30, 2008 in the Company’s condensed consolidated balance sheets. YA
      Global may convert any portion of the unpaid principal and interest into shares
      representing up to 4.99% of the Company’s common stock at the lesser of $0.04973
      per share or the average of the two lowest volume weighted average prices during
      the five trading days immediately preceding the conversion date. If certain
      conditions are met, the Company has the option to pay up to 4.5% of the total
      interest due in common stock at the applicable conversion price on the day
      immediately prior to the interest payment date. The conversion price is subject
      to adjustment if the Company is deemed to have issued shares at a price that
      is
      lower than the effective conversion price on the date such shares are issued.
      The Convertible Debenture is secured by substantially all of the assets of
      the
      Company.




-
          38
          -





During
      the three months ended September 30, 2008, the Company issued 76,942,857 shares
      of common stock in satisfaction of $104,800 in principal relating to the
      Convertible Debenture. Subsequent to September 30, 2008, YA Global converted
      an
      additional $36,075 of principal into 85,500,000 shares of common stock. Such
      shares are tradable by YA Global pursuant to Rule 144 of the Securities Act
      of
      1933 (the “Securities Act”)





As
      described above, certain equipment leases and other equipment purchases of
      Kite
      Networks were co-signed by Mobilepro Corp. The Company, subject to any defenses
      it may have, could be required to make the payments due on these leases and
      other equipment-related obligations that were transferred to Gobility in
      connection with the sale of the Wireless Networks Business. To date Gobility
      has
      not made any lease payments and has not raised at least $3.0 million in cash
      as
      required under the terms of the Gobility Debenture. As a result, the Company
      has
      the right but not the obligation to repurchase the Wireless Networks Business
      with the surrender of the Gobility Debenture and the payment of nominal
      additional consideration.





On
      March
      10, 2008, Gobility sold the assets of the wireless network in Longmont,
      Colorado, and the Company received the proceeds in the form of promissory notes
      totaling $1,800,000. In addition, the Company entered into a forbearance
      agreement with the principal equipment vendor and agreed to pay the $1,591,978
      equipment obligation, with interest at the prime rate, and a related lease
      obligation in the principal amount of $149,749. In March 2008, the Company
      also
      paid one of the leases with an aggregate principal balance of $318,595, plus
      accrued interest, by paying $93,000 in cash and applying the $250,000
      certificate of deposit that secured the lease relating to the Tempe, Arizona
      wireless network.





On
      August
      1, 2008, the Company executed a promissory note and release with Data Sales
      in
      the principal amount of $330,000. The note is in full satisfaction of $1,231,138
      of the lease obligations of Kite Networks and reflects the impact of a sale
      of
      certain uninstalled wireless equipment by Data Sales to an unaffiliated third
      party purchaser that was consummated in July 2008. The note requires
      twenty-three monthly payments of $10,000 and accrues interest at the rate of
      twelve percent. The unpaid principal balance and accrued interest is due and
      payable on July 31, 2010. The Company recorded a gain of $901,138, or $0.0011
      per share, in its fiscal second quarter as a result of the
      transaction.





The
      Company is currently cooperating with Gobility in its efforts to sell the
      remaining assets of Kite Networks in order to pay off the obligations relating
      to the leases and other equipment. In the event Gobility is unsuccessful in
      its
      attempts to sell the remaining assets and satisfy the lease obligations, the
      Company could be required to make the payments on the remaining leases. At
      September 30, 2008, the aggregate amount recorded on the condensed consolidated
      balance sheets as liabilities of companies held for sale relating to the capital
      lease obligations, accrued interest, and the note payable and equipment
      obligation was $5,448,846. The Company has also recorded the certificates of
      deposits securing the lease obligations of $937,664 as assets of companies
      held
      for sale.





Our
      major
      challenge is to sustain the funding of current operations until the sale of
      the
      CLEC Businesses can be completed or another method to retire our debt to YA
      Global is achieved. Following the termination of the sale of the CLEC Business
      to USA and the related management agreement in the fourth quarter of fiscal
      year
      2008, the Company re-assumed operating control of AFN and CloseCall. The CLEC
      Business continues to generate cash in amounts that we believe will be
      sufficient to fund the cost of debt service relating to the Convertible
      Debenture and certain other costs. However, we continue to fund the operations
      of ProGames which has not yet generated sufficient revenues to be profitable.
      ProGames continues to expand its venues to market its online gaming activities.
      We also have corporate expenses and the lease obligations associated with the
      Wireless Networks Business that, subject to certain defenses, the Company may
      be
      required to fund.





The
      Company’s financial statements have been prepared on a going concern basis which
      contemplates the realization of assets and settlement of liabilities and
      commitments based on recorded amounts for the foreseeable future. If
      the
      Company is unable to permanently eliminate the cash requirements represented
      by
      the Wireless Networks Business, and/or fails to sell the CLEC Businesses to
      USA
      or a new buyer on terms that are acceptable to the Company, the Company will
      not
      have the ability to continue as a going concern without additional capital
      and/or collections of significant amounts on claims against third parties.
      The
      consolidated financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.




-
          39
          -





**Inflation**





Our
      monetary assets, consisting primarily of cash and receivables, and our
      non-monetary assets, consisting primarily of intangible assets and goodwill,
      are
      not affected significantly by inflation. We believe that replacement costs
      of
      equipment, furniture, and leasehold improvements will not materially affect
      our
      operations. However, the rate of inflation affects our expenses, such as those
      for employee compensation and costs of network services, which may not be
      readily recoverable in the price of services offered by us.





**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk.**





Our
      exposure to market risk for changes in interest rates relates primarily to
      our
      purchase of certificates of deposit to secure letters of credit and capital
      leases. In addition, we own an investment in the common stock of Microlog which
      had a market value of $453,333 at September 30, 2008. Microlog’s common stock is
      traded on the “Pink Sheets” under the symbol “MLOG” and is subject to variations
      in price based on trading volume as well as general market conditions. Our
      investment is accounted for under the equity method of accounting and, along
      with the notes and other receivables due from Microlog, had a carrying value
      of
      $321,884 at September 30, 2008.





We
      do not
      use derivative financial instruments in our investments. Accordingly, we do
      not
      believe that there is any material market risk exposure with respect to
      derivative or other financial instruments that would require disclosure in
      this
      item





**Item
      4T. Controls and Procedures.**





**Evaluation
      of Disclosure Controls and Procedures**





Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer (“CEO”) and Chief Accounting Officer (“CAO”), we conducted an
      evaluation of our disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the
      end
      of the period covered by this Quarterly Report on Form 10-Q. Based upon that
      evaluation, our CEO and our Principal Accounting Officer have concluded that
      the
      design and operation of our disclosure controls and procedures were effective
      to
      ensure that information required to be disclosed by us in reports that we file
      or submit under the Exchange Act is recorded, processed, summarized and reported
      within the time periods specified in the rules and forms of the Securities
      and
      Exchange Commission and that information required to be disclosed in the reports
      that we file or submit under the Exchange Act is accumulated and communicated
      to
      management, including our principal executive and financial officers, to allow
      timely decisions regarding required disclosure. Our quarterly evaluation of
      disclosure controls includes an evaluation of some components of our internal
      control over financial reporting, and internal control over financial reporting
      is also separately evaluated on an annual basis for purposes of providing the
      management report, which is set forth below.





**Management
      Report on Internal Control over Financial Reporting**




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting to provide reasonable assurance regarding
      the
      reliability of our financial reporting and the preparation of financial
      statements for external purposes in accordance with U.S. generally accepted
      accounting principles. Internal control over financial reporting includes those
      policies and procedures that (i) pertain to the maintenance of records that
      in
      reasonable detail accurately and fairly reflect the transactions and
      dispositions of the assets of the company; (ii) provide reasonable assurance
      that transactions are recorded as necessary to permit preparation of financial
      statements in accordance with authorizations of management and directors of
      the
      company; and (iii) provide reasonable assurance regarding prevention of timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial
      statements.




Management
      assessed our internal control over
      financial reporting as of March 31, 2008, the end of the fiscal year. Management
      based its assessment on criteria established in Internal Control—Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission. Management’s assessment included evaluation of elements such as the
      design and operating effectiveness of key financial reporting controls, process
      documentation, accounting policies, and our overall control environment. This
      assessment is supported by testing and monitoring performed by our own finance
      and accounting personnel.




-
          40
          -




Based
      on
      our assessment, management has concluded that our internal control over
      financial reporting was ineffective as of the end of the fiscal year to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external reporting purposes in
      accordance with U.S. generally accepted accounting principles as a result of
      the
      material weaknesses in internal control as described and defined below. We
      reviewed the results of management’s assessment with the Audit Committee of our
      Board of Directors. In addition, on a quarterly basis we will evaluate any
      changes to our internal control over financial reporting to determine if a
      material changed has occurred.




**Material
      Weaknesses in Internal Controls**




Bagell,
      Josephs, Levine & Company, L.L.C. (“Bagell”) our independent registered
      public accounting firm, has provided us with an unqualified report on our
      consolidated financial statements for the fiscal year ended March 31, 2008.
      However, during the conduct of our assessment of internal control over financial
      reporting, we identified material weaknesses in the design of certain general
      controls governing computer processing activities and have **** advised
      the audit committee that the following material weaknesses existed at March
      31,
      2008. As defined by the Public Company Accounting Oversight Board Auditing
      Standard No. 5, a material weakness is a deficiency or a combination of
      deficiencies in internal control over financial reporting such that there is
      a
      reasonable possibility that a material misstatement of the annual or interim
      financial statements will not be prevented or detected on a timely basis.





The
      material weaknesses exist in the design and execution of certain general
      controls governing computer processing (“I/T”) activities. **** Most
      significantly, the management of the customer information database utilized
      by
      the customer care and customer billing functions of one of our companies is
      performed offsite by a subcontracted consultant without proper controls over
      access to the data or changes to the system. In addition, we do not have
      processes established to document the control over changes made to certain
      proprietary information systems that supply transaction amounts. Finally, we
      do
      not have the proper processes in place at all subsidiaries for the establishment
      and maintenance of individual access codes and passwords.





While
      these material weaknesses did not have an effect on our reported results or
      result in the restatement of any previously issued financial statements or
      any
      other related disclosure, they nevertheless constituted deficiencies in our
      controls. In light of these material weaknesses and the requirements enacted
      by
      the Sarbanes-Oxley act of 2002, and the related rules and regulations adopted
      by
      the SEC, our Chief Executive Officer and Chief Accounting Officer concluded
      that, as of March 31, 2008, our controls and procedures needed improvement
      and
      were not effective at a reasonable assurance level. Despite those deficiencies
      in our internal controls, management believes that there were no material
      inaccuracies or omissions of material fact in this quarterly
      report.





Since
      the
      discovery of the material weaknesses in I/T internal controls at our CLEC
      subsidiaries as described above, our CLEC subsidiaries became subject to the
      Management Agreement with USA as described elsewhere in this Form 10Q. As a
      result, management’s focus on internal controls over financial reporting was
      temporarily diverted until we reassumed the management of the Company’s CLEC
      Business. Management has plans to strengthen the Company's oversight over the
      I/T functions and its attendant controls, procedures, documentation and security
      beyond what has existed in prior years. Specifically, we have converted to
      a new
      general ledger system and plan to replace the customer information database
      system utilized by the customer care and customer billing functions that is
      presently maintained offsite by a subcontractor. During the next fiscal year
      we
      plan to convert to a new billing system that is currently being developed by
      one
      of our other subsidiaries which we believe will provide proper controls over
      access to the data and changes to the system. We also plan to take whatever
      additional steps are necessary to improve our I/T controls and procedures and
      eliminate the identified material weaknesses.





The
      elimination of the material weaknesses identified above is among our highest
      priorities. We have discussed our corrective actions and future plans with
      our
      Audit Committee and Bagell as of the date of this quarterly report, and believe
      the planned actions should serve to correct the above listed material weaknesses
      in our internal controls. However, we cannot provide assurance that either
      we or
      our independent auditors will not in the future identify further material
      weaknesses or significant deficiencies in our internal control over financial
      reporting that we have not discovered to date.




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          41
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**Inherent
      Limitations on Effectiveness of Controls**




The
      Company’s management, including the CEO and CAO, does not expect that our
      Disclosure Controls or our internal control over financial reporting will
      prevent or detect all error and all fraud. A control system, no matter how
      well
      designed and operated, can provide only reasonable, not absolute, assurance
      that
      the control system’s objectives will be met. The design of a control system must
      reflect the fact that there are resource constraints, and the benefits of
      controls must be considered relative to their costs. Further, because of the
      inherent limitations in all control systems, no evaluation of controls can
      provide absolute assurance that misstatements due to error or fraud will not
      occur or that all control issues and instances of fraud, if any, within the
      company have been detected. These inherent limitations include the realities
      that judgments in decision-making can be faulty and that breakdowns can occur
      because of simple error or mistake. Controls can also be circumvented by the
      individual acts of some persons, by collusion of two or more people, or by
      management override of the controls. The design of any system of controls is
      based in part on certain assumptions about the likelihood of future events,
      and
      there can be no assurance that any design will succeed in achieving its stated
      goals under all potential future conditions. Projections of any evaluation
      of
      controls effectiveness to future periods are subject to risks. Over time,
      controls may become inadequate because of changes in conditions or deterioration
      in the degree of compliance with policies or procedures.




**Changes
      in Internal Control over Financial Reporting**





There
      have been no changes in our internal controls over financial reporting that
      occurred during the period covered by this Quarterly Report on Form 10-Q that
      have materially affected, or are reasonably likely to materially affect, our
      internal controls over financial reporting.




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**PART
      II**


**OTHER
      INFORMATION**





**Item
      1. Legal Proceedings.**




In
      addition to certain other litigation arising in the normal course of its
      business that we believe will not materially affect our financial position
      or
      operating results, we were involved with the following legal proceedings during
      the six months ended September 30, 2008.





1)
      At the
      time that we acquired Davel, there was existing litigation brought against
      Davel
      and other defendants regarding a claim associated with certain alleged patent
      infringement. Davel was named as a defendant in a civil action captioned Gammino
      v. Cellco Partnership d/b/a Verizon Wireless, et al., C.A. No. 04-4303 filed
      in
      the United States District Court for the Eastern District of Pennsylvania.
      The
      plaintiff claimed that Davel and other defendants allegedly infringed its patent
      involving the prevention of fraudulent long-distance telephone calls. The
      plaintiff was seeking monetary relief of at least $7,500,000. Davel did not
      believe that the allegations set forth in the complaint were valid, and
      accordingly, Davel filed a Motion for Summary Judgment with the United States
      District Court. On October 4, 2007 the United States District Court granted
      Davel’s Motion for Summary Judgment and the Court entered final judgment
      dismissing Plaintiff John R. Gammino’s claims for patent infringement. On
      November 1, 2007, Plaintiff filed his Notice of Appeal commencing an action
      in
      the United States Court of Appeal for the Federal District. In response, Davel
      filed its appellate brief on February 26, 2008. Notwithstanding the pending
      appellate proceeding, in July 2008 the parties entered into a Settlement
      Agreement terminating the litigation and providing a mutual release of claims,
      which ended the pending litigation between the parties.




2)
      On
      April 17, 2007, the Supreme Court of the United States issued an opinion in
      the
      case captioned Global Crossing Telecommunications, Inc. v. Metrophones
      Telecommunications, Inc. on Certiorari from the United States Court of Appeals
      for the Ninth Circuit (the "Ninth Circuit" and the "Metrophones Case"), No.
      05-705, in which it upheld the Ninth Circuit's decision that independent
      payphone providers have a private right of action to pursue recovery in federal
      court from telecommunication carriers who fail to pay dial around compensation.
      The ruling in the Metrophones Case impacts litigation that has been pending
      in
      federal district court against AT&T, Sprint and Qwest (the "Defendants") for
      non-payment of dial around compensation (the “District Court Litigation”). Davel
      Communications, Inc. and certain of Davel's subsidiaries (collectively, the
      "Davel Entities") are directly or indirectly plaintiffs in the District Court
      Litigation. Following the Supreme Court ruling in the Metrophones Case, AT&T
      and Sprint filed with the United States Supreme Court a Petition for a Writ
      of
      Certiorari No. 07-552 seeking review of the ruling of the United States Court
      of
      Appeals for the District of Columbia Circuit that the plaintiffs had standing
      in
      the District Court Litigation. On January 4, 2008 the United States Supreme
      Court granted the Petition for a Writ of Certiorari. The parties filed their
      respective briefs during the first calendar quarter of 2008, with the United
      States Supreme Court hearing oral arguments on April 21, 2008. On June 23,
      2008,
      the United Stated Supreme Court issued a ruling affirming the decision of the
      United States Court of Appeals. The recent ruling by the United States Supreme
      Court has permitted the District Court Litigation to move forward.





Although
      the District Court Litigation has been pending since 1999, the litigation
      remains in its preliminary phases. As a result, we cannot predict the likelihood
      of success on the merits, the costs associated with the pursuit of the claims,
      the timing of any recovery or the amount of recovery, if any. However, the
      industry representing a group of independent payphone providers, including
      the
      Davel Entities, has prevailed in a similar Federal Communications Commission
      administrative proceeding against another carrier for non-payment of dial-around
      compensation using a similar methodology which was accepted and pursuant to
      which the Federal Communications Commission assessed pre-judgment interest
      (the
      "Similar Litigation"). The Similar Litigation is being appealed to the U.S.
      Court of Appeals for the District of Columbia. Based upon our methodology in
      the
      Similar Litigation, we estimate that the amount in controversy for the Davel
      Entities against the Defendants extends well into the eight figures, but any
      recovery is conditioned on, among other things (i) prevailing on the merits
      at
      trial; (ii) having the Davel Entities' damages model and other claims approved
      in whole or in large part; (iii) prevailing on any appeals that the Defendants
      may make; and (iv) the continued solvency of the Defendants. As evidenced by
      the
      nine years that this litigation has been in process, the Defendants have shown
      an interest in stretching the duration of the litigation and have the means
      to
      do so. Although the Davel Entities could ultimately benefit (in an absolute
      sense, although not necessarily on a present value basis) from this delay in
      the
      event that pre-and/or post-judgment interest (awarded at 11.25% per annum in
      the
      Similar Litigation) is assessed against the Defendants and the potential award
      of attorneys' fees and/or other remedies (in addition to compensatory damages)
      if the Davel Entities prevail, such delay will result in a deferral of the
      receipt of any cash to the Davel Entities.




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          43
          -





3)  Under
      the
      authority granted by the Management Agreement to USA, CloseCall America filed
      a
      complaint in the Circuit Court for Howard County, Maryland, against Skyrocket
      Communications, Inc. (“Skyrocket”) Case No. 13-C-07-70296 for breach of contract
      and unjust enrichment (the “Skyrocket Litigation”). CloseCall’s claim arose from
      an unpaid credit owing to CloseCall in the amount of $23,914 owed under a
      terminated technical support services agreement. In response thereto, Skyrocket
      filed a counter-claim alleging breach of contract and asserting damages in
      the
      amount of $1.5 million. In January 2008 Skyrocket filed an amended
      counter-complaint asserting an additional claim for intentional
      misrepresentation, seeking $5 million in actual damages and $5 million in
      punitive damages. Based upon our belief that the counter-claim and amended
      counter-claims are without merit, CloseCall filed a motion for summary judgment.
      The Court granted CloseCall’s motion on the amended counter-claim and dismissed
      Skyrocket’s claim for intentional misrepresentation. CloseCall intends to seek
      reconsideration of its motion for summary judgment on the counter-claim. It
      is
      expected that the matter will proceed to trial during the first calendar quarter
      of 2009. We believe that CloseCall has meritorious defenses to the alleged
      claims and we intend to vigorously defend CloseCall in this matter.
      Notwithstanding the foregoing, in the event that CloseCall is required to
      litigate the matter and its defenses were not successful, we believe that any
      potential exposure related to the claims alleged against CloseCall are not
      likely to be material.




4) On
      or
      about March 15, 2008 we were served with a summons and complaint in the Superior
      Court of New Jersey in Bergen County captioned Harborside Investments III LLC
      vs. MobilePro Corp. and Neoreach, Inc. The plaintiff alleges claims of breach
      of
      agreement and unjust enrichment arising out of an equipment lease agreement
      for
      wireless equipment and seeks damages in the amount of $976,361 (the “Harborside
      Litigation”). On or about April 28, 2008 the Company filed its answer, separate
      defenses and third party complaint against JTA Leasing Co., LLC. The Harborside
      Litigation is in its initial stages. Although we believe MobilePro has
      meritorious defenses to the alleged claims and we intend to vigorously defend
      ourselves in this matter we cannot predict the likelihood of success in the
      Harborside Litigation. The Company has recorded the liability for the estimated
      principal balance relating to this capital lease obligation and the related
      accrued interest which is included in liabilities of companies held for sale
      in
      the condensed consolidated balance sheets at September 30 and March 31, 2008.





5)
      On
      March 4, 2008 the Company filed a complaint in the Circuit Court of Madison
      County, Mississippi against Telava Networks, Inc. d/b/a Telava Wireless/Network,
      Inc. (“Telava”) asserting claims against Telava for breach of contract and
      tortuous breach of contract in connection with a June 2007 purchase agreement
      pursuant to which Telava agreed to purchase MobilePro’s interests in Kite
      Networks and the rest of our wireless business. The Company seeks recovery
      of
      all available damages including, but not limited to, actual, consequential
      general, expectancy and punitive damages. Telava filed a motion to remove the
      case to the United States District Court for the Southern District of
      Mississippi, Jackson Division after which it filed an answer denying the
      substantive claims made by MobilePro and asserting certain affirmative defenses
      to the claims. On or about September 30, 2008 the parties entered into a joint
      stipulation of dismissal, without prejudice. The dismissal agreement ends the
      existing litigation while preserving the Company’s right to re-assert the claims
      at a later date if the Company so elects.





6)
      Davel
      and certain of its wholly owned subsidiaries have been plaintiffs in a complaint
      filed against Qwest Corporation (“Qwest” and the “Qwest Litigation”) in the
      United States District Court for the Western District of Washington alleging
      various claims concerning Qwest’s billings to the plaintiffs from 1997 to 2003
      for certain communication services from Qwest. The proceeding had previously
      been stayed through January 2008 to permit the Federal Communications Commission
      to issue a ruling that would provide the court guidance concerning the billing
      matters at issue in the Qwest Litigation. Despite the failure of the Federal
      Communications Commission to timely issue the guidance sought by the district
      court, on or about September 30, 2008 the parties entered into a Settlement
      Agreement to resolve the Qwest Litigation. The proceeds received as a result
      of
      the Settlement Agreement had previously been assigned to the former lenders
      of
      Davel pursuant to the acquisition and related agreements between the Company
      and
      former secured lenders of Davel. As a result of a modification to certain
      agreements between the Company and the former lenders in December 2007, the
      Company was permitted to retain $718,314 of the settlement proceeds.




7) Other
      Ongoing and Threatened Litigation




The
      Company is involved in other claims and litigation arising in the ordinary
      course of business, which it does not expect to materially affect its financial
      position or results of operations. The Company has been threatened by several
      former employees with litigation; however, to date, no litigation or other
      action has commenced which is material to the Company.




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          44
          -


**Item
      1A. Risks Factors**





*Investing
      in our securities involves a high degree of risk. Before investing in our
      securities, you should carefully consider the risks and uncertainties described
      below and those included in our Annual Report on Form 10-K for the fiscal year
      ended March 31, 2008, our Quarterly Report on Form 10-Q for the fiscal quarter
      ended June 30, 2008, and the other information contained in this report.* *Our
      future results may also be impacted by other risk factors listed from time
      to
      time in our future filings with the SEC, including, but not limited to, our
      Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.* *If
      any of these risks or uncertainties actually occurs, our business, financial
      condition or future operating results could be materially harmed. In such an
      event, the trading price of our common stock could decline and you could lose
      part or all of your investment.*





**The
      Sale of Portions of Our Business May Not Be Concluded and We May Not Have
      Sufficient Cash to Continue Operations**





We
      have
      forecasted our operating cash requirements through the end of fiscal year 2009
      based on several important assumptions. We have assumed that Gobility will
      succeed in selling some or all of its assets, thus enabling Kite Networks to
      satisfy some or all of its liabilities including the capital equipment leases
      or
      that the wireless networks can be sold by Gobility to a party or parties that
      are capable of paying these obligations or otherwise renegotiating the terms
      of
      the leases in a satisfactory manner. A sale of the wireless networks further
      assumes that in addition to finding a willing and able buyer, Gobility can
      also
      negotiate an assignment or other transfer of the existing lease obligations
      with
      the various leasing companies, as well as obtaining approval of the various
      municipalities in which the wireless networks are deployed. The Company
      understands that negotiations between potential buyers, Gobility and the various
      leasing companies have to date been difficult and lacking in reasonable
      cooperation. As a result, despite the interest of potential buyers, it may
      be
      difficult or impossible to negotiate a reasonable settlement with certain
      leasing companies. The lack of reasonable cooperation by the leasing companies
      could cause a potential buyer to choose not to purchase the Gobility assets
      and
      have a material adverse effect on the Company and its ability to continue as
      a
      going concern.





If
      Gobility is unsuccessful in facilitating a sale of some or all of its assets,
      the Company will be unable to permanently eliminate the cash requirements
      represented by the wireless network business as planned. In such an event,
      the
      Company will not have sufficient cash to sustain operations without the
      completion of the Wireline Business sale , raising additional capital or
      arriving at the successful conclusion of one or more of the District Court
      Litigation matters. (see Paragraph 2 of Item 1. - “Legal Proceedings”).





On
      June
      30, 2007, we executed an agreement to sell the Wireline Businesses (including
      CloseCall, AFN and the Internet service provider companies) to USA. We had
      assumed that the sale of CloseCall and AFN would occur in accordance with the
      terms of the Purchase Agreement. However, on January 14, 2008 we received notice
      from USA, which purports to terminate the Purchase Agreement. In the event
      that
      the Company is unsuccessful in closing the Purchase Agreement with USA, or
      otherwise selling the businesses to an alternative buyer or raising new capital,
      the Company will not have sufficient cash to satisfy the cash requirements
      represented by the wireless network businesses, our corporate overhead and
      our
      debt obligations and we could therefore suffer a material adverse effect to
      our
      business.





Included
      in its audit report on our consolidated financial statements included for the
      fiscal year ended March 31, 2008, our independent registered public accounting
      firm included a paragraph describing that there is substantial doubt about
      the
      Company’s ability to continue as a going concern.





**The
      Failure of Gobility to Sell Assets May Result in Our Payment of Transferred
      Liabilities and May Cause a Material Adverse Effect to our
      Business**





In
      December 2006, we engaged an investment banking firm to assist in evaluating
      strategic alternatives for the wireless networks business conducted by its
      Kite
      Networks and Kite Broadband subsidiaries. Efforts to secure investment capital
      for this business or to find a willing buyer resulted in the sale of the
      wireless networks business to Gobility on July 8, 2007. The purchase price
      was
      $2.0 million, paid with a debenture convertible into shares of common stock
      of
      Gobility. However, under the terms of the debenture, Gobility was required
      to
      raise at least $3.0 million in cash no later than August 15, 2007. Gobility
      has
      defaulted on the financing obligation under the debenture, providing us the
      right to repurchase the wireless networks business with the surrender of the
      debenture and the payment of a nominal additional amount.




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          45
          -





Mobilepro
      remains a co-obligor on certain capital leases transferred to Gobility. The
      total principal balance of these leases was approximately $2,422,000 at
      September 30, 2008. Monthly payments on these capital leases total approximately
      $111,000 and they are more than twelve months in arrears. In addition, Mobilepro
      was a co-purchaser of certain wireless network equipment obtained by Kite
      Networks. The amount originally owed to the supplier of this equipment for
      the
      purchase of this equipment was $1,591,978. The Company entered into a
      forbearance agreement with the equipment vendor and agreed to pay the equipment
      obligation over time, with interest at the prime rate. In the event certain
      assets are sold by Gobility, the proceeds of such asset sale will be used to
      satisfy all or a portion of the equipment obligation.





On
      March
      10, 2008 Gobility sold the assets of the wireless network in Longmont, Colorado
      and the Company received the related proceeds in the form of promissory notes
      from the purchaser totaling $1,800,000. Thereafter, in July 2008 Data Sales
      sold
      certain of the leased assets to a third party, further reducing the total
      principal balance of the leases by approximately $1,231,000. In connection
      with
      the foregoing asset sale, the Company executed a promissory note and release
      with Data Sales in the principal amount of $330,000. Although Gobility has
      previously represented to us that it is pursuing the sale of its remaining
      wireless network assets, we understand that Gobility has not yet closed on
      the
      sale of those wireless networks and that it has defaulted in making scheduled
      lease payments. If Gobility fails to consummate the sale of its remaining
      wireless network assets and make the required payments on the liabilities
      described above, it is likely that the creditors described above will demand
      payment of the past due amounts from Mobilepro. As a result of Gobility’s
      failure to satisfy the monthly lease obligations, one leasing company has
      commenced legal action against Mobilepro, which is currently proceeding in
      its
      initial phases of discovery (see the Harborside Litigation in Paragraph 4 of
      Item 1. “Legal Proceedings”). Other leasing companies may also elect to commence
      legal action and may elect to accelerate the payment date for the balance of
      the
      remaining monthly payments. In such event, Mobilepro would not have sufficient
      cash to satisfy the obligations to the leasing companies. Further, if we were
      unsuccessful in defending lawsuits from the leasing companies and were required
      to satisfy the obligations to the leasing companies, the Company may not be
      able
      to meet its principal and interest payment obligations on the convertible
      debenture and YA Global could potentially foreclose on the assets of the
      Company.





**We
      Have Lost Money Historically Which Means That We May Not Be Able to Continue
      Operations**




The
      Company has historically lost money. The Company’s accumulated deficit at
      September 30, 2008 was $95,350,754. Although the Company had net income of
      $282,093 in the six months ended September 30, 2008, it had a loss from
      continuing operations of $1,104,971. In the years ended March 31, 2008, 2007
      and
      2006, the Company sustained net losses of $18,361,602, $45,898,288 and
      $10,176,407, respectively. Over this three year period, most of the acquired
      businesses of Mobilepro have experienced declining revenues. Although
      restructuring measures have reduced other operating expenses, the Company had
      been unable to reduce the corresponding costs of services. In addition, the
      Company has funded the start-up and operations of the municipal wireless
      networks and online gaming businesses without these companies achieving expected
      profitability and continues to fund the Company’s corporate overhead. The
      Company was able to generate $532,481of cash from operating activities during
      the six months ended September 30, 2008. Cash flow from operations was primarily
      due to cash generated by its CLEC Business and $810,215 of Regulatory Receipts
      relating to claims against certain telecommunications carriers of Davel,
      including $718,314 received from Qwest in the second fiscal quarter (see Item
      1.
      - “Legal Proceedings”). Future losses are likely to occur. Accordingly, the
      Company will continue to experience liquidity and cash flow problems if it
      is
      unable to improve its operating performance, to sell assets for cash including
      the CLEC Business, or to raise additional capital as needed and on acceptable
      terms.





**If
      YA Global or Other Large Stockholders Sell Part or All of Their Shares of Common
      Stock in the Market, Such Sales May Cause Our Stock Price to
      Decline**




From
      time
      to time, YA Global and other selling stockholders may sell in the public market
      up to all of the shares of common stock owned at that time. Under
      the
      Convertible Debenture, YA Global has the right to convert its debt into common
      stock of the Company. Such shares are tradable under Rule 144 of the Securities
      Act. YA Global has converted $140,875 of debt into 162,442,857 shares of common
      stock since June 30, 2008 and has sold at least 118,642,857
      shares.




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          46
          -




Any
      significant downward pressure on our stock price caused by the sale of stock
      by
      large selling stockholders could encourage short sales by third parties. Such
      short sales could place further downward pressure on our stock
      price.




**Failure
      to Complete the Sale of the CLEC Business May Result in Our Inability to Retire
      the YA Global Debentures**





On
      June
      30, 2007, we executed an agreement to sell the Wireline Businesses (including
      CloseCall, AFN and the Internet service provider companies) to USA. Pursuant
      to
      the USA Purchase Agreement, we closed the sale of the Internet service provider
      companies to USA on July 18, 2007 and received cash proceeds of $2,500,000,
      a
      promissory note for $2,000,000 and preferred stock convertible into 7.5% of
      the
      fully diluted shares of USA’s common stock initially valued at $5.8 million.
      Simultaneously, we used $2,000,000 of this cash to pay down principal and
      accrued interest owed to YA Global under the debentures. The balance of the
      promissory note was $1,000,000 and was scheduled to be paid by USA on or before
      March 31, 2008. In July 2008, the Company revised the payment terms relating
      to
      the USA note and received principal and interest payments totaling $200,000.
      The
      remaining principal balance and accrued interest at 12% per annum is due on
      December 29, 2008.





Upon
      the
      close and pursuant to the terms of the USA Purchase Agreement, the Company
      was
      scheduled to receive additional cash proceeds of $18.4 million, including
      payment of the balance of the promissory note. The cash proceeds from the sale
      of the CLEC Business were expected to be utilized to retire the YA Global
      debentures plus accrued interest. ** However,
      on January 14, 2008 we received notice from USA which purports to terminate
      the
      Purchase Agreement but provides that USA remains interested in discussing the
      terms upon which it would purchase CloseCall and AFN. USA was unable to complete
      the purchase of the CLEC Business on terms acceptable to the Company and, as
      a
      result of this default the Company subsequently terminated the purchase
      agreement. In the event that the Company is unsuccessful in selling the
      businesses to an alternative buyer and if the Company is unable to obtain
      additional credit or an extension of the maturity date of May 1, 2009 under
      the
      YA Global debt, the Company may not have the ability to continue as a going
      concern.





**We
      Do Not Have Enough Shares and Registered Shares to Cover the Conversion of
      the
      Debentures into Our Common Stock**





Effective
      June 30, 2008, the Company issued the Convertible Debenture to YA Global with
      an
      initial principal balance of $13,391,175 replacing the Amended Debenture and
      the
      Secured Debenture. The Convertible Debenture provides for monthly payments
      of
      interest at 12% with the remaining principal balance due on May 1, 2009.
      Accordingly, the entire principal balance of the Convertible Debenture has
      been
      classified as a current liability at September 30, 2008 in the Company’s
      condensed consolidated balance sheets. YA Global may convert any portion of
      the
      unpaid principal and interest into shares representing up to 4.99% of the
      Company’s common stock at the lesser of $0.04973 per share or the average of the
      two lowest volume weighted average prices during the five trading days
      immediately preceding the conversion date. If certain conditions are met, the
      Company has the option to pay up to 4.5% of the total interest due in common
      stock at the applicable conversion price on the day immediately prior to the
      interest payment date. The conversion price is subject to adjustment if the
      Company is deemed to have issued shares at a price that is lower than the
      effective conversion price on the date such shares are issued.  Using
      shares of its common stock registered on Form S-3 in November 2006, the Company
      made principal and interest payments on the debentures that totaled $4,880,481
      during the fiscal year ended March 31, 2007, and that totaled $1,967,908 from
      April 2007 through May 2007.




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          47
          -





In
      order
      to issue a sufficient number of shares to permit the unpaid balance of the
      Convertible Debenture to be converted into common stock, assuming sufficient
      market capitalization, the Company would need to obtain authorization from
      its
      shareholders to increase the number of authorized shares of common stock. In
      conjunction with its annual meeting on October 23, 2008, the Company has
      commenced the process to obtain shareholder approval to increase the number
      of
      authorized shares and/or to conduct a reverse stock split of its common stock,
      and has further extended the meeting to obtain such approval. The Company cannot
      guarantee that any such proposal will ultimately be approved by the
      shareholders. In the event the Company is not successful in obtaining the
      approval of its shareholders, the Company will not have a sufficient number
      of
      shares of its common stock to permit the conversion of the Convertible
      Debenture, which could cause the Company to be unable to fulfill its obligations
      under the terms of the Convertible Debenture.





Absent
      new capital, a sale of the CLEC Business on acceptable terms or other
      significant event, the Company may not have the ability to continue as a going
      concern without a significant restructuring of the YA Global Convertible
      Debenture.





**Legal
      Actions May Be Required by Us in order to Enforce Certain Legal Rights**





The
      telecommunications industry includes hundreds of companies, many with
      substantially greater infrastructure, financial, personnel, technical,
      marketing, and other resources, and larger numbers of established customers
      and
      more prominent name recognition than us. We transact business with certain
      of
      these companies. In addition, certain of our businesses operate in areas of
      the
      industry that are subject to federal and/or state regulations. As a result,
      in
      order to enforce rights under negotiated contracts with transaction partners
      or
      to obtain the benefits of certain government regulations, we may be forced
      to
      initiate or to participate in legal action. For example, as discussed in Item
      1,
      Paragraph 2 - “Legal Proceedings”, Davel is engaged in a lengthy and expensive
      legal process relating to the nonpayment of dial-around compensation by large,
      long distance carriers. Using their greater resources, defendants have taken
      and
      may in the future continue to take actions that stretch the duration of
      litigation and substantially delay our receipt of the benefits of favorable
      legal decisions. Furthermore, there can be no guarantee that the legal actions
      taken by the Company will ultimately result in a favorable legal decision to
      the
      Company.





**Adverse
      Decisions in Litigation Could Cause a Material Adverse Effect and/or Cause
      the
      Company to Cease Operations**





CloseCall
      is a defendant in the Skyrocket Litigation and the Company is a defendant in
      the
      Harborside Litigation, which are described in Item 1 - “Legal Proceedings”.
      Although CloseCall and the Company believe they have meritorious defenses to
      the
      claims raised in each of these matters and intend to vigorously defend
      themselves, there can be no guarantee that CloseCall and the Company will
      ultimately succeed in doing so. If an adverse ruling is ultimately issued
      against CloseCall in the Skyrocket Litigation or against the Company in the
      Harborside Litigation, we may not have sufficient funds available to satisfy
      a
      judgment. In such event, the Company could cease operations and/or be required
      to seek the protection of the bankruptcy court to protect the interests of
      its
      secured creditor.





Similarly,
      Davel and its subsidiaries are plaintiffs in the District Court Litigation
      in
      which it seeks recovery of significant amounts of nonpaid dial around
      compensation from large, long distance carriers. Although the Company believes
      Davel’s litigation efforts will ultimately result in a favorable legal decision
      in the District Court Litigation, there can be no guarantee that Davel will
      ultimately succeed, or that it will ultimately recover, or timely recover,
      significant amounts of money owed to it. In the event Davel is unable to recover
      the monies owed to it for the non-payment of dial around compensation, and
      the
      Company is otherwise unable to raise additional capital, the Company could
      be
      forced to cease operations.




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          -





**Federal
      Regulators Have Taken and May Take Positions in the Future with Which We
      Disagree or Which We Believe are Contrary to Existing Law and Regulation, Which
      May Impose Substantial Litigation Costs on Our Business, Impede Our Access
      to
      Capital and/or Force Us to Seek a Merger Partner or Cease
      Operations**




As
      a
      publicly traded telecommunications company, we are subject to the regulatory
      scrutiny of both the FCC and the SEC. Both agencies are so-called
“administrative agencies” with statutory authority to implement and enforce laws
      passed by the U.S. Congress. Despite this limited scope, both the FCC and SEC
      have the ability to use discretion in certain cases both in interpreting what
      the laws passed by Congress mean and when to enforce such laws. The FCC and/or
      SEC may even take positions with which we disagree or which we believe are
      unfounded in statute, regulation, or prior agency guidance and which are adverse
      to Mobilepro. For instance, the FCC has been repeatedly overruled by federal
      courts in recent years for misinterpretations of the 1996 Telecom Act. In order
      to contest such behavior, Mobilepro may be forced to resort to litigation.
      In
      the context of the SEC, Mobilepro’s ability to have any registration statement
“go effective” may be impeded if in its comments to a future registration
      statement the SEC were to take a position with which we disagree based on prior
      law, regulation or prior SEC interpretative guidance. The registration process
      that resulted in our Form S-3 becoming effective in November 2006 commenced
      in
      September 2005 with the filing of Form SB-2. The protracted registration process
      included the filing of several registration statement amendments in order to
      incorporate changes from the SEC received in a series of comment letters. If
      we
      were to encounter similar difficulties and a prolonged registration process
      in
      connection with a future registration statement, it could materially impair
      Mobilepro’s access to the capital markets, potentially force Mobilepro to incur
      substantial litigation related costs and may force Mobilepro to seek a merger
      with another company or cease operations.




**The
      Federal and State Regulations under Which We Operate Could Change,
      Resulting in Harm to Our Business**




The
      enactment of the Telecommunications Act of 1996 significantly altered the
      regulatory landscape in which our businesses operate. In addition, state
      regulators maintain jurisdiction over certain of our services. We cannot predict
      whether future FCC or state regulatory decisions may adversely affect our
      ability to operate certain of our businesses or impact our
      profitability.





Although
      the Telecommunications Act of 1996, as implemented by the FCC, addressed certain
      historical inequities in the payphone marketplace, uncertainties relating to
      the
      impact and timing of the implementation of this framework still exist. The
      uncertainty with the greatest potential financial impact relates to revenue
      from
      and collectibility of access code calls and toll-free dialed calls, or dial
      around compensation. Dial around compensation has previously accounted for
      a
      material percentage of our revenues. Historically, many parties legally
      obligated by the FCC to pay dial around compensation have nevertheless failed
      to
      do so. We believe that such failures exist today. While we believe that we
      would
      have the right to sue in order to collect amounts owed, such efforts may consume
      management time and attention and our cash, and there can be no assurance that
      such efforts would result in the collection of any additional amounts.
      Consequently, such illegal nonpayment activities may adversely affect our cash
      flows, receivable collectibility, and future business
      profitability.




In
      addition, the FCC has issued recent orders concerning, among other things,
      universal service contribution methodology and inter-carrier compensation.
      It is
      unclear whether these orders will ultimately be implemented by the FCC, and
      if
      implemented, what impact, if any, they will have for our CLEC
      businesses.





**Our
      Common Stock Is Deemed to Be “Penny Stock,” Which May Make It More Difficult for
      Investors to Resell Their Shares Due to Suitability
      Requirements**




Our
      common stock is deemed to be “penny stock” as that term is defined in Rule
      3a51-1 promulgated under the Securities Exchange Act of 1934. A penny stock
      has
      the following characteristics:




•
            It
                is traded at a price of less than $5.00 per share;•
            It
                is not traded on a “recognized” national exchange;•
            Its
                price is not quoted on the NASDAQ automated quotation system
                (NASDAQ-listed stock must still have a price of not less than $5.00
                per
                share); or•
            Its
                issuer has net tangible assets less than $2.0 million (if the issuer
                has
                been in continuous operation for at least three years) or $5.0 million
                (if
                in continuous operation for less than three years), or has average
                annual
                revenues of less than $6.0 million for the last three years.




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          49
          -




Trading
      of our stock may be restricted by the SEC’s penny stock regulations that may
      limit a stockholder’s ability to buy and sell our stock.




The
      penny
      stock rules impose additional sales practice requirements on broker-dealers
      who
      sell to persons other than established customers and “accredited investors.” The
      term “accredited investor” refers generally to institutions with assets in
      excess of $5,000,000 or individuals with a net worth in excess of $1,000,000
      or
      annual income exceeding $200,000 or $300,000 jointly with their spouse. The
      penny stock rules require a broker-dealer, prior to a transaction in a penny
      stock not otherwise exempt from the rules, to deliver a standardized risk
      disclosure document in a form prepared by the SEC that provides information
      about penny stocks and the nature and level of risks in the penny stock market.
      The broker-dealer also must provide the customer with current bid and offer
      quotations for the penny stock, the compensation of the broker-dealer and its
      salesperson in the transaction and monthly account statements showing the market
      value of each penny stock held in the customer’s account. The bid and offer
      quotations, and the broker-dealer and salesperson compensation information,
      must
      be given to the customer orally or in writing prior to effecting the transaction
      and must be given to the customer in writing before or with the customer’s
      confirmation. Moreover, broker/dealers are required to determine whether an
      investment in a penny stock is a suitable investment for a prospective investor.
      The penny stock rules require that prior to a transaction in a penny stock
      not
      otherwise exempt from these rules, the broker-dealer must make a special written
      determination that the penny stock is a suitable investment for the purchaser
      and receive the purchaser’s written agreement to the transaction.




These
      disclosure requirements may have the effects of reducing the number of potential
      investors and the level of trading activity in the secondary market for the
      stock that is subject to these penny stock rules. Consequently, these penny
      stock rules may affect the ability of broker-dealers to trade our securities.
      This may make it more difficult for investors in our common stock to sell shares
      to third parties or to otherwise dispose of them. This could cause our stock
      price to decline. We believe that the penny stock rules discourage investor
      interest in and limit the marketability of our common stock.




In
      addition, the National Association of Securities Dealers, or NASD, has adopted
      sales practice requirements that may also limit a stockholder’s ability to buy
      and sell our stock. Before recommending an investment to a customer, a
      broker-dealer must have reasonable grounds for believing that the investment
      is
      suitable for that customer. Prior to recommending speculative low priced
      securities to their non-institutional customers, broker-dealers must make
      reasonable efforts to obtain information about the customer’s financial status,
      tax status, investment objectives and other information. Under interpretations
      of these rules, the NASD believes that there is a high probability that
      speculative low priced securities will not be suitable for at least some
      customers. The NASD requirements make it more difficult for broker-dealers
      to
      recommend that their customers buy our common stock, which may limit investors’
ability to buy and sell our stock and have an adverse effect on the market
      for
      our shares.





**The
      Unavailability of Telecommunication Lines Could Threaten Our
      Business**




Our
      ability to deliver good quality services at competitive prices depends on our
      ability to obtain access to T-l and dial-up lines pursuant to pricing and other
      terms that are acceptable to us. Access to these lines necessary for providing
      services to a significant portion of our subscribers is obtained from incumbent
      local exchange carriers like Verizon and AT&T. To date, we have been
      successful in reaching certain important agreements with each of these carriers
      providing us with opportunities to expand services and the geographic coverage
      of such services and predictable prices, avoiding any interruption in service
      to
      our customers. In the event that any of the carriers would be unable or
      unwilling to provide service to us, even if legally required to do so, our
      ability to service existing customers or add new customers could be adversely
      impaired in a material manner.




**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**





On
      May
      26, 2008, the Board of Directors approved the issuance of up to 36,850,000
      shares of common stock as follows: a warrant for up to 20,000,000 shares of
      common stock to Jay O. Wright, Chairman of the Board and Chief Executive
      Officer, a warrant to each of Douglas Bethell, President of the CloseCall and
      AFN, and Tammy L. Martin, Chief Administrative Officer and General Counsel,
      for
      4,000,000 shares of common stock, a warrant for up to 1,750,000 shares of common
      stock to Donald Paliwoda, the Company’s Chief Accounting Officer, 1,500,000
      shares of common stock to its independent director, Donald Sledge, and warrants
      totaling 5,600,000 to nine non-executive employees of the Company. The exercise
      price for each warrant is $0.0016 per share.




Effective
        June 30, 2008, the Company issued the Convertible Debenture in the amount
        of
        $13,391,175 to YA Global, replacing the previously issued convertible
        debentures. YA Global may convert any portion of the unpaid principal and
        interest into shares representing up to 4.99% of the Company’s common stock at
        the lesser of $0.04973 per share or the average of the two lowest volume
        weighted average prices during the five trading days immediately preceding
        the
        conversion date. If certain conditions are met, the Company has the option
        to
        pay up to 4.5% of the total interest due in common stock at the applicable
        conversion price on the day immediately prior to the interest payment date.
        The
        conversion price is subject to adjustment if the Company is deemed to have
        issued shares at a price that is lower than the effective conversion price
        on
        the date such shares are issued.




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          -





On
      June
      30, 2008, in connection with the issuance of the Convertible Debenture, the
      Company granted to YA Global a seven-year warrant to purchase 25,000,000 shares
      of its common stock at an exercise price of $0.04973 per share which expires
      on
      June 30, 2015. In addition, the outstanding warrants previously granted to
      YA
      Global to purchase 15,000,000 share of common stock at $0.20 per share and
      10,000,000 shares of common stock at $0.174 per share were repriced and are
      now
      exercisable at a price of $0.04973 per share.




During
      the three months ended September 30, 2008, the Company issued 76,942,857
      unregistered shares of common stock to YA Global in satisfaction of $104,800
      in
      principal relating to the Convertible Debenture. Subsequent to September 30,
      2008, YA Global converted an additional $36,075 of principal into 85,500,000
      unregistered shares of common stock. Such shares are tradable by YA Global
      pursuant to Rule 144 of the Securities Act of 1933.




Except
      as
      otherwise noted, the securities described in this Item were issued pursuant
      to
      the exemption from registration provided by Section 4(2) of the Securities
      Act
      of 1933 and/or Regulation D promulgated under the Securities Act. Each such
      issuance was made pursuant to individual contracts that are discrete from one
      another and are made only with persons who were sophisticated in such
      transactions and who had knowledge of and access to sufficient information
      about
      Mobilepro to make an informed investment decision. Among this information was
      the fact that the securities were restricted securities.





**Item
      3. Defaults upon Senior Securities.**





There
      were no defaults upon senior securities during the three months ended June
      30,
      2008. However, please see the Risk Factors above titled “The Failure of Gobility
      to Sell Assets May Result in Our Payment of Transferred Liabilities and May
      Cause a Material Adverse Effect to our Business”.





**Item
      4. Submission of Matters to a Vote of Security Holders.**




On
      October 23, 2008 the Company held its Annual Meeting of Shareholders. The voting
      has been extended to provide additional time to solicit proxies of additional
      shareholders regarding the matters presented at the 2008 Annual
      Meeting.





**Item
      5. Other Information.**




Not
      applicable.




**Item
      6. Exhibits.**





(a)
              The
                  following exhibits are filed as part of this
                  report:





**Exhibit**
              **No.**
            **Description**
            
            **Location**10.1
            Third
                Amended and Restated Employment Agreement, dated June 25, 2008, between
                Jay O. Wright and the Company
            
            Incorporated
                by reference to Exhibit 10.51 to the Registrant’s Annual Report on Form
                10-K filed on June 27, 200810.2
            Securities
                Purchase Agreement dated June 30, 2008 between Mobilepro Corp. and
                YA
                Global Investments, L.P.
            
            Incorporated
                by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
                8-K filed on July 9, 200810.3
            12%
                Secured Convertible Debenture dated June 30, 2008 issued by Mobilepro
                Corp. to YA Global Investments, L.P.
            
            Incorporated
                by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
                8-K filed on July 9, 200810.4
            Global
                Security Agreement dated June 30, 2008 between Mobilepro Corp. and
                YA
                Global Investments, L.P.
            
            Incorporated
                by reference to Exhibit 10.3 to the Registrant’s Current Report on Form
                8-K filed on July 9, 200810.5
            Intellectual
                Property Security Agreement dated June 30, 2008 between Mobilepro
                Corp.
                and YA Global Investments, L.P.
            
            Incorporated
                by reference to Exhibit 10.4 to the Registrant’s Current Report on Form
                8-K filed on July 9, 2008




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          51
          -




10.6
            Global
                Guarantee Agreement dated June 30, 2008 between Mobilpro Corp. and
                YA
                Global Investments, L.P.
            
            Incorporated
                by reference to Exhibit 10.5 to the Registrant’s Current Report on Form
                8-K filed on July 9, 200810.7
            Global
                Pledge Agreement dated June 30, 2008 between Mobilpro Corp. and YA
                Global
                Investments, L.P.
            
            Incorporated
                by reference to Exhibit 10.6 to the Registrant’s Current Report on Form
                8-K filed on July 9, 200810.8
            Warrant
                dated June 30, 2008 issued by Mobilepro Corp. to YA Global Investments,
                L.P.
            
            Incorporated
                by reference to Exhibit 10.7 to the Registrant’s Current Report on Form
                8-K filed on July 9, 200810.9
            Promissory
                Note made as of August 1, 2008 by and among Mobilepro Corp. and Data
                Sales
                Co., Inc. in the amount of Three Hundred Thirty Thousand Dollars
                ($330,000).
            
            Incorporated
                by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
                8-K filed on August 4, 200831.1
            Certification
                by Jay O. Wright, Chief Executive Officer, pursuant to Rule
                13a-14(a)
            
            Provided
                herewith31.2
            Certification
                by Donald L. Paliwoda, Principal Financial Officer, pursuant to Rule
                13a-14(a)
            
            Provided
                herewith32.1
            Certification
                by Jay O. Wright and Donald L. Paliwoda, pursuant to 18 U.S.C. Section
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002**
            
            Provided
                herewith99.1
            Power
                Point Presentation by Mobilepro Corp. at its Annual Meeting of
                Shareholders on October 23, 2008
            
            Incorporated
                by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
                8-K filed on October 24, 2008




**
      These
      certifications are not deemed filed by the SEC and are not to be incorporated
      by
      reference in any filing of the Registrant under the Securities Act of 1933
      or
      the Securities Exchange Act of 1934, irrespective of any general incorporation
      language in any filings.




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          52
          -




**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly authorized.




**MOBILEPRO
              CORP.**Date:November
              14, 2008
            By:
            /s/ Jay
              O.
              WrightJay O. Wright, Chief Executive
              Officer  Date:November
              14, 2008
            By:
            /s/ Donald
              L.
              PaliwodaDonald L. Paliwoda, Chief
              Accounting
              Officer




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