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 December 31, 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
 ̈





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  ̈
            Accelerated
      filer  ̈
            Non-accelerated
      filer  ̈
            Smaller
      reporting company x(Do
      not check if smallerreporting company)





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


Yes  ̈       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 February 10, 2009, the Company
had 1,196,464,653 outstanding shares of its common stock, $0.001 par value per
share.









TABLE
OF CONTENTS





ITEM NUMBER AND CAPTION
                                                            
                                                            PAGEPART 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
                                                            
                                                            28ITEM
      3.
                                                            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                                            
                                                            41ITEM
      4T.
                                                            CONTROLS
      AND PROCEDURES
                                                            
                                                            41PART II
                                                            OTHER
      INFORMATION
                                                            
                                                            44ITEM
      1.
                                                            LEGAL
      PROCEEDINGS
                                                            
                                                            44ITEM
      1A.
                                                            RISK
      FACTORS
                                                            
                                                            46ITEM
      2.
                                                            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                                                            
                                                            52ITEM
      3.
                                                            DEFAULTS
      UPON SENIOR SECURITIES
                                                            
                                                            52ITEM
      4.
                                                            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                                            
                                                            52ITEM
      5.
                                                            OTHER
      INFORMATION
                                                            
                                                            53ITEM
      6.
                                                            EXHIBITS
                                                            
                                                            53SIGNATURES
                                                            
                                                            55




- 2
-




PART
I


FINANCIAL
INFORMATION





Item 1.
Financial Statements





MOBILEPRO
CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


DECEMBER
31 AND MARCH 31, 2008





ASSETSDecember 31,
                  
                  
                  March 31,2008
                  
                  
                  2008(Unaudited)
                  
                  
                  (Audited)CURRENT
      ASSETSCash
      and cash equivalents
                  
                  $
                  873,809
                  
                  
                  $
                  1,011,396Restricted
      cash
                  
                  
                  80,000
                  
                  
                  
                  556,397Accounts
      receivable, net
                  
                  
                  255,602
                  
                  
                  
                  231,362Notes
      receivable
                  
                  
                  759,128
                  
                  
                  
                  1,065,000Prepaid
      expenses and other current assets
                  
                  
                  130,735
                  
                  
                  
                  123,759Assets
      of companies held for sale
                  
                  
                  26,246,096
                  
                  
                  
                  28,021,141Total
      Current Assets
                  
                  
                  28,345,370
                  
                  
                  
                  31,009,055FIXED
      ASSETS, NET OF ACCUMULATED DEPRECIATION
                  
                  
                  121,285
                  
                  
                  
                  257,655OTHER
      ASSETSNotes
      receivable, long-term
                  
                  
                  1,374,817
                  
                  
                  
                  1,800,000Deferred
      financing fees
                  
                  
                  74,410
                  
                  
                  
                  -Investments
      and other assets
                  
                  
                  433,091
                  
                  
                  
                  324,243Total
      Other Assets
                  
                  
                  1,882,318
                  
                  
                  
                  2,124,243TOTAL
      ASSETS
                  
                  $
                  30,348,973
                  
                  
                  $
                  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


DECEMBER
31 AND MARCH 31, 2008


(CONTINUED)





LIABILITIES
      AND STOCKHOLDERS' EQUITYDecember 31,
                        
                        
                        March 31,2008
                        
                        
                        2008(Unaudited)
                        
                        
                        (Audited)CURRENT
      LIABILITIESNotes
      payable and convertible debentures
                        
                        $
                        13,305,009
                        
                        
                        $
                        13,253,736Accounts
      payable and accrued expenses
                        
                        
                        2,986,082
                        
                        
                        
                        3,177,037Deferred
      revenue
                        
                        
                        600,000
                        
                        
                        
                        600,000Liabilities
      of companies held for sale
                        
                        
                        7,104,660
                        
                        
                        
                        9,663,144Total
      Current Liabilities
                        
                        
                        23,995,751
                        
                        
                        
                        26,693,917STOCKHOLDERS'
      EQUITYPreferred
      stock, $0.001 par value, 20,035,425 shares authorized,35,378
      shares issued and outstanding at December 31 and March 31,
      2008
                        
                        
                        35
                        
                        
                        
                        35Common
      stock, $0.001 par value, 2,979,964,575 and 1,500,000,000
      sharesauthorized,
      1,082,864,653 and 775,821,796 shares issued andoutstanding
      at December 31 and March 31, 2008
                        
                        
                        1,082,865
                        
                        
                        
                        775,822Additional
      paid-in capital
                        
                        
                        101,526,456
                        
                        
                        
                        101,554,026Accumulated
      deficit
                        
                        
                        (96,256,134
                        )
                        
                        
                        (95,632,847
                        )Total
      Stockholders' Equity
                        
                        
                        6,353,222
                        
                        
                        
                        6,697,036TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                        
                        $
                        30,348,973
                        
                        
                        $
                        33,390,953




The
accompanying notes are and 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 Nine Months EndedDecember
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007REVENUES
                  
                  $
                  123,084
                  
                  
                  $
                  353,887
                  
                  
                  $
                  1,057,080
                  
                  
                  $
                  10,519,113OPERATING
      COSTS AND EXPENSESCost
      of services (exclusive of depreciation and amortization)
                  
                  
                  1,040
                  
                  
                  
                  (15,312
                  )
                  
                  
                  3,200
                  
                  
                  
                  5,734,722Payroll, professional fees and related expenses (exclusive of stock
      compensation)
                  
                  
                  378,500
                  
                  
                  
                  629,457
                  
                  
                  
                  1,136,278
                  
                  
                  
                  6,857,916Office
      rent and expenses
                  
                  
                  30,258
                  
                  
                  
                  11,792
                  
                  
                  
                  107,902
                  
                  
                  
                  392,205Other
      general and administrative expenses
                  
                  
                  72,763
                  
                  
                  
                  216,846
                  
                  
                  
                  258,032
                  
                  
                  
                  842,044Write-down
      in carrying value of notes receivable
                  
                  
                  400,000
                  
                  
                  
                  -
                  
                  
                  
                  700,000
                  
                  
                  
                  -Depreciation
      and amortization
                  
                  
                  45,457
                  
                  
                  
                  48,389
                  
                  
                  
                  136,370
                  
                  
                  
                  1,257,094Stock
      compensation
                  
                  
                  25,398
                  
                  
                  
                  128,007
                  
                  
                  
                  75,073
                  
                  
                  
                  763,129Total
      Operating Costs and Expenses
                  
                  
                  953,416
                  
                  
                  
                  1,019,179
                  
                  
                  
                  2,416,855
                  
                  
                  
                  15,847,110OPERATING
      LOSS
                  
                  
                  (830,332
                  )
                  
                  
                  (665,292
                  )
                  
                  
                  (1,359,775
                  )
                  
                  
                  (5,327,997
                  )INTEREST
      AND OTHER INCOME (EXPENSE), NET
                  
                  
                  (351,999
                  )
                  
                  
                  192,820
                  
                  
                  
                  (827,194
                  )
                  
                  
                  (512,204
                  )LOSS
      ON SALE OF ASSETS
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,778,906
                  )EQUITY
      IN NET INCOME (LOSS) OF MICROLOG CORPORATION
                  
                  
                  10,965
                  
                  
                  
                  -
                  
                  
                  
                  (89,368
                  )
                  
                  
                  -LOSS
      FROM CONTINUING OPERATIONS
                  
                  
                  (1,171,366
                  )
                  
                  
                  (472,472
                  )
                  
                  
                  (2,276,337
                  )
                  
                  
                  (8,619,107
                  )DISCONTINUED
      OPERATIONSIncome
      (loss) from operation of discontinued operations
                  
                  
                  265,986
                  
                  
                  
                  (133,452
                  )
                  
                  
                  751,912
                  
                  
                  
                  (2,068,726
                  )Gain
      (loss) on sale of discontinued operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  901,138
                  
                  
                  
                  (7,517,516
                  )INCOME
      (LOSS) FROM DISCONTINUED OPERATIONS
                  
                  
                  265,986
                  
                  
                  
                  (133,452
                  )
                  
                  
                  1,653,050
                  
                  
                  
                  (9,586,242
                  )NET
      LOSS APPLICABLE TO COMMON SHARES
                  
                  $
                  (905,380
                  )
                  
                  $
                  (605,924
                  )
                  
                  $
                  (623,287
                  )
                  
                  $
                  (18,205,349
                  )INCOME
      (LOSS) PER SHARE, BASIC AND DILUTEDContinuing
      operations
                  
                  $
                  (0.0012
                  )
                  
                  $
                  (0.0006
                  )
                  
                  $
                  (0.0027
                  )
                  
                  $
                  (0.0112
                  )Discontinued
      operations
                  
                  
                  0.0003
                  
                  
                  
                  (0.0002
                  )
                  
                  
                  0.0020
                  
                  
                  
                  (0.0125
                  )NET
      LOSS PER SHARE, BASIC AND DILUTED
                  
                  $
                  (0.0009
                  )
                  
                  $
                  (0.0008
                  )
                  
                  $
                  (0.0007
                  )
                  
                  $
                  (0.0237
                  )WEIGHTED
      AVERAGE NUMBER OF COMMONSHARES
      OUTSTANDING
                  
                  
                  956,057,044
                  
                  
                  
                  775,821,796
                  
                  
                  
                  844,984,861
                  
                  
                  
                  768,589,348





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 Nine Months EndedDecember
      31,2008
                              
                              
                              2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                              
                              $
                              (623,287
                              )
                              
                              $
                              (18,205,349
                              )(Income)
      loss from discontinued operations
                              
                              
                              (1,653,050
                              )
                              
                              
                              9,586,242Loss
      from continuing operations
                              
                              
                              (2,276,337
                              )
                              
                              
                              (8,619,107
                              )Items
      that reconcile net income (loss) to net cash provided by(used
      in) operating activities:Depreciation
      and amortization
                              
                              
                              136,370
                              
                              
                              
                              1,257,094Noncash
      interest expense
                              
                              
                              148,856
                              
                              
                              
                              184,087Amortization
      of deferred financing fees
                              
                              
                              111,614
                              
                              
                              
                              -Stock
      compensation
                              
                              
                              75,073
                              
                              
                              
                              763,129Equity
      in net loss of Microlog Corporation
                              
                              
                              89,368
                              
                              
                              
                              -Write-down
      in carrying value of notes receivable
                              
                              
                              700,000
                              
                              
                              
                              -Loss
      on sale of payphone assets
                              
                              
                              -
                              
                              
                              
                              2,778,906Other
      noncash charges
                              
                              
                              -
                              
                              
                              
                              220,684Changes
      in assets and liabilitiesDecrease
      in restricted cash
                              
                              
                              476,397
                              
                              
                              
                              -(Increase)
      decrease in accounts receivable
                              
                              
                              (24,240
                              )
                              
                              
                              1,840,762Decrease
      in notes receivable
                              
                              
                              140,872
                              
                              
                              
                              -(Increase)
      in other current assets
                              
                              
                              (6,976
                              )
                              
                              
                              (386,015
                              )(Increase)
      decrease in other assets
                              
                              
                              (198,216
                              )
                              
                              
                              83,776(Decrease)
      in accounts payable and accrued expenses
                              
                              
                              (190,955
                              )
                              
                              
                              (2,160,459
                              )Operating
      activities of discontinued operations
                              
                              
                              280,741
                              
                              
                              
                              (190,193
                              )1,738,904
                              
                              
                              
                              4,391,771Net
      cash (used in) operating activities
                              
                              
                              (537,433
                              )
                              
                              
                              (4,227,336
                              )CASH
      FLOWS FROM INVESTING ACTIVITIESProceeds
      from sale of payphone assets
                              
                              
                              -
                              
                              
                              
                              3,248,741Capital
      expenditures, net
                              
                              
                              -
                              
                              
                              
                              (320,128
                              )Proceeds
      from sale of investments
                              
                              
                              -
                              
                              
                              
                              361,993Investing
      activities of discontinued operations
                              
                              
                              -
                              
                              
                              
                              1,702,316Net
      cash provided by investing activities
                              
                              
                              -
                              
                              
                              
                              4,992,922CASH
      FLOWS FROM FINANCING ACTIVITIESBorrowings/(payments)
      of debt, net
                              
                              
                              (3,000
                              )
                              
                              
                              (2,156,788
                              )Deferred
      financing fees
                              
                              
                              (186,024
                              )
                              
                              
                              -Financing
      activities of discontinued operations
                              
                              
                              (291,303
                              )
                              
                              
                              (278,625
                              )Net
      cash (used in) financing activities
                              
                              $
                              (480,327
                              )
                              
                              $
                              (2,435,413
                              )





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 Nine Months EndedDecember
      31,2008
                                                        
                                                        
                                                        2007NET
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                                                        
                                                        $
                                                        (1,017,760
                                                        )
                                                        
                                                        $
                                                        (1,669,827
                                                        )CASH
      AND CASH EQUIVALENTS - BEGINNING OF PERIOD
                                                        
                                                        
                                                        2,075,117
                                                        
                                                        
                                                        
                                                        3,430,844CASH
      AND CASH EQUIVALENTS - END OF PERIOD
                                                        
                                                        
                                                        1,057,357
                                                        
                                                        
                                                        
                                                        1,761,017LESS
      CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS
                                                        
                                                        
                                                        (183,548
                                                        )
                                                        
                                                        
                                                        (679,613
                                                        )CASH
      AND CASH EQUIVALENTS OF CONTINUING OPERATIONS
                                                        
                                                        $
                                                        873,809
                                                        
                                                        
                                                        $
                                                        1,081,404SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWINFORMATION:Cash
      paid during the period for interest
                                                        
                                                        $
                                                        1,009,133
                                                        
                                                        
                                                        $
                                                        970,519Income
      taxes paid
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -SUPPLEMENTAL
      DISCLOSURE OF NONCASHACTIVITIES: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
                                                        
                                                        $
                                                        (194,010
                                                        )
                                                        
                                                        $
                                                        (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


December
31, 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 previously 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
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 Business”). 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
December 31, 2008 was $96,256,134. In the nine months ended December 31, 2008,
the Company had a net loss of $623,287, including a loss from continuing
operations of $2,276,337. 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 amount of cash
used in operations during the nine months ended December 31, 2008 and the fiscal
year ended March 31, 2008 were $537,433 and $3,558,996, respectively. The
decline in cash used in operation was partly due to cash generated by the
Company’s 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).





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 new 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. ( f/k/a Cornell
Capital Partners, L.P)(“YA Global”) 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 to fund certain
remaining liabilities of the Wireless Networks Business for which the Company is
co-obligor, and/or fails to sell the CLEC Businesses to 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 December 31, 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.




- 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 nine months ended
December 31, 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 December 31 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 nine months ended December 31,
2007. For the nine months ended December 31, 2008, discontinued operations
include 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.




- 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.




- 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 nine months ended December 31, 2008 were $63,232 and $108,523,
respectively. The amounts for the corresponding periods of the prior year were
$114,000 and $2,291,000, 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 $813,453 and $993,356 at December 31 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 condensed consolidated balance sheets.





Dial-around
receivable amounts included in the condensed consolidated balance sheets at
December 31, 2008 and March 31, 2008 were $64,232 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 December 31 and March
31, 2008, respectively, and notes receivable with an original principal balance
of $1,865,000 that the Company received in connection with the 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 payments
totaling $200,000. The remaining principal balance and accrued interest at 12%
per annum was due on December 29, 2008. USA has not paid the balance due on the
note and certain other receivables and has advised the Company that USA is being
indemnified for the amounts due and owing under the USA note by its former Chief
Executive Officer, L. William Fogg.  Mr. Fogg, and his wholly owned
company, Nationwide Acquisition Corp. are alleged to be the successors in
interest to the ISP Business previously sold to USA.  Mr. Fogg has
disputed the amount due under the USA note and alleges the right to certain
setoffs against the amounts due and owing the Company.  Mr. Fogg and
Nationwide Acquisition Corp. have filed a declaratory judgment lawsuit against
the Company, AFN, CCA and USA relating to various amounts owed to the Company
including the note receivable (see Note 8).  USA is in default with
respect to the note, which provides for interest at a default rate of 18% per
annum. During the quarter ended December 31, 2008, the Company wrote down the
carrying value of the note by $100,000. The net carrying values of the note of
$759,128 and $1,000,000 and accrued interest of $45,534 and $19,852, are
included in current assets of continuing operations in the accompanying
condensed consolidated balance sheets at December 31 and March 31, 2008,
respectively.





Notes
receivable with an original principal balance of $1,865,000 of are due from DHB
Networks, LLC (“DHB”), the purchaser of the Longmont, Colorado wireless network,
and consist of four notes. The notes generally provide for quarterly payments of
interest only at 9%  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 principal
owner of DHB.





In
October 2008, the Company revised the payment terms on the DHB notes and
subsequently received $12,500 towards the interest that was due in September
2008.  The remaining unpaid interest accrued through November 30, 2008
totaling $109,817 was 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 $600,000 in the nine months ended December 31,
2008, of which $300,000 was written down in the quarter ended December 31, 2008,
in recognition of the current financial condition of DHB.  The Company
has also discontinued the accrual of interest for financial reporting purposes
effective December 1, 2008. These notes receivable, with a net carrying value of
$1,374,817 at December 31, 2008, are included in assets of continuing operations
in the condensed consolidated balance sheets.




- 12
-




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.





Deferred Financing
Fees





The
Company incurred financing costs of $186,024 in connection with the refinancing
of the secured convertible debenture issued to YA Global on June 30, 2008. These
costs, representing primarily legal and other fees paid in cash, are included in
other assets of continuing operations at December 31, 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 in continuing operations for
the three and nine months ended December 31, 2008 was $58,482 and $111,615,
respectively. At December 31, 2008, the unamortized balance of deferred
financing fees included in the condensed consolidated balance sheets was
$74,410.





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 nine months ended December 31, 2008 were $45,457 and $136,370,
respectively. The amounts for the corresponding periods of the prior year were
approximately $48,389 and $1,041,409, 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
has used 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. The
Company has re-evaluated the effectiveness of its long-term advertising
contracts and has decided to discontinue such programs. At March 31, 2008,
assets of companies held for sale included prepaid expenses of $137,749 related
to such contracts. The corresponding contract liability has been typically paid
in installments. At March 31, 2008, liabilities of companies held for sale
included accounts payable and accrued expenses of $171,375 that were payable
under such contracts. At December 31, 2008, there were no prepaid expense or
contract liability amounts included in assets and liabilities of companies held
for sale in the accompanying condensed consolidated balance sheets.




- 13
-




Goodwill and Long-Lived
Assets





At
December 31 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 nine months ended December 31, 2008 and
2007.





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 $215,685 is included in operating costs and expenses of
continuing operations for the nine months ended December 31, 2007.





Accounts Payable and Accrued
Liabilities





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





December 31,
                          2008
                        
                        
                        March
      31,
                          2008Accounts
      payable
                        
                        $
                        647,108
                        
                        
                        $
                        768,175Accrued
      restructuring costs
                        
                        
                        100,218
                        
                        
                        
                        100,218Accrued
      compensation
                        
                        
                        288,479
                        
                        
                        
                        252,874Accrued
      interest expense
                        
                        
                        136,576
                        
                        
                        
                        167,371Other
      accrued liabilities
                        
                        
                        1,813,701
                        
                        
                        
                        1,888,399Totals
                        
                        $
                        2,986,082
                        
                        
                        $
                        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 nine months ended December 31, 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”).




- 14
-




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.





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 (the “USA 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 were applied to
principal and interest on the debentures held by YA Global.   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 and USA entered into an amendment to the USA
Note.  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 payments totaling $200,000. The remaining principal
balance and accrued interest at 12% per annum was due on December 29,
2008.  USA has not paid the balance due on the USA Note and certain
other receivables and has advised the Company that USA is being indemnified for
the amounts due and owing under the USA Note by its former Chief Executive
Officer, L. William Fogg.  Mr. Fogg, and his wholly owned company,
Nationwide Acquisition Corp. are alleged to be the successors in interest to the
ISP Business previously sold to USA.  Mr. Fogg has disputed the amount
due under the USA Note and alleges the right to certain setoffs against the
amounts due and owing the Company.  Mr. Fogg and Nationwide
Acquisition Corp. have filed a declaratory judgment lawsuit against the Company,
AFN, CCA and USA relating to various amounts owed to the Company including the
USA Note (see Note 8).  USA is in default with respect to the USA
Note, which provides for interest at a default rate of 18% per
annum.  During the quarter ended December 31, 2008, the Company wrote
down the carrying value of the USA Note by $100,000.




- 15
-




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 nine months ended December 31, 2007.





Sale of the Wireless
Networks Business





On July
8, 2007, the Company entered into the Gobility Agreement, pursuant to which
Gobility acquired all of the outstanding shares of Neoreach, and indirectly Kite
Networks, and all of the outstanding membership interest 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%.





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 obligations relating to the equipment
leases and equipment purchases. 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 equipment lease obligations.





The
Company is currently cooperating with Gobility in its efforts to sell the assets
of Kite Networks in order to pay the obligations relating to the equipment
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
equipment lease obligations, the Company, subject to any defenses it might have,
could be required to make the payments on the remaining equipment leases. At
December 31, 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 $2,403,952,
$411,625 and $1,687,801, 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.




- 16
-




Discontinued
Operations





The
Company has sold its Wireless Networks and ISP Businesses and continues to
market for sale its CLEC Business. Revenues, operating costs and expenses, and
other income and expense attributable to the Wireless Networks Business, ISP
Business and CLEC Business 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 December 31,2008
                          
                          
                          2007Revenues
                          
                          $
                          6,481,454
                          
                          
                          $
                          8,593,531Income
      (loss) from discontinued operations before disposal
                          
                          $
                          265,986
                          
                          
                          $
                          (133,452)Gain
      (loss) on disposal
                          
                          
                          -
                          
                          
                          
                          -Income
      (loss) from discontinued operations
                          
                          $
                          265,986
                          
                          
                          $
                          (133,452)





Nine
      Months Ended December 31,2008
                          
                          
                          2007Revenues
                          
                          $
                          22,192,048
                          
                          
                          $
                          33,382,829Income
      (loss) from discontinued operations before disposal
                          
                          $
                          751,912
                          
                          
                          $
                          (2,068,726)Gain
      (loss) on disposal
                          
                          
                          901,138
                          
                          
                          
                          (7,517,516)Income
      (loss) from discontinued operations
                          
                          $
                          1,653,050
                          
                          
                          $
                          (9,586,242)




Assets
and liabilities associated with the Wireless Networks Business and CLEC Business
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 December 31 and March 31, 2008. The
major classifications of such assets and liabilities were as
follows:




December 31,
                                2008
                              
                              
                              March 31,
                                2008Cash
      and cash equivalents
                              
                              $
                              183,548
                              
                              
                              $
                              1,063,721Restricted
      cash
                              
                              
                              1,294,502
                              
                              
                              
                              1,425,165Accounts
      receivable, net
                              
                              
                              2,262,402
                              
                              
                              
                              2,718,933Prepaid
      expenses and other current assets
                              
                              
                              825,389
                              
                              
                              
                              1,125,926Fixed
      assets, net
                              
                              
                              540,122
                              
                              
                              
                              539,047Goodwill,
      net of impairment
                              
                              
                              20,531,278
                              
                              
                              
                              20,531,278Customer
      contracts and relationships, net
                              
                              
                              530,833
                              
                              
                              
                              508,424Other
      assets
                              
                              
                              78,022
                              
                              
                              
                              108,647Assets
      of companies held for sale
                              
                              $
                              26,246,096
                              
                              
                              $
                              28,021,141Accounts
      payable and accrued expenses
                              
                              $
                              2,281,693
                              
                              
                              $
                              3,675,162Deferred
      revenue
                              
                              
                              610,514
                              
                              
                              
                              701,638Notes
      payable and capital lease and equipment obligations
                              
                              
                              4,212,453
                              
                              
                              
                              5,286,344Liabilities
      of companies held for sale
                              
                              $
                              7,104,660
                              
                              
                              $
                              9,663,144




- 17
-




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 loss on sale of assets
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.





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
Business 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.




- 18
-




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, Maryland 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 December 31, 2008 was
$333,333.





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 $79,200 related to this management agreement and $56,250 and
$168,750 of interest income related to notes receivable from Microlog for the
three months and nine months ended December 31, 2008, respectively. There were
no comparable amounts for the corresponding periods of the prior year. At
December 31 and March 31, 2008, the carrying value of the investment and amounts
due from Microlog of $415,499 and $256,917, respectively, are included in
investments and other assets of continuing operations in the accompanying
condensed consolidated balance sheets.





NOTE
5-DEBT





Debt
Maturities





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




December 31,
                      
                      
                      March 31,2008
                      
                      
                      2008Convertible
      Debenture issued to YA Global
                      
                      $
                      13,197,165
                      
                      
                      $
                      -Amended
      Debenture issued to YA Global
                      
                      
                      -
                      
                      
                      
                      11,006,823Secured
      Debentures issued to YA Global
                      
                      
                      -
                      
                      
                      
                      2,162,121Other
      notes payable
                      
                      
                      112,000
                      
                      
                      
                      115,00013,309,165
                      
                      
                      
                      13,283,944Less:
      Unamortized debt discounts
                      
                      
                      (4,156
                      )
                      
                      
                      (30,208
                      )Less:
      Amounts due within one year
                      
                      
                      (13,305,009
                      )
                      
                      
                      (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 December 31, 2008 will become due for
payment in the twelve-month period ending December 31, 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 December 31, 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 a portion 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 nine months ended December 31, 2008, the Company issued 307,042,857 shares
of common stock in satisfaction of $194,010 in principal relating to the
Convertible Debenture. Subsequent to December 31, 2008, YA Global converted an
additional $46,220 of principal into 108,600,000 shares of common stock. Such
shares are tradable by YA Global pursuant to Rule 144 of the Securities Act of
1933 (the “Securities Act”).




- 19
-




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.





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 USA Note 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%.




- 20
-




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.





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 USA Note 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
December 31, 2008, the total principal balance payable to YA Global under the
Convertible Debenture was $13,197,165.





The Debentures – Interest
Expense





For the
three and nine months ended December 31, 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 $406,134 and $1,070,197, respectively.  The amounts for
the corresponding periods of the prior year were $275,732 and $886,837,
respectively.




- 21
-




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 $36,442, respectively, for the three months
and nine months ended December 31, 2008. The amounts for the corresponding
periods of the prior year were $38,151 and $231,992, respectively. Interest
expense also included $58,480 and $111,614, respectively, for amortization of
deferred financing fees related to the Convertible Debenture for the three
months and nine months ended December 31, 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 the nine months ended December 31, 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 $25,315 for the nine months ended
December 31, 2007.





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
equipment 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 equipment 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 equipment 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
December 31 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 December 31, 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 —December
      31, 2009
                            
                            $
                            2,830,713December
      31, 2010
                            
                            
                            61,0242,891,737Less
      – interest portions
                            
                            
                            (487,785)Capital
      leases – principal portions
                            
                            
                            2,403,952Equipment
      obligation
                            
                            
                            1,391,978Note
      payable
                            
                            
                            295,823Accrued
      interest on capital leases and other obligation
                            
                            
                            411,625Total
      liabilities
                            
                            $
                            4,503,378





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 $388,500 and
$1,003,478 for the twelve months ended December 31, 2009 and 2010,
respectively.




- 22
-




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 Nine Months Ended December 31, 2008





On
December 19, 2008, at our Annual Meeting of Stockholders, our stockholders voted
to increase the number of authorized shares of capital stock from 1,500,000,000
shares to 3,000,000,000 shares. Our stockholders also voted in favor of amending
our certificate of incorporation to permit a reverse stock split by a ratio of
not less than one for two and not more than one for ten, with the exact ratio to
be set within that range at the discretion of the Company’s Board of
Directors.





In the
nine months ended December 31, 2008, the Company issued 307,042,857 shares of
its common stock in satisfaction of $194,010 in principal owed to YA Global
relating to the Convertible Debenture. Subsequent to December 31, 2008, the
Company issued 108,600,000 additional shares of common stock in satisfaction of
$46,220 in principal owed to YA Global.





On
January 19, 2009, the Company and its newly formed subsidiary, MWS Newco, Inc.,
consummated the terms of an asset purchase agreement with MobileWebSurf to
acquire certain mobile email, texting and social networking software products
and related intellectual property technology (the “Acquired Assets”). As
consideration for the Acquired  Assets, MobileWebSurf received
5,000,000 shares of the Company’s common stock valued at $2,500 and an initial
nineteen percent ownership interest in MWS Newco, Inc.





Common Stock Transactions in
the Nine Months Ended December 31, 2007





In the
nine months ended December 31, 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 nine months ended December 31, 2008:




- 23
-





Weighted-
                                                    AverageStock Options —
                                                  
                                                  Number
      of
                                                    Options
                                                  
                                                  Exercise
                                                    PriceOutstanding
      – 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
                                                  
                                                  $
                                                  0.2200Granted
                                                  
                                                  -
                                                  
                                                  $
                                                  -Exercised
                                                  
                                                  -
                                                  
                                                  $
                                                  -Cancelled
                                                  
                                                  (55,000)
                                                  
                                                  $
                                                  0.2200Outstanding
      – December 31, 2008
                                                  
                                                  1,601,000
                                                  
                                                  $
                                                  0.2200Exercisable
      – December 31, 2008
                                                  
                                                  1,601,000
                                                  
                                                  $
                                                  0.2200





Weighted-
                                      AverageStock Warrants —
                                    
                                    Number
      of
                                      Warrants
                                    
                                    Exercise
                                      PriceOutstanding
      – 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
                                    
                                    178,788,968
                                    
                                    $
                                    0.0757Granted
                                    
                                    -
                                    
                                    $
                                    -Exercised
                                    
                                    -
                                    
                                    $
                                    -Cancelled
                                    
                                    -
                                    
                                    $
                                    -Outstanding
      – December 31, 2008
                                    
                                    178,788,968
                                    
                                    $
                                    0.0757Exercisable
      – December 31, 2008
                                    
                                    131,684,801
                                    
                                    $
                                    0.1011





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.




- 24
-




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 nine months ended
December 31, 2008 were $25,398 and $75,073, respectively. The amounts for the
corresponding periods of the prior year were $128,007 and $763,129,
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
nine months ended December 31, 2008 and 2007:





2008
                    
                    
                    2007Dividend
      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
nine 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 nine months ended December 31, 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, 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.




- 25
-




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
more than 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.
The Skyrocket Litigation was scheduled for trial on February 9,
2009.  During the trial, the court granted CloseCall’s motion for
judgment on the claims alleged in the counter-complaint, leaving CloseCall’s
breach of contract and unjust enrichment claims to be determined by the
jury.  After deliberation on the claims against Skyrocket, the jury
returned a verdict in favor of CloseCall.  Notwithstanding the jury
verdict, the Company cannot predict whether Skyrocket will appeal the ruling or
whether it will ultimately be able to collect on the judgment.




- 26
-





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. Although discovery has commenced, the Harborside
Litigation remains 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 December 31 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)  On
January 7, 2009 the Company received notice that it and its subsidiaries, AFN
and CloseCall, had been served with a summons and complaint in the York County
Superior Court in Maine by Nationwide Acquisition Corp. (“Nationwide”) and L.
William Fogg (“Fogg” and the “Complaint”).  Fogg is a former executive
officer of USA and allegedly the owner of Nationwide, the company which
allegedly now owns the ISP Business acquired by USA from the Company. Pursuant
to an agreement between USA and Fogg, Fogg allegedly acquired the ISP Business,
agreed to indemnify USA for all of USA’s liabilities under the USA Note and
agreed to indemnify and hold USA harmless against any loss, damage or expense
arising out of the USA Note.  Fogg, Nationwide and its related
companies also agreed to indemnify USA for various USA debts or liabilities
outstanding as of June 4, 2008.





The
Complaint is an action for declaratory relief to resolve certain disputes among
the Company, CloseCall, AFN, USA, Nationwide and Fogg, including, among other
things, the payment of the past due amount under the USA Note. Nationwide and
Fogg allege that the Company made certain misrepresentations in connection with
the USA Agreement for which USA and/or Fogg are entitled to set-off against the
past due amount.  The Company believes that the claims alleged in the
Complaint are a tactic to further delay payment of the past due
amount.





On
February 10, 2009 the Company filed its answer to the declaratory relief
complaint, together with cross-claims against USA for (i) the payment default
under the terms of the USA Note, (ii) anticipatory repudiation and breach of the
USA Agreement, (iii) breach of the USA Management Agreement and a related
services agreement, (iii) negligent and intentional misrepresentation in
connection with the USA Agreement, (iv) breach of fiduciary duty, (v)
indemnification under the USA Agreement, (vi) restitution and unjust enrichment
under the USA Management Agreement, (vii) conversion and (viii) securities fraud
under the Maine Uniform Securities Act and Section 10 (b) of the Securities
Exchange Act.  In the same pleading, MobilePro also brought
counterclaims against Nationwide and Fogg for (i) the payment default under the
terms of the USA Note, (ii) breach of a non-disclosure agreement executed in
connection with the USA Agreement, (iii) breach of fiduciary duty and duty of
good faith in connection with the USA Management Agreement, (iv) intentional
misrepresentation in connection with the USA Agreement, (v) restitution and
unjust enrichment under the USA Management Agreement, (vi) securities fraud
under the Maine Uniform Securities Act and Section 10 (b) of the Securities
Exchange Act and (vii) injunctive relief. Although MobilePro intends to
vigorously defend itself and its subsidiaries in this matter, and to pursue USA,
Nationwide and Fogg for the claims asserted, we cannot predict the likelihood of
our success on the merits, the costs associated with the pursuit of the claims,
or the timing of recovery, if any.




- 27
-




8) 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.  The Company
and its subsidiaries are involved from time to time in disputes with industry
providers which are typically resolved through negotiations.  One such
industry provider has asserted certain amounts are owed by
AFN.  Although AFN has disputed such amounts and does not believe the
amount owed to the industry provider is material, if the dispute is not resolved
through negotiations and is adversely determined against AFN, such amount could
be material.





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 nine month periods ended December 31, 2008 and 2007, our financial
condition at December 31, 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.




- 28
-




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.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 (the “ISP
  Business”).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.




- 29
-




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.





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.





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 shares of AFN and
CloseCall (the “CLEC Business”) and ISP Business to United Systems Access, Inc.
(“USA”, and the “USA Agreement”).  The closing of the ISP Business
occurred on July 18, 2007.  The closing of the sale of the CLEC
Business to USA did not occur.  See discussion below concerning The
Sale of the ISP and CLEC Business 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.




- 30
-




As a
result, our business has historically lost money. Our accumulated deficit at
December 31, 2008 was $96,256,134. In the nine months ended December 31, 2008,
the Company had a net loss of $623,287, including a loss from continuing
operations of $2,276,337. 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 amount of cash used in operations during the nine
months ended December 31, 2008 and the fiscal year ended March 31, 2008 were
$537,433 and $3,558,996, respectively. The decline in cash used in operation was
partly due to cash generated by the Company’s 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). 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.





To date,
YA Global Investments, L.P. ( f/k/a Cornell Capital Partners, L.P) (“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
equipment leases, the Company, subject to any defenses it may have, may be
obligated to pay these obligations.  The Company could also be subject
to late payment penalties and interest at the default rate.




- 31
-




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 equipment
leases and other equipment. In September 2007, the Company was required to make
equipment 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.





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 December 31, 2008, the
aggregate amount recorded on the balance sheet as liabilities of companies held
for sale relating to the capital lease obligations, accrued interest, note
payable and the equipment obligation was $4,503,378. 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 its
condensed consolidated balance sheets.





The Sale of the ISP and CLEC
Business 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 Wireline 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 ISP Business 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 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%.




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-




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, in
January 2008 the Company re-assumed operating control of the CLEC Business and
terminated the USA Management Agreement and USA Agreement.  Following
the termination of the USA Agreement relating to the CLEC Business 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
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 (the “USA Note”). On January 3, 2008, the Company entered into an amendment
to the USA Note. 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 was due on
December 29, 2008. USA has not paid the balance due on the note and certain
other receivables and has advised the Company that USA is being indemnified for
the amounts due and owing under the USA Note by its former Chief Executive
Officer, L. William Fogg.  Mr. Fogg, and his wholly owned company,
Nationwide Acquisition Corp. are alleged to be the successors in interest to the
ISP Business previously sold to USA.  Mr. Fogg has disputed the amount
due under the USA Note and alleges the right to certain setoffs against the
amounts due and owing the Company.  Mr. Fogg and Nationwide
Acquisition Corp. have filed a declaratory judgment lawsuit against the Company,
AFN, CCA and USA relating to various amounts owed to the Company including the
USA Note. USA is in default with respect to the note, which provides for
interest at a default rate of 18% per annum.  During the quarter ended
December 31, 2008, the Company wrote down the carrying value of the USA Note by
$100,000.





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 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 December 31 and
March 31, 2008.  In addition, we have classified the results of
operations of the CLEC Business, ISP Business, and Wireless Networks Business in
discontinued operations in the condensed consolidated statements of operations
for the three months and nine months ended December 31,
2007.  Discontinued operations include the results of operations for
the CLEC Business and the costs associated with the remaining net liabilities of
the Wireless Networks Business for the three months and nine months ended
December 31, 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.




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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 loss on sale of assets
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.





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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-




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 nine months ended December 31,
2008 and 2007 are not comparable. Results of discontinued operations include the
operating results of the CLEC Business, ISP Business and Wireless Networks
Business. The operating results of the first and second quarters of the current
and prior fiscal years are not comparable due to the sale of the ISP Business
and Wireless Networks Business in the second quarter of the fiscal year ending
March 31, 2008.





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 December 31, 2008 and 2007





Consolidated
revenues of continuing operations for the quarter ended December 31, 2008 were
$123,084 compared with revenues of $353,887 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, including settlement amounts
applicable to underpayments by certain carriers. 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 December 31, 2007, revenues included $250,000
of regulatory receipts received pursuant to an amendment to an escrow agreement
with Davel’s former lenders, established in connection with the acquisition of
Davel to fund certain costs and other amounts associated with the Gammino
litigation (see Item 1. – Legal Proceedings) as well as coin and “dial-around”
revenues generated by Davel’s payphones.





Cost of
services (exclusive of depreciation and amortization) in the quarter ended
December 31, 2008 was $1,040 compared to a $15,312 credit reflecting the
adjustment of previously accrued costs in the third quarter of the prior fiscal
year. These amounts also reflect the reduction in the number of payphones
operated by Davel following the payphone sales described above.




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-




The total
operating costs and expenses of continuing operations for the quarter ended
December 31, 2008, excluding the cost of services, depreciation and
amortization, were $906,919 compared to $986,102 in the third quarter of the
prior fiscal year, a decrease of $79,183. The Company was able to reduce
operating costs through a reduction in payroll, professional fees and related
expenses, a reduction in stock compensation expense and a reduction in other
general and administrative expenses. Payroll, professional fees and related
expenses decreased from $629,457 to 378,500 in the three months ended December
31, 2008 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 $128,007 to $25,398
in the current quarter due to the vesting of options and warrants granted in
prior years and a reduction in the fair value of current year grants. Other
general and administrative expenses declined from 216,846 to $72,763 in the
current quarter due primarily to the elimination of a majority of Davel’s
expenses following the sale of its payphone assets. The reductions in operating
costs and expenses were partially offset by a $400,000 write down in the
carrying value of notes receivable in three months ended December 31, 2008. The
operating costs and expenses (excluding depreciation and amortization) of
ProGames for the three months ended December 31, 2008 and 2007 were
approximately $38,000 and $108,000, respectively reflecting reductions in
personnel and other costs.





Depreciation
and amortization expenses of continuing operations were $45,457 and $48,389 in
the quarters ended December 31, 2008 and 2007, respectively.





Interest
and other expense, net, was $351,999 for the quarter ended December 31, 2008
compared with net interest income of $192.820 in the corresponding quarter of
the prior fiscal year. Interest expense in the three months ended December 31,
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 December 31, 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 December 31, 2008 and 2007 are presented in
the following schedule.





Type
      of Debt
                  
                  2008
                  
                  
                  2007Convertible
      debentures (at stated rates)
                  
                  $
                  406,134
                  
                  
                  $
                  275,732Convertible
      debentures (debt discount amortization)
                  
                  
                  3,117
                  
                  
                  
                  38,151Convertible
      debenture (deferred financing fee amortization)
                  
                  
                  58,480
                  
                  
                  
                  -Notes
      receivable - Microlog
                  
                  
                  (56,250
                  )
                  
                  
                  -Other
      notes receivable
                  
                  
                  (56,203
                  )
                  
                  
                  -USA
      interest on cash due at CLEC closing
                  
                  
                  -
                  
                  
                  
                  (339,896
                  )Accretion
      of discount – USA Preferred Stock
                  
                  
                  -
                  
                  
                  
                  (147,733
                  )Other,
      net
                  
                  
                  (3,279
                  )
                  
                  
                  (19,074
                  )Interest
      and Other (Income) Expense, net
                  
                  $
                  351,999
                  
                  
                  $
                  (192,820
                  )





The loss
from continuing operations for the three months ended December 31, 2008 was
$1,171,366, or $0.0012 per share, compared to a loss of $472,472, or $0.0006 per
share, in the prior year quarter.  The current quarterly loss from
continuing operations includes a $400,000 loss from the write down in the
carrying value of notes receivable as described above. It also includes $10,965
of income representing our equity in the net income of an affiliate, Microlog,
an investment we acquired in January 2008, and losses of $68,903 for ProGames
and $94,603 for Davel. The loss from continuing operations for the three months
ended December 31, 2007 includes $250,000 of regulatory receipts and $487,629 of
interest income from USA applicable to cash originally due at time of the
closing of the planned sale of the CLEC Business and the accretion of discount
on the USA Preferred. It also includes a loss of $146,158 for ProGames and
income of $101,717 for Davel.





Revenues
from discontinued operations consist of revenues from the Company’s CLEC
Business which were $6,481,454 in the current quarter compared to $8,953,531 in
the third quarter of the prior fiscal year. The decline in revenues relating to
the CLEC Business was primarily due to a reduction in the number of business
lines and residential customers and, to a lesser extent, to reductions
applicable to the bundling of services billed to customers.




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-




Income
from discontinued operations for the three months ended December 31, 2008 was
$265,986, or $0.0003 per share, and includes the operating results of the CLEC
Business less interest and other expenses relating to the remaining obligations
of Kite Networks. The loss from discontinued operations for the three months
ended December 31, 2007 was $133,452, or $0.0002 per share, which represents the
interest cost associated with the Wireless Business obligations. Under the USA
Management Agreement, there was no income relating to the CLEC Business in last
year’s third fiscal quarter due to the offsetting management fee from
USA.





We
reported a net loss of $905,380 for the quarter ended December 31, 2008, or
$0.0009 per share, compared with a net loss of $605,924, or $0.0008 per share,
for the quarter ended December 31, 2007.





The
Nine Months Ended December 31, 2008 and 2007





Consolidated
revenues of continuing operations for the nine months ended December 31, 2008
were $1,057,080 compared with revenues of $10,519,113 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 nine months ended December 31, 2007,
Davel derived most of its operating revenues from coin revenue and “dial-around”
revenues generated by its payphones. Revenues for the nine months ended December
31, 2007 also included $250,000 of regulatory receipts received in the third
quarter as discussed above.





Cost of
services (exclusive of depreciation and amortization) in the nine months ended
December 31, 2008 was $3,200 compared to $5,734,722 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 nine months ended
September 30, 2008, excluding the cost of services, depreciation and
amortization, were $2,277,285 compared to $8,855,294 in the corresponding period
of the prior fiscal year, a decrease of $6,578,009.  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 $5,505,284 compared
to the corresponding period of the prior fiscal year. The Company was also able
to reduce its operating expenses (other than Davel’s) by $1,072,725 through the
reduction in payroll, professional fees and related expenses and a reduction in
stock compensation expense. Payroll, professional fees and related expenses
declined by $896,590 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
by $688,056, from $763,129 to $75,073 in the nine months ended December 31,
2008, due to the vesting of options and warrants granted in prior years and a
reduction in the fair value of current year grants. These decreases were
partially offset by a $700,000 write down in the carrying value of notes
receivable in nine months ended December 31, 2008. The operating costs and
expenses (excluding depreciation and amortization) of ProGames for the nine
months ended December 31, 2008 and 2007 were $138,140 and $411,058, respectively
reflecting reductions in personnel and other costs.





Depreciation
and amortization expenses were $136,370 and $1,257,094 in the nine months ended
December 31, 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 in the prior year.





Interest
and other expense, net, was $827,194 for the nine months ended December 31, 2008
compared with $512,204 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 nine months ended December 31, 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 nine months ended December 31, 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 nine months ended
December 31, 2008 and 2007 are presented in the following schedule.




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Type
      of Debt
                  
                  2008
                  
                  
                  2007Convertible
      debentures (at stated rates)
                  
                  $
                  1,070,197
                  
                  
                  $
                  886,837Convertible
      debentures (debt discount amortization)
                  
                  
                  36,442
                  
                  
                  
                  231,992Convertible
      debentures (stock issuance discounts)
                  
                  
                  -
                  
                  
                  
                  148,550Convertible
      debenture (deferred financing fee amortization)
                  
                  
                  111,614
                  
                  
                  
                  -Notes
      payable to YA Global
                  
                  
                  -
                  
                  
                  
                  25,315Notes
      receivable - Microlog
                  
                  
                  (168,750
                  )
                  
                  
                  -Other
      notes receivable
                  
                  
                  (199,173
                  )
                  
                  
                  -USA
      interest on cash due at CLEC closing
                  
                  
                  -
                  
                  
                  
                  (616,985
                  )Accretion
      of discount – USA Preferred Stock
                  
                  
                  -
                  
                  
                  
                  (244,198
                  )Other,
      net
                  
                  
                  (23,136
                  )
                  
                  
                  80,693Interest
      and Other (Income) Expense, net
                  
                  $
                  827,194
                  
                  
                  $
                  512,204





The loss
from continuing operations for the nine months ended December 31, 2008 was
$2,276,337, or $0.0027 per share, compared to a loss of $8,619,107, or $0.0112
per share, in the corresponding period of the prior year. The current
year-to-date loss included an $89,368 loss representing our equity in the net
loss of an affiliate, Microlog, an investment we acquired in January
2008.  It also includes a $700,000 write down in the carrying value of
notes receivable, a loss of $237,377 for ProGames, and income of $416,611 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 nine months ended December 31, 2007 includes losses of
$549,259 for ProGames and $5,102,327 for Davel, including a $2,778,906 loss on
the sale of certain payphone assets and related liabilities of
Davel.





For the
nine months ended December 31, 2008, revenues from discontinued operations were
$22,192,048, which relates to the Company’s CLEC Business. Year-to-date revenues
from discontinued operations last year were $33,382,829, which included
$26,652,134 relating to the CLEC Business and $6,730,695 relating to the ISP
Business and Wireless Networks Business.  The decline in revenues
relating to the CLEC Business was primarily due to a reduction in the number of
business lines and 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 nine months ended December 31, 2008 was
$1,653,050, or $0.0020 per share, including income of $751,912 relating to the
operating results of the CLEC Business and interest and other expenses relating
to the remaining obligations of the Wireless Networks Business. 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’ equipment leases. The
loss from discontinued operations for the nine months ended December 31, 2007
was $9,586,242, or $0.0125 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 Business, there would have been income of $485,650 relating to the CLEC
Business (including Kite interest) in the nine months ended December 31,
2007.





We
reported a net loss of $623,287 for the nine months ended December 31, 2008, or
$0.0007 per share, compared with a net loss of $18,205,349 for the nine months
ended December 31, 2007, or $0.0237 per share.




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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 equipment lease obligations
as liabilities of companies held for sale in its condensed consolidated balance
sheets. The total principal balance of these leases was approximately $2,404,000
at December 31, 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 $1,392,000 at December 31, 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 December 31, 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
first quarter of the next 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 nine months ended December 31, 2008, the balance of unrestricted cash and
cash equivalents relating to continuing operations decreased by $137,587 to
$873,809. There was also a decrease in cash and cash equivalents of $880,173
relating to discontinued operations.





Net cash
used in operations during the nine months ended December 31, 2008 was $537,433,
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 $280,741 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 funding of operating expenses. Net cash used in
operations also reflects a $700,000 non-cash adjustment for the write down in
the carrying value of certain notes receivable and $148,856 of net 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 nine months ended
December 31, 2008.





Our
financing activities during the nine months ended December 31, 2008 used net
cash of $480,327, including $291,303 of cash used in discontinued operations.
Cash used in financing activities also includes $186,024 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 $291,303 in cash to pay principal on debt obligations, including the notes
payable and equipment and capital lease obligations relating to the Wireless
Networks Business. The Company also paid $1,009,133 in cash for interest out of
net cash from operating activities during the nine months ended December 31,
2008.





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.




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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 of
continuing operations at December 31, 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 nine months ended December 31, 2008, the Company issued 307,042,857 shares
of common stock in satisfaction of $194,010 in principal relating to the
Convertible Debenture. Subsequent to December 31, 2008, YA Global converted an
additional $46,220 of principal into 108,600,000 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 equipment
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 equipment 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.




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-




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 December 31, 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 $4,503,378. 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 Business can be completed or another method to retire our debt to YA Global
is achieved. Following the termination of the USA Agreement relating to the sale
of the CLEC Business, and the USA Management Agreement in the fourth quarter of
fiscal year 2008, the Company re-assumed operating control of the CLEC
Business.  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 equipment 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 Business to 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.





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 $333,333 at December 31, 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 $415,499 at December 31, 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.




- 41
-




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.




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 haveadvised 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.




- 42
-




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 CEO and CAO  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 USA
Management Agreement 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. Around the end of the
fiscal year we plan to convert to a new billing system that is currently being
developed by one of our 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.




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 nine months ended December 31, 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
more than 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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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.  The Skyrocket Litigation was scheduled for trial
on February 9, 2009.  During the trial, the court granted CloseCall’s
motion for judgment on the claims alleged in the counter-complaint, leaving
CloseCall’s breach of contract and unjust enrichment claims to be determined by
the jury.  After deliberation on the claims against Skyrocket, the
jury returned a verdict in favor of CloseCall.  Notwithstanding the
jury verdict, the Company cannot predict whether Skyrocket will appeal the
ruling or whether it will ultimately be able to collect on the
judgment.




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.   Although discovery has commenced, the
Harborside Litigation remains 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 December 31 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)  On
January 7, 2009 the Company received notice that it and its subsidiaries, AFN
and CloseCall, had been served with a summons and complaint in the York County
Superior Court in Maine by Nationwide Acquisition Corp. (“Nationwide”) and L.
William Fogg (“Fogg” and the “Complaint”).  Fogg is a former executive
officer of USA and allegedly the owner of Nationwide, the company which
allegedly now owns the ISP Business acquired by USA from the Company. Pursuant
to an agreement between USA and Fogg, Fogg allegedly acquired the ISP Business,
agreed to indemnify USA for all of USA’s liabilities under the USA Note and
agreed to indemnify and hold USA harmless against any loss, damage or expense
arising out of the USA Note.  Nationwide and its related companies
also agreed to indemnify USA for various USA debts or liabilities outstanding as
of June 4, 2008.




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The
Complaint is an action for declaratory relief to resolve certain disputes among
the Company, CloseCall, AFN, USA, Nationwide and Fogg, including, among other
things, the payment of the past due amount under the USA Note. Nationwide and
Fogg allege that the Company made certain misrepresentations in connection with
the USA Agreement for which USA and/or Fogg are entitled to set-off against the
past due amount.  The Company believes that the claims alleged in the
Complaint are a tactic to further delay payment of the past due
amount.





On
February 10, 2009 the Company filed its answer to the declaratory relief
complaint, together with cross-claims against USA for (i) the payment default
under the terms of the USA Note, (ii) anticipatory repudiation and breach of the
USA Agreement, (iii) breach of the USA Management Agreement and a related
services agreement, (iii) negligent and intentional misrepresentation in
connection with the USA Agreement, (iv) breach of fiduciary duty, (v)
indemnification under the USA Agreement, (vi) restitution and unjust enrichment
under the USA Management Agreement, (vii) conversion and (viii) securities fraud
under the Maine Uniform Securities Act and Section 10 (b) of the Securities
Exchange Act.  In the same pleading, MobilePro also brought
counterclaims against Nationwide and Fogg for (i) the payment default under the
terms of the USA Note, (ii) breach of a non-disclosure agreement executed in
connection with the USA Agreement, (iii) breach of fiduciary duty and duty of
good faith in connection with the USA Management Agreement, (iv) intentional
misrepresentation in connection with the USA Agreement, (v) restitution and
unjust enrichment under the USA Management Agreement, (vi)  securities
fraud under the Maine Uniform Securities Act and Section 10 (b) of the
Securities Exchange Act and (vii) injunctive relief. Although MobilePro intends
to vigorously defend itself and its subsidiaries in this matter, and to pursue
USA, Nationwide and Fogg for the claims asserted, we cannot predict the
likelihood of our success on the merits, the costs associated with the pursuit
of the claims, or the timing of recovery, if any.




8) 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.  The Company
and its subsidiaries are involved from time to time in disputes with industry
providers which are typically resolved through negotiations.  One such
industry provider has asserted certain amounts are owed by
AFN.  Although AFN has disputed such amounts and does not believe the
amount owed to the industry provider is material, if the dispute is not resolved
through negotiations and is adversely determined against AFN, such amount could
be material.





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 September 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 equipment 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
equipment 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 equipment 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 equipment leasing companies.  The
lack of reasonable cooperation by the equipment 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.




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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 Networks Business as planned. In such an event, the
Company will not have sufficient cash to sustain operations without the
completion of the CLEC  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 USA Agreement.  However, on January
14, 2008 we received notice from USA, which purports to terminate the USA
Agreement.  In the event that the Company is unsuccessful in closing
the USA Agreement, 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 Business, 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.





Mobilepro
remains a co-obligor on certain capital leases transferred to Gobility. The
total principal balance of these leases was approximately $2,404,000 at December
31, 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.




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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
December 31, 2008 was $96,256,134. In the nine months ended December 31, 2008,
the Company had a net loss of $623,287, including a loss from continuing
operations of $2,276,337. 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 amount of cash used in
operations during the nine months ended December 31, 2008 and the fiscal year
ended March 31, 2008 were $537,433 and $3,558,996, respectively. The decline in
cash used in operation was partly due to cash generated by the Company’s 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 $240,230 of debt into 415,642,857 shares of common
stock since June 30, 2008 and has sold at least 360,042,857 shares.





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 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 was due on
December 29, 2008. To date, USA has not paid this balance and the Company has
written down the carrying value of the note and other amounts due from USA by
$100,000 in the third quarter of fiscal 2009 (see also Paragraph 7 of Item 1. –
“Legal Proceedings”).




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Upon the
close and pursuant to the terms of the USA  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 USA
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.





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





The
Company is a defendant in the Harborside Litigation, which is described in Item
1 – “Legal Proceedings”.  Although the Company believes that it has
meritorious defenses to the claims raised in this and the other matters
identified in Item 1 – “Legal Proceedings” and intends to vigorously defend
itself in each matter, there can be no guarantee that the Company will
ultimately succeed in doing so.  If an adverse ruling is ultimately
issued 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.





Further
Declines in the Economy May Adversely Affect our Discontinued Operations and
Impair Our Ability to Sell that Business





The U.S.
Economy has entered a recession, unemployment claims have increased and
consumers’ incomes have been reduced.  Given our CLEC’s exposure to
business travel (through its temporary housing and hospitality business) and
consumer welfare (through our residential business), further declines in the
economy could materially adversely affect our CLEC business, impairing our
ability to sell it at a price sufficient to retire our debt.  Such
failure may cause us to further reduce the goodwill attributable to the CLEC
business when we do our annual review of goodwill as of March 31,
2009.





Poor
Operating Performance by the Companies With Which We have Notes Receivable May
Cause Us to Further “Write Down” the Carrying Value of our Notes Receivable,
Reducing the Book Value Per Share of Our Company





DHB
Network, USA Telephone and Microlog all owe us money in the form of notes
receivable.  If any or all of these three businesses has poor
operating performance and is unable to service the payments, we may be required
to take additional write downs of the carrying value of the notes
receivable.  We have already taken write downs against the DHB and USA
notes.   Such write downs would reduce the book value per share
of our Company.




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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;  - 50
-
  •
              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.





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.




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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 common shares representing up to 4.99% of the Company’s common
stock at the lesser $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 adjustments 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.





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.





In the
nine months ended December 31, 2008, the Company issued 307,042,857 shares of
its common stock in satisfaction of $194,010 in principal owed to YA Global
relating to the Convertible Debenture. Subsequent to December 31, 2008, the
Company issued 108,600,000 additional shares of common stock in satisfaction of
$46,220 in principal owed to YA Global.





On
January 19, 2009, the Company and its newly formed subsidiary, MWS Newco, Inc.,
consummated the terms of an asset purchase agreement with MobileWebSurf to
acquire certain mobile email, texting and social networking software products
and related intellectual property technology (the “Acquired Assets”). As
consideration for the Acquired  Assets, MobileWebSurf received
5,000,000 shares of the Company’s common stock valued at $2,500 and a nineteen
percent ownership interest in MWS Newco, Inc.





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 December
31, 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
was extended through December 19, 2008 to provide additional time to solicit
proxies of additional shareholders regarding the matters presented at the 2008
Annual Meeting. We previously reported the results of matters submitted to a
vote of security holders at our Annual Meeting of Shareholder by filing a
Current Report on Form 8-K on December 22, 2008, which report is incorporated
herein by reference.




- 52
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Item
5.  Other Information.





Not
applicable.





Item
6.  Exhibits.





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





Exhibit
                                                                                No.
                                                                              
                                                                              Description
                                                                              
                                                                              Location2.1
                                                                              
                                                                              Asset
      Purchase Agreement dated December 30, 2008 by and between MobileWebSurf,
      Mobilepro Corp., and MWS Newco, Inc.
                                                                              
                                                                              Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed on January 19, 20093.1
                                                                              
                                                                              Amendment
      to Certificate of Incorporation of MobilePro Corp. filed with the
      Secretary of State of Delaware  on January 6,
    2009
                                                                              
                                                                              Provided
      herewith10.1
                                                                              
                                                                              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, 200810.6
                                                                              
                                                                              Global
      Guarantee Agreement dated June 30, 2008 between Mobilepro 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 Mobilepro 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, 2008




- 53
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31.1
                  
                  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, 200899.1
                  
                  Transcript
      of  the on-line interview conducted by the Registrant’s Chief
      Executive Officer, Jay O. Wright, on December 16, 2008
                  
                  Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed on December 16, 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.




- 54
-


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:
                        February 17, 2009
                        
                        By:
                        /s/ Jay O. WrightJay
      O. Wright, Chief Executive OfficerDate:
                        February 17, 2009
                        
                        By:
                        /s/ Donald L. PaliwodaDonald
      L. Paliwoda, Chief Accounting
Officer
  - 55
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