** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**x**** QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly PeriodEnded September 30, 2007**

** **

**or**

 

**o**** TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)****OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For theTransition Period From                   To                   **

 

**CommissionFile Number:  0-27024**

 

**METRO ONETELECOMMUNICATIONS, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

###### **11200 MurrayScholls Place, Beaverton, Oregon  97007**

(Address ofprincipal executive offices) (zip code)

 

**(503)643-9500**

(Registrant’stelephone number, including area code)

 

**Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes  ****x  No  ****o**

 

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

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

 

**Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).****Yes  ****o****    No  ****x**

 

**Number of shares of common stockoutstanding as of November 10, 2007: 6,233,326 shares, no par value per share.**

 

 

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**METRO ONETELECOMMUNICATIONS, INC.**

 

**INDEX TO FORM 10 - Q**

** **
| Part I    | Financial Information                                                                                             |   |
|-----------|-------------------------------------------------------------------------------------------------------------------|--------|
|      |                                                                                                              |   |
| Item 1.   | Financial Statements  (Unaudited)                                                                                 |   |
|      |                                                                                                              |   |
|      | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2007 and 2006 |   |
|      |                                                                                                              |   |
|      | Condensed  Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006                             |   |
|      |                                                                                                              |   |
|      | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2007 and 2006           |   |
|      |                                                                                                              |   |
|      | Notes  to Condensed Consolidated Financial Statements                                                             |   |
|      |                                                                                                              |   |
| Item 2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       |   |
|      |                                                                                                              |   |
| Item 3.   | Quantitative  and Qualitative Disclosures About Market Risk                                                       |   |
|      |                                                                                                              |   |
| Item 4.   | Controls and  Procedures                                                                                          |   |
|      |                                                                                                              |   |
| Part II   | Other Information                                                                                                 |   |
|      |                                                                                                              |   |
| Item  1A. | Risk Factors                                                                                                      |   |
|      |                                                                                                              |   |
| Item 4.   | Submission of  Matters to a Vote of Security Holders                                                              |   |
|      |                                                                                                              |   |
| Item  6.  | Exhibits                                                                                                          |   |
|      |                                                                                                              |   |
|      | Signatures                                                                                                        |   |

 

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**Metro One Telecommunications, Inc.**

**Condensed Consolidated Statementsof Operations (Unaudited)**

 
| ** **                                                         | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | **2007**                                                   | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                               |       |                                                       |       |                                                |       |   |   |   |   |
| Revenues                                                           |       | $                                                          | 4,198      |                                                | $          | 5,205 |   | $ | 14,378 |   | $ | 25,553 |   |
|                                                               |       |                                                       |       |                                                |       |   |   |   |   |
| Costs and  expenses:                                               |       |                                                       |       |                                                |       |   |   |   |   |
| Direct operating                                                   |       | 3,724                                                      |       | 3,789                                               |       | 12,002 |   | 15,319 |   |
| Selling, general  and administrative                               |       | 3,583                                                      |       | 4,465                                               |       | 11,016 |   | 16,813 |   |
| Depreciation and  amortization                                     |       | 514                                                        |       | 686                                                 |       | 1,670 |   | 3,040 |   |
| Restructuring  charges                                             |       | 221                                                        |       | 453                                                 |       | 1,130 |   | 6,230 |   |
|                                                               |       | 8,042                                                      |       | 9,393                                               |       | 25,818 |   | 41,402 |   |
|                                                               |       |                                                       |       |                                                |       |   |   |   |   |
| Loss from  operations                                              |       | (3,844                                                     | )          | (4,188                                              | )          | (11,440 | ) | (15,849 | ) |
|                                                               |       |                                                       |       |                                                |       |   |   |   |   |
| Other income,  net                                                 |       | 69                                                         |       | 187                                                 |       | 297 |   | 599 |   |
|                                                               |       |                                                       |       |                                                |       |   |   |   |   |
| Loss before  income taxes                                          |       | (3,775                                                     | )          | (4,001                                              | )          | (11,143 | ) | (15,250 | ) |
| Income tax  (benefit) expense                                      |       | (6                                                         | )          | —                                              |       | (8 | ) | 50 |   |
|                                                               |       |                                                       |       |                                                |       |   |   |   |   |
| Net loss                                                           |       | $                                                          | (3,769     | )                                                   | $          | (4,001 | ) | $ | (11,135 | ) | $ | (15,300 | ) |
|                                                               |       |                                                       |       |                                                |       |   |   |   |   |
| Net loss per  common share:                                        |       |                                                       |       |                                                |       |   |   |   |   |
| Basic                                                              |       | $                                                          | (.60       | )                                                   | $          | (.64 | ) | $ | (1.79 | ) | $ | (2.45 | ) |
| Diluted                                                            |       | $                                                          | (.60       | )                                                   | $          | (.64 | ) | $ | (1.79 | ) | $ | (2.45 | ) |
|                                                               |       |                                                       |       |                                                |       |   |   |   |   |
| Weighted average  shares outstanding:                              |       |                                                       |       |                                                |       |   |   |   |   |
| Basic                                                              |       | 6,233                                                      |       | 6,233                                               |       | 6,233 |   | 6,233 |   |
| Diluted                                                            |       | 6,233                                                      |       | 6,233                                               |       | 6,233 |   | 6,233 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

1

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**Metro One Telecommunications, Inc.**

**Condensed Consolidated BalanceSheets (Unaudited)**

 
| ** **                                                                                                                                                                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In thousands, except share amounts)**                                                                                                                                                                                      | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                                                                                        | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                                                                                        | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                                                                                                                                                                                              |       |                   |       |                  |       |
| Current assets:                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                        |       | $                      | 11,267     |                  | $          | 11,965 |   |
| Restricted cash                                                                                                                                                                                                                                   |       | 3,000                  |       | 4,741                 |       |
| Accounts  receivable, net                                                                                                                                                                                                                         |       | 2,621                  |       | 2,179                 |       |
| Prepaid costs  and other current assets                                                                                                                                                                                                           |       | 705                    |       | 961                   |       |
|                                                                                                                                                                                                                                              |       |                   |       |                  |       |
| Total current  assets                                                                                                                                                                                                                             |       | 17,593                 |       | 19,846                |       |
|                                                                                                                                                                                                                                              |       |                   |       |                  |       |
| Furniture,  fixtures and equipment, net                                                                                                                                                                                                           |       | 1,730                  |       | 3,014                 |       |
| Intangible  assets, net                                                                                                                                                                                                                           |       | 4,210                  |       | 4,666                 |       |
| Other assets                                                                                                                                                                                                                                      |       | 84                     |       | 86                    |       |
|                                                                                                                                                                                                                                              |       |                   |       |                  |       |
| Total assets                                                                                                                                                                                                                                      |       | $                      | 23,617     |                  | $          | 27,612 |   |
|                                                                                                                                                                                                                                              |       |                   |       |                  |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                                                                                                                    |       |                   |       |                  |       |
|                                                                                                                                                                                                                                              |       |                   |       |                  |       |
| Current  liabilities:                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                  |       | $                      | 692        |                  | $          | 983 |   |
| Accrued  liabilities                                                                                                                                                                                                                              |       | 1,595                  |       | 1,685                 |       |
| Accrued  dividends preferred stock                                                                                                                                                                                                                |       | 128                    |       | —                |       |
| Accrued payroll  and related costs                                                                                                                                                                                                                |       | 2,405                  |       | 3,898                 |       |
|                                                                                                                                                                                                                                              |       |                   |       |                  |       |
| Total current  liabilities                                                                                                                                                                                                                        |       | 4,820                  |       | 6,566                 |       |
|                                                                                                                                                                                                                                              |       |                   |       |                  |       |
| Other long-term  liabilities                                                                                                                                                                                                                      |       | 381                    |       | 470                   |       |
|                                                                                                                                                                                                                                              |       |                   |       |                  |       |
| Total  liabilities                                                                                                                                                                                                                                |       | 5,201                  |       | 7,036                 |       |
|                                                                                                                                                                                                                                              |       |                   |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                                                                    |       |                   |       |                  |       |
|                                                                                                                                                                                                                                              |       |                   |       |                  |       |
| Shareholders’  equity:                                                                                                                                                                                                                       |       |                   |       |                  |       |
| Preferred stock,  no par value, 10,000,000 shares authorized:                                                                                                                                                                                     |       |                   |       |                  |       |
| Series A  convertible preferred stock, 1,385 shares authorized 1,000 and 0 shares  issued and outstanding at September 30, 2007 and December 31, 2006,  respectively; liquidation preference of $10,000 plus cumulative unpaid  dividends of $127 |       | 9,070                  |       | —                |       |
| Preferred stock  discount and beneficial conversion feature                                                                                                                                                                                       |       | 3,472                  |       | —                |       |
|                                                                                                                                                                                                                                              |       |                   |       |                  |       |
| Common stock, no  par value; 50,000,000 shares authorized, 6,233,326 shares issued and  outstanding at September 30, 2007 and December 31, 2006, respectively                                                                                     |       | 120,100                |       | 120,067               |       |
| Accumulated  deficit                                                                                                                                                                                                                              |       | (114,226               | )          | (99,491               | )          |
|                                                                                                                                                                                                                                              |       |                   |       |                  |       |
| Total  shareholders’ equity                                                                                                                                                                                                                  |       | 18,416                 |       | 20,576                |       |
|                                                                                                                                                                                                                                              |       |                   |       |                  |       |
| Total liabilities  and shareholders’ equity                                                                                                                                                                                                  |       | $                      | 23,617     |                  | $          | 27,612 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

2

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**Metro One Telecommunications, Inc.**

**Condensed Consolidated Statementsof Cash Flows for the nine months ended September 30, 2007 and 2006**

 
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(In thousands)**                                                      | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
|                                                                         |       |                                                    |       |   |   |
| Cash flows used  in operating activities:                                    |       |                                                    |       |   |   |
| Net loss                                                                     |       | $                                                       | (11,135    | ) | $ | (15,300 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                                    |       |   |   |
| Depreciation and  amortization                                               |       | 1,670                                                   |       | 3,040 |   |
| Loss on disposal  of fixed assets                                            |       | 99                                                      |       | 1,117 |   |
| Deferred rent                                                                |       | (89                                                     | )          | 56 |   |
| Stock  compensation expense                                                  |       | 33                                                      |       | 92 |   |
| Changes in certain  assets and liabilities:                                  |       |                                                    |       |   |   |
| Accounts  receivable                                                         |       | (442                                                    | )          | 9,146 |   |
| Prepaid costs  and other current assets                                      |       | 267                                                     |       | 575 |   |
| Accounts payable  and other liabilities                                      |       | (1,874                                                  | )          | (5,390 | ) |
|                                                                         |       |                                                    |       |   |   |
| Net cash used in  operating activities                                       |       | (11,471                                                 | )          | (6,664 | ) |
|                                                                         |       |                                                    |       |   |   |
| Cash flows from  investing activities:                                       |       |                                                    |       |   |   |
| Decrease in cash  restricted to secure letter of credit                      |       | 1,741                                                   |       | 1,144 |   |
| Capital  expenditures                                                        |       | (60                                                     | )          | (233 | ) |
| Proceeds from  sale of assets                                                |       | 22                                                      |       | 817 |   |
|                                                                         |       |                                                    |       |   |   |
| Net cash  provided by investing activities                                   |       | 1,703                                                   |       | 1,728 |   |
|                                                                         |       |                                                    |       |   |   |
| Cash flows from  financing activities:                                       |       |                                                    |       |   |   |
| Proceeds from  issuance of convertible preferred stock, net                  |       | 9,070                                                   |       | — |   |
|                                                                         |       |                                                    |       |   |   |
| Net cash  provided by financing activities                                   |       | 9,070                                                   |       | — |   |
|                                                                         |       |                                                    |       |   |   |
| Net decrease in  cash and cash equivalents                                   |       | (698                                                    | )          | (4,936 | ) |
|                                                                         |       |                                                    |       |   |   |
| Cash and cash  equivalents, beginning of period                              |       | 11,965                                                  |       | 17,769 |   |
|                                                                         |       |                                                    |       |   |   |
| Cash and cash  equivalents, end of period                                    |       | $                                                       | 11,267     |   | $ | 12,833 |   |
|                                                                         |       |                                                    |       |   |   |
| Supplemental  disclosure of cash flow information:                           |       |                                                    |       |   |   |
| Cash paid for  income taxes, net                                             |       | $                                                       | 8          |   | $ | 109 |   |
|                                                                         |       |                                                    |       |   |   |   |   |
| **Non-cash  financing activities:**                                          |       |                                                    |       |   |   |   |   |

 

For the three and ninemonth periods ended September 30, 2007, the Company accrued approximately $128of liability to accumulated dividends payable on the convertible preferredstock.

 

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

 

3

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**Metro One Telecommunications, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements (Unaudited)**

 

**1.             Summary of Significant AccountingPolicies**

 

**Basis of Presentation**

 

The accompanyingunaudited interim condensed consolidated financial statements have beenprepared by Metro One Telecommunications, Inc. in conformity with accountingprinciples generally accepted in the United States of America (“US GAAP”) forinterim financial information. Accordingly, certain financial information andfootnotes have been omitted or condensed. In the opinion of management, thecondensed financial statements include all adjustments necessary for a fairpresentation of the results for the interim periods. These condensedconsolidated financial statements and notes thereto should be read inconjunction with our audited financial statements included in our Annual Reporton Form 10-K for the year ended December 31, 2006. The results of operationsfor the interim periods shown in this report are not necessarily indicative ofresults for future interim periods or the entire fiscal year.

 

The condensedconsolidated financial statements include the accounts of Metro OneTelecommunications, Inc. and its wholly-owned subsidiaries. All significantintercompany balances and transactions have been eliminated in consolidation.

 

On July 6, 2006, weeffected a one-for-four reverse split of our common stock. All share and pershare data presented in the accompanying financial statements and notes theretohave been restated for the reverse stock split.

 

**Cash, Cash Equivalents, andRestricted Cash**

 

Cash and cash equivalentsinclude cash deposits in banks and highly liquid investments with maturitydates of three months or less at the date of acquisition. Restricted cashconsists of cash restricted to secure a letter of credit related to our workers’compensation program and is invested in a bank certificate of deposit.

 

**Stock-Based Compensation**

 

Effective January 1,2006, we adopted the fair value recognition provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” (“SFAS123R”), under which compensation expense is recognized in the condensedconsolidated statement of operations for the fair value of employee stock-basedcompensation. We elected the modified-prospective transition method aspermitted by SFAS No. 123R and accordingly, prior periods have not beenrestated to reflect the effect of SFAS No. 123R. The modified-prospectivetransition method requires that stock-based compensation expense recognized inthe Condensed Consolidated Statements of Operations include (1) quarterlyamortization of all stock-based compensation granted prior to, but not vestedas of January 1, 2006, based on the grant date fair value estimated inaccordance with the original provisions of SFAS No. 123 and(2) quarterly amortization of all stock-based payments granted subsequentto January 1, 2006, based on the grant date fair value estimated inaccordance with the provisions of SFAS No. 123R. In addition, pursuant toSFAS No. 123R, we estimate forfeitures when calculating stock-basedcompensation expense, rather than accounting for forfeitures as incurred, whichwas our previous method. Compensation expense is recognized over the requisiteservice (vesting) period using the straight-line attribution method.

 

Stock compensationexpense recognized in accordance with SFAS No. 123R for the three and ninemonth periods ended September 30, 2007 was approximately $12,000 and $33,000,respectively. Stock compensation expense recorded was approximately $92,000 forboth the three and nine month periods ended September 30, 2006. The effect ofrecording stock-based compensation on basic and diluted earnings per share forthe three and nine month periods ended September 30, 2007 and 2006 was notmaterial to our per share loss in those periods. Costs related to stock-basedcompensation are recorded in selling, general, and administrative expenses inthe statements of operations.

 

Options to purchase ourcommon stock are granted at prices equal to or greater than the fair marketvalue on the date of grant. Options granted to directors generally vestimmediately while options granted to employees generally vest and becomeexercisable quarterly over a four year period. All options generally expire tenyears from the date of the grant.

 

4

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We estimate the fairvalue of stock options using the Black-Scholes option pricing model. Key inputassumptions used to estimate the fair value of stock options include theexercise price of the award, the expected option term, the expected volatilityof our stock over the option’s expected term, and the risk-free interest rateover the option’s expected term and our expected annual dividend yield. Theexpected option term represents the estimated time until exercise and is basedon our historical experience with similar awards, taking into considerationcontractual terms, vesting schedules and expected employee behavior. Theexpected stock price volatility is based on the historical volatility of ourstock over the most recent period equal to the expected term of the option,adjusted for activity that is not expected to occur in the future. Therisk-free interest rate is based on the U.S. Treasury yield curve in effect atthe time of grant for periods corresponding with the expected term of theoption. We have not yet paid a dividend, and thus the dividend yield is 0.0%. Prospectively,the assumptions will be evaluated and revised as necessary to reflect changesin market conditions and our experience.

 

Estimates of fair valueare not intended to predict actual future events or the value ultimatelyrealized by people who receive equity awards.

 

**RecentAccounting Pronouncements.**

 

In February 2007,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, *The Fair Value Option for Financial Assets and FinancialLiabilities* (“SFAS 159”).SFAS 159 provides companies with an option to report selected financial assetsand liabilities at fair value. SFAS 159 also establishes presentation anddisclosure requirements designed to facilitate comparisons between companiesthat choose different measurement attributes for similar types of assets andliabilities and to provide additional information that will help investors andother financial statement users to more easily understand the effect of a company’schoice to use fair value on its earnings. Finally, SFAS 159 requires entitiesto display the fair value of those assets and liabilities for which a companyhas chosen to use fair value on the face of the balance sheet. SFAS 159 iseffective as of the beginning of an entity’s first fiscal year beginning afterNovember 15, 2007. We are currently assessing the impact of SFAS 159 whichwe will be required to adopt in the first quarter of our 2008 fiscal year.

 

In May 2007, the FASBissued FSP FIN 48-1, *Definition of Settlementin FASB Interpretation No. 48* (“FSP FIN 48-1”).  FSP FIN48-1 clarifies when a tax position is considered settled under FIN 48. Per FSP FIN 48-1, a tax position is considered “effectively settled” uponcompletion of the examination by the taxing authority without being legallyextinguished.  For “effectively settled” tax positions, a company canrecognize the full amount of the tax benefit.  FSP FIN 48-1 is effectiveupon a company’s adoption of FIN 48.  See further discussion of FIN 48below.  FSP FIN 48-1 did not have a material impact on our consolidatedfinancial position or results of operations.

 

In July 2006, the FASBissued Interpretation No. 48, “*Accounting for Uncertaintyin Income Taxes – an interpretation of FASB Statement No. 109*”(“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attributefor financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. FIN 48 is effective for our fiscal yearbeginning January 1, 2007. The adoption of this statement has not had amaterial effect on our consolidated financial position or results ofoperations.

 

In September 2006, theFASB issued SFAS No. 157, “*Fair Value Measurements*”(“SFAS 157”), which establishes a framework for measuring the fair value ofassets and liabilities. This framework is intended to increase consistency inhow fair value determinations are made under various existing accountingstandards that permit, or in some cases require, estimates of fair market value.SFAS 157 also expands financial statement disclosure requirements about acompany’s use of fair value measurements, including the effect of such measureson earnings. SFAS 157 is effective for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. We donot expect the adoption of this statement to have a material effect on ourconsolidated financial position or results of operations.

 

**2.             Restructuring Charges and ExitActivities**

 

In the third quarter andfirst nine months of 2007, we have continued to focus our efforts on reducingour operating costs and establishing long-term viability and stability. To thatend, we incurred approximately $221,000 of restructuring expenses in the thirdquarter of 2007, which consisted primarily of payments to our strategicadvisors for assistance with our operational, strategic and financial initiatives.During the first nine months of 2007, we

 

5

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incurred approximately $1.1million of restructuring expenses primarily associated with one-timetermination benefits related to head-count reductions as well as other costsprimarily associated with efforts to select and engage our strategic advisors.

 

In the first nine monthsof 2006, we undertook significant restructuring activities, due primarily tothe loss of a major customer. We closed 13 call centers and significantlyreduced the number of call center and administrative employees and recordedrestructuring charges in the third quarter and first nine months of 2006totaling $453,000 and $6.2 million, respectively.

 

Costs incurred in ourrestructuring activities during the third quarter and first nine months of 2007are shown in the following table (in thousands).

 

 
| ** **                               | ** ** | **Three months ended  September 30, 2007** | ** ** | **Nine months ended  September 30, 2007** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Major cost type                          |       |                                                           |       |                                                          |       |
|                                     |       |                                                           |       |                                                          |       |
| One-time  termination benefits           |       | $                                                              | 13         |                                                          | $          | 161 |   |
| Lease  termination costs                 |       | (1                                                             | )          | 8                                                             |       |
| Consulting,  professional and other fees |       | 209                                                            |       | 961                                                           |       |
|                                     |       | $                                                              | 221        |                                                          | $          | 1,130 |   |

 

The following summarizesthe provisions, payments, adjustments and liability for costs associated withour cost reduction efforts for the period shown (in thousands):

 
| ** **                      | ** ** | **One-time**              | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------------------|------------|-----------------------------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **termination  benefits** | ** ** | **Lease  termination costs** | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|                            |       |                      |       |                              |       |       |       |       |       |
| Balance at  January 1, 2007     |       | $                         | 520        |                              | $          | 192        |       | $          | —     |   | $ | 712 |   |
| Provisions                      |       | 113                       |       | 24                                |       | 345        |       | 482        |       |
| Payments                        |       | (633                      | )          | (74                               | )          | (345       | )          | (1,052     | )          |
| Adjustments                     |       | —                    |       | —                            |       | —     |       | —     |       |
| Balance at March  31, 2007      |       | $                         | —     |                              | $          | 142        |       | $          | —     |   | $ | 142 |   |
| Provisions                      |       | 35                        |       | (15                               | )          | 407        |       | 427        |       |
| Payments                        |       | (17                       | )          | (45                               | )          | (407       | )          | (469       | )          |
| Adjustments and  non-cash items |       | —                    |       | (82                               | )          | —     |       | (82        | )          |
| Balance at June  30, 2007       |       | $                         | 18         |                              | $          | —     |       | $          | —     |   | $ | 18 |   |
| Provisions                      |       | 13                        |       | (1                                | )          | 209        |       | 221        |       |
| Payments                        |       | —                    |       | —                            |       | (209       | )          | (209       | )          |
| Adjustments and  non-cash items |       | —                    |       | 1                                 |       | —     |       | 1          |       |
| Balance at  September 30, 2007  |       | $                         | 31         |                              | $          | —     |       | $          | —     |   | $ | 31 |   |

 

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

 

**3.             Net Loss Per Share**

 

Basic net loss per share is based on the weightedaverage number of shares of common stock outstanding. Diluted net loss pershare reflects the potential dilution that could occur if outstanding optionsto purchase common stock were exercised or converted into common stock. Therewere no adjustments to net loss for the calculation of both basic and dilutednet loss per share for all periods. For all periods presented in thesefinancial statements, the calculation of weighted-average outstanding shares isthe same on both a basic and diluted basis because inclusion of 

 

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potential common shares would be anti-dilutive.

 

Options to purchase approximately 513,000 and 568,000shares of common stock were outstanding at September 30, 2007 and 2006,respectively, but were not included in the computation of diluted net loss pershare because their effect would be anti-dilutive.  In addition, sharesresulting from conversion of convertible preferred stock and warrants describedin Note 5 under “Financing arrangement” below were not included in thecomputation of diluted net loss per share because their effect would beanti-dilutive.

 

**4.             Commitments and Contingencies**

 

From time to time, we are party to various legal actions andadministrative proceedings arising in the ordinary course of business. Webelieve the disposition of these matters will not have a material adverseeffect on our financial position, results of operations or cash flows.

 

From time to time, in the normal course of our business, we issuestandby letters of credit and bank guarantees. At September 30, 2007, we hadone letter of credit outstanding in the amount of $3,000,000 related to ourworkers’ compensation program. The letter of credit is secured by a certificateof deposit for the same amount that is recorded as restricted cash. This letterof credit expires in March 2008. In August 2007, the benefactor of the letterof credit agreed to a reduction in the amount of the letter of credit from $4.7million to $3.0 million based on lower than expected workers’ compensationclaims. The result was a reduction in the restricted cash balance andcertificate of deposit securing the letter which released $1.7 million of fundsfor our use.

 

**5.             Significant Events**

 

**Financing arrangement**

 

On June 5, 2007, we entered into a private financing transaction (“financingtransaction”) pursuant to a Securities Purchase Agreement (the “PurchaseAgreement”) by and among Metro One and Columbia Ventures Corporation (“Columbia”)and Everest Special Situations Fund L.P. (“Everest”, together with Columbia,the “investors”).  Pursuant to the Purchase Agreement, on June 5, 2007, weissued to the investors (i) 220 shares of its newly authorized Series AConvertible Preferred Stock, no par value (the “convertible preferred stock”),at a stated value of $10,000 per share, (ii) Stock Purchase Warrants topurchase an additional 77 shares of the convertible preferred stock at an initialexercise price of $10,000 per share of convertible preferred stock (the “warrants”)and (iii) Senior Secured Convertible Revolver Bridge Notes having a maximumprincipal amount of $7,800,000 and, subject to approval of our shareholders,convertible into shares of convertible preferred stock (the “notes” andtogether with the convertible preferred stock and the warrants, the “securities”).We received $2.2 million in gross proceeds in the initial closing.

 

At the annual meeting of shareholders held on August 14, 2007, theholders of our common stock approved, among other things, the issuance ofadditional shares in the financing, permitting the second closing to take place.At a second closing held on August 15, 2007, we drew down the maximum principalamount of $7.8 million under the notes, and the notes were immediatelyconverted into 780 shares of convertible preferred stock and the securityinterest we granted in certain of our assets as security for repayment of thenotes was released. No amounts had been drawn under the notes prior to thesecond closing. In addition, we issued warrants to the investors for thepurchase of an additional 273 shares of convertible preferred stock at an initialexercise price of $10,000 per share. We received $7.8 million in gross proceedsat the second closing.

 

The number of shares of convertible preferred stock that can bepurchased on exercise of the warrants represents 35% of the number of shares ofconvertible preferred stock issued in the financing. The warrants are currentlyexercisable over a two year period at an initial all cash exercise price of$10,000 per share. If all of the convertible preferred stock issued to theinvestors is converted into shares of common stock, the warrants will beexchanged for warrants to purchase common stock.

 

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At the initial conversion price, the 1,000 shares of convertiblepreferred stock currently outstanding are convertible into an aggregate of5,617,977 shares of our common stock and, if the warrants are exercised infull, we will receive an additional $3.5 million and the 350 shares ofconvertible preferred stock purchased on exercise of the warrants will be convertibleinto an aggregate of 1,966,292 shares of common stock at the initial conversionprice. A cumulative dividend of 4% is payable on each share of outstanding convertiblepreferred stock on June 5th of each year with the first dividendpayment due on June 5th, 2008.

 

In connection with the sale of the securities to the investors, weentered into a Registration Rights Agreement with the investors dated as ofJune 5, 2007 (the “Registration Rights Agreement”), which requires us to use ourbest efforts to register on Form S-3 under the Securities Act of 1933, asamended (the “Securities Act”), the shares of common stock issuable uponconversion of the convertible preferred stock (including those shares ofconvertible preferred stock issuable on exercise of warrants). Should itbe determined that we are not eligible to register these shares on Form S-3, wewill be required to register the shares on Form S-1 and will be required tofile the Form S-1 within 60 days after it is determined that the Form S-3registration is not available. Under the Registration Rights Agreement, asamended, we will incur penalties if, among other things, the Form S-3registration statement is not declared effective by the Securities and ExchangeCommission on or prior to December 3, 2007, or if the registration is on FormS-1, within 120 days after being first filed on Form S-1. The penalties,payable to the holders of the convertible preferred stock and warrantsproportionately to their holdings, is 1.25% of the purchase price of thepreferred stock (or $125,000) for each 30-day period during which theeffectiveness of the registration statement is delayed beyond the applicablefinal date, which amount is prorated for any partial period of delay. Penaltiesmay not exceed 20% of the purchase price of the preferred stock (or $2,000,000).The Registration Rights Agreement also provides the investors with demand andpiggyback registration rights under the Securities Act for shares of commonstock issuable upon conversion of the convertible preferred stock (includingshares of convertible preferred stock issuable on exercise of warrants orconversion of the notes).

 

The convertible preferred stock is convertible into shares of ourcommon stock at an initial conversion price of $1.78 per share.  Inaccordance with EITF Issue 98-5, *Accounting for ConvertibleSecurities with Beneficial Conversion Features or Contingently AdjustableConversion Ratios* we had evaluated if the convertible preferredstock had a beneficial conversion feature as the conversion price was less thanthe fair value of our common stock on the measurement date. Under paragraph 6of EITF 98-5, the discount related to the beneficial conversion feature wouldbe calculated based on its intrinsic value which was approximately $1.7 million.The fair value of the warrants, also based on intrinsic value, wasapproximately $1.7 million.  Theseamounts are reflected on the balance sheet in the preferred stock discount andbeneficial conversion feature.

 

**Nasdaqlisting issues**

 

On June 27, 2007, wereceived a Nasdaq Staff Deficiency Letter informing us that we no longer complywith Nasdaq’s audit committee requirements for continued listing as set forthin Marketplace Rule 4350. Marketplace Rule 4350(d)(2)(A) requires that theaudit committee of each Nasdaq issuer have at least three members, each ofwhom, among other things, must be independent as defined under Marketplace Rule4200(a)(15) and meets the criteria for independence set forth in SEC Rule10A-3(b)(1) under the Securities Exchange Act of 1934, as amended. Currently, ourAudit Committee is comprised of two independent members.

 

We were advised in theletter that we will be provided a cure period in order to regain complianceuntil December 3, 2007. The letter also stated that, in the event we do notregain compliance within this period, we will be provided written notificationthat our securities will be delisted.

 

Our Board of Directorsintends to take the necessary action to appoint an independent member to theAudit Committee within the cure period provided so as to maintain continuedNasdaq listing.

 

**Terminationof contract**

 

In February 2005, weentered into a Master Services Agreement for Directory Assistance Services (the“Services Agreement”) with Nextel Operations, Inc., acting on behalf of certainaffiliates (collectively “Nextel”) of Nextel Communications, Inc. The ServicesAgreement superseded our previous services agreement dated in June 1999. Underthe Services Agreement, we agreed to provide directory assistance services toNextel’s customers on a non-

 

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exclusive basis, andNextel could transition call volume away from us on short notice and/orterminate services entirely.

 

In October 2005, wereceived notification from Nextel that it would be terminating the ServicesAgreement effective January 9, 2006. In February 2006, we entered into aSettlement Agreement and Disentanglement Transition Plan (the “Plan”) withNextel that resolved certain disputed matters in connection with thetermination of the Services Agreement. Under the Plan, we continued to provideservices to Nextel callers through March 31, 2006 in return for the payment byNextel of approximately $5.75 million. Those payments were in addition to $2.5million previously paid by Nextel in December 2005 in connection with thetransition and in addition to the contractual payments by Nextel for normalservice provided by Metro One to Nextel callers through the transition period. Callsfrom Nextel were substantially transitioned away from us by March 31, 2006, andwe have received all amounts due from Nextel as of the date of this filing. Includingthe $5.75 million received in the first quarter of 2006 as part of thesettlement payments, Nextel represented approximately 44% of our revenues forthe first nine months of 2006.

 

Termination of theServices Agreement and other customer losses has had, and will continue tohave, a significant adverse impact on our results of operations and cash flows.We have experienced net losses in each of the quarterly and annual periodsbeginning with the second quarter of 2003. It is likely that we will continueto experience operating losses in the fourth quarter of 2007 and parts or allof 2008. Our management is working to aggressively pursue new and additionalsources of revenues to support our reduced cost structure, further reduce thedirect cost of delivering our services and reduce our general andadministrative overhead, and develop and grow our data services business. Therecan be no assurance that management’s plans will be successful. In that case,we may need additional cash to fund our operations and/or pursue our businessinitiatives during 2008. We may attempt to establish borrowing arrangements orotherwise raise additional funds in order to maintain adequate liquidity. Wecannot provide assurance that borrowing or other funding will be available inamounts or on terms acceptable to us. If we are unable to execute ouroperations according to our plan or obtain additional financing, we may beforced to cease operations. For the remainder of 2007, we expect to meet ourcash requirements using our existing cash and cash equivalents includingproceeds from our recently completed sale of convertible preferred stock.

 

**Significant new contract**

 

In August 2006, we entered into a Telecom Information ServicesAgreement (the “Agreement”) with Jingle Networks, Inc. (“Jingle”). Under theAgreement, we are a preferred directory assistance provider for “1-800-FREE411.”  In addition to per call charges, theAgreement includes financial commitments from Jingle based on call volumeexpansion and other financial incentives. The Agreement is for three years andwill automatically renew annually for up to two additional years unless eitherparty provides notice of termination at least 60 days prior to the commencementof such renewal period. Under the Agreement, as a preferred directory providerwe will be allocated no fewer calls than any other vendor providing similarservices. The Agreement provides that our status as a preferred provider may beterminated by Jingle but, in such event, the warrants described below will beterminated. Jingle accounted for approximately 18% and 33% of our revenue inthe third quarter and first nine months of 2007, respectively. As a result ofJingle’s increased automation of its call volume in September 2007, revenues inOctober declined to $0. We do not expect to service additional Jingle calls forthe remainder of 2007.

 

In connection with the Agreement, we issued to Jingle two warrants topurchase shares of our common stock. The first warrant was for the purchase ofup to 623,250 shares of common stock at an exercise price of $2.60 per share. Thewarrant was exercisable under the condition that Jingle meet certain revenueand payment thresholds through February 28, 2007. The revenue and payment targetswere not met, and accordingly, the first warrant expired and terminated unexercisedeffective as of February 28, 2007.

 

The second warrant is for the purchase of up to 870,075 shares of ourcommon stock; provided, however, that shares represented by the sum of thefirst and second warrants, if exercised, cannot exceed 19.98% of our totalshares outstanding after the warrants are exercised. The exercise price for thesecond warrant is $4.55, which was the July 1, 2006 book value of our commonstock determined on the basis of our US GAAP financial statements. The secondwarrant will not be exercisable unless and until certain revenue and paymentthresholds are achieved by Jingle during specified time periods as outlined inthe Agreement. The second warrant terminates on July 1, 2009. Since we are notobligated to accept call volume from Jingle in any month that exceed by acertain percentage the call volume 

 

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from Jingle in the immediately preceding month, unless we were to waivethis limitation on increased call volume, Jingle will not be able to meet therevenue and payment thresholds necessary for the second warrant to becomeexercisable. Since Jingle did not meet the revenue targets necessary for thefirst warrants to become exercisable and it is not likely that they will meetthe revenue targets for the second warrants to become exercisable, we have notrecognized any expense amounts in our financial statements related to the valueof the first or the second warrants.

 

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| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION  AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

#### ** **

All statements and trend analyses contained in this item and elsewherein this report on Form 10-Q relative to the future constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. These forward-looking statements may, but do not necessarily, alsoinclude words such as “believes,” “expects,” “anticipates,” “plans,” “estimates,”“may,” “will,” “should,” “could,” “continue” or similar expressions. Forward-lookingstatements are not guarantees. They involve known and unknown business andeconomic risks, uncertainties and other factors that may cause our actualresults, performance or achievements to be materially different from any futureresults, performance or achievements expressed or implied by suchforward-looking statements. These risks, uncertainties and other factorsinclude the expiration or pricing of customer contracts, the successfulexecution of our cost reduction efforts and current business strategy, and ourability to generate cash from operations, and other risks, including thosediscussed in our most recent Annual Report on Form 10-K filed with theSecurities and Exchange Commission (the “SEC”) and those described in our otherfilings with the SEC, press releases and other communications. Anyforward-looking statement in this report reflects our expectations at the timeof this report only. We undertake no obligation to publicly release any revisionsto these forward-looking statements to reflect events or circumstances afterthe date hereof or to reflect the occurrence of unanticipated events.

 

#### **Overview**

#### ** **

We are a provider of Enhanced Directory Assistance® and otherinformation services delivered through live operators and by electronic means. Wecontract primarily with wireless carriers, Voice over Internet Protocol (“VoIP”)providers, cable companies, Competitive Local Exchange Carriers (“CLEC”),Incumbent Local Exchange Carriers (“ILEC”), free directory assistanceproviders, prepaid carriers, and payphone operators to provide our services totheir subscribers and users. Our proprietary Enhanced Directory Assistanceplatform provides comprehensive directory assistance listings and otherinformational content and services. Other non-directory assistance services andcontent include access to movie listings and a variety of other unique services.Our special return-to-operator features, StarBack® and AutoBack®, make thetelephone easier to use and are offered exclusively by Metro One. All of ourservices are provided by operators located only in the United States orelectronically. Many of our features or aspects thereof are the subject ofpatents or pending patent applications. Revenues are derived principallythrough fees charged to telecommunications carriers and other customers.

 

In addition to voice-based services, we also provide Enhanced DirectoryAssistance services in electronic format. These services are provided tocustomers who electronically issue directory assistance queries and use thereturned information to complete and correct their own data records. Wecurrently provide electronic directory assistance services in a number ofdelivery formats to meet customer needs including automated file processing andreal-time individual look ups. We contract with a broad range of companies thatrequire electronic directory assistance including companies in the service,marketing, and financial sectors. Our Data Services business represents an emergingbusiness based on infrastructure originally developed to support ourvoice-based call center business.

 

Under a typical wholesale contract, a carrier agrees to route some orall of their directory assistance calls to us. We offer our services to multiplecarriers within the same market. When a carrier’s subscribers dial a typicaldirectory assistance number, such as “411,” “555-1212” or “00,” the calls arerouted to and answered by our live operators or the automated equivalent, identifyingthe service by that carrier’s brand name.

 

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

 

We charge our carrier customers on a per call basis. Prices forservices provided to other types of customers, including businesses,governmental units or customers who receive our services in electronic form,may vary based on the nature of the service, volume and other circumstances.

 

As discussed in Note 5 to the Condensed Consolidated FinancialStatements (Unaudited), as a result of the termination of contracts withsignificant customers, we have experienced significant financial losses andreduction of cash flows over the last several years. These losses have had, andwill continue to have, a significant adverse impact 

 

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on our results of operations and cash flows. We have experienced netlosses in each of the quarterly and annual periods beginning with the secondquarter of 2003. It is likely that we will continue to experience operatinglosses in the fourth quarter of 2007 and parts or all of 2008. Our managementis working to aggressively pursue new and additional sources of revenues tosupport our reduced cost structure, further reduce the direct cost ofdelivering our services and reduce our general and administrative overhead, anddevelop and grow our data services business. There can be no assurance thatmanagement’s plans will be successful. In that case, we may need additionalcash to fund our operations and/or pursue our business initiatives during 2008.We may attempt to establish borrowing arrangements or otherwise raiseadditional funds in order to maintain adequate liquidity. We cannot provideassurance that borrowing or other funding will be available in amounts or onterms acceptable to us. If we are unable to execute our operations according toour plan or obtain additional financing, we may be forced to cease operations. Forthe remainder of 2007, we expect to meet our cash requirements using ourexisting cash and cash equivalents including proceeds from our recentlycompleted sale of convertible preferred stock.

 

**Significant Events**

 

**Restructuring.**

 

In the third quarter andfirst nine months of 2007, we have continued to focus our efforts on reducingour operating costs and establishing long-term viability and stability. To thatend, we incurred approximately $221,000 of restructuring expenses in the thirdquarter of 2007, which consisted primarily of payments to our strategicadvisors for assistance with our operational, strategic and financialinitiatives. During the first nine months of 2007, we incurred approximately$1.1 million of restructuring expenses primarily associated with one-timetermination benefits related to head-count reductions as well as other costsprimarily associated with efforts to select and engage our strategic advisors.

 

**Other significant events.**

 

See Note 5 of the Notesto the Condensed Consolidated Financial Statements (Unaudited) for a discussionof the financing arrangement, Nasdaq listing issues, termination of contract,and significant new contract.

 

**Results of Operations**

 

This table shows selecteditems from our statements of operations expressed as a percentage of revenues:

 
| ** **                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Revenues                                   |       | 100.0                                                | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |
| Direct operating  costs                    |       | 88.7                                                 |       | 72.8                                                |       | 83.5 |   | 59.9 |   |
| Selling, general  and administrative costs |       | 85.4                                                 |       | 85.8                                                |       | 76.6 |   | 65.8 |   |
| Depreciation and  amortization             |       | 12.2                                                 |       | 13.2                                                |       | 11.6 |   | 11.9 |   |
| Restructuring  charges                     |       | 5.3                                                  |       | 8.7                                                 |       | 7.9 |   | 24.4 |   |
| Loss from  operations                      |       | (91.6                                                | )          | (80.5                                               | )          | (79.6 | ) | (62.0 | ) |
| Other income,  net                         |       | 1.6                                                  |       | 3.6                                                 |       | 2.1 |   | 2.3 |   |
| Loss before  income taxes                  |       | (90.0                                                | )          | (76.9                                               | )          | (77.5 | ) | (59.7 | ) |
| Income tax  (benefit)                      |       | (0.1                                                 | )          | 0.0                                                 |       | (0.1 | ) | 0.2 |   |
| Net loss                                   |       | (89.9                                                | )%         | (76.9                                               | )%         | (77.4 | )% | (59.9 | )% |

 

*Comparison of third quarter 2007to third quarter 2006*

 

Revenues decreased 19.3% to $4.2 million from $5.2 million due to loweraverage revenue per call offset by a slight increase in call volume. Averagerevenue per call was approximately $0.20 in the third quarter of 2007 comparedwith $0.25 in the third quarter of 2006. Call volume was 19.5 million and 19.2million in the third quarter of 2007 and 2006, respectively. Average revenueper call was lower in the third quarter of 2007 reflecting the effect of newcustomer additions and existing customer contract renewals, both at rates belowthe average revenue per call earned in third quarter of 2006. We expect marketrates will continue to trend downward in the near term and to negatively affectour average revenue per call as we continue to sign new agreements.

 

Direct operating costsconsist of salaries, wages, benefits and payroll taxes relating to call centerpersonnel plus the costs of listings data and content acquisition. These costs decreased1.7% to $3.7 million in the third quarter of 2007 compared with $3.8 million inthe third quarter of 2006. This decrease was due to an approximate 10% decreasein 

 

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the average hourly fullyloaded labor rate for servicing those calls offset by an approximate 9%decrease in operator productivity. As a percentage of revenues, directoperating costs increased to approximately 88.7% from 72.8% in the thirdquarter of 2007, primarily resulting from the decrease in the average revenueper call. We will continue to work to find the optimal balance between laborrates and productivity in our efforts to reduce costs faster than the declinesin average revenue per call.

 

Selling, general andadministrative costs decreased 19.8% to $3.6 million from $4.5 million. Thisdecrease resulted primarily from continued overall efforts to reduceadministrative costs including network and facilities costs, legal and otherprofessional services and administrative payroll. As a percentage of revenues,selling, general and administrative costs were unchanged due to lower revenue.

 

Depreciation andamortization expense decreased 25.1% to $ 514,000 from $686,000. The decreasein depreciation and amortization was due primarily to the overall reduction inacquisition of fixed assets in the last several years as operations have beenreduced. Depreciation and amortization decreased to 12.2% from 13.2% of revenueas a result of our reduced operations facilities in place.

 

Restructuring charges inthe quarter ended September 30, 2007 were $221,000 and consisted primarily ofpayments to our strategic advisors for assistance with our operational,strategic and financial initiatives. Net restructuring costs in the thirdquarter of 2006 were $453,000 and consisted primarily of one-time terminationbenefits for employees of approximately $342,000, and dismantling costs relatedto the closed call centers of approximately $171,000, partially offset by lowercosts incurred on lease settlements than were previously accrued for thoseleases.

 

Other income was $69,000and $187,000 in the third quarter of 2007 and 2006, respectively, and consistedprimarily of interest income earned on cash and cash equivalents. The reductionin interest income was due to a decrease in cash available for investing.

 

Because of our operatinglosses in the third quarters of 2007 and 2006, we recorded no net federal orstate income tax expense. We have a valuation allowance against deferred taxassets associated with operating losses in this and prior quarters and otherdeferred tax assets because it is deemed more likely than not that these assetswill not be realized. Accordingly, no federal income tax benefit has beenrecorded with respect to these deferred tax assets.

 

#### **Liquidity and Capital Resources**

#### ** **

As of September 30, 2007, we had approximately $14.3million in cash and cash equivalents and restricted cash (including $3.0million of restricted cash) compared to approximately $16.7 million (including$4.7 million of restricted cash) at December 31, 2006. As noted aboveunder “Financing arrangement” in Note 5 of the Notes to the CondensedConsolidated Financial Statements (Unaudited), during the second and thirdquarters of 2007, we received net proceeds of approximately $9.1 million fromour convertible preferred stock sale. In addition, during the third quarter of 2007,we received a release of $1.7 million from the restricted cash account thatsecures our letter of credit for our formerly self-insured workers’compensation program. Excluding these non-recurring events, our operationsconsumed approximately $11.5 million of cash in the first nine months of 2007primarily from net operating losses and restructuring costs. Management’s goalis to restructure our operations to achieve positive, sustainable cash flow andearnings and we believe we have made significant progress toward that goal. Therecan be, however, no assurances that our cash resources will be sufficient toachieve that goal in the near term or ever.

 

Cash and cash equivalents and restricted cash are recorded at costwhich approximates their fair market value. We have no outstanding debt, but wemust pay a 4% cumulative dividend on the outstanding convertible preferredstock on June 5th of each year beginning in 2008.

 

*Cash flow from operations.*Netcash used in operations was $11.5 million in the first nine months of 2007compared to net cash used in operations of $6.7 million in the first nine monthsof 2006. This difference of approximately $4.8 million resulted primarily froma net decrease in cash received from customers of approximately $20.8 millionpartially offset by net decreases in cash paid to or on behalf of employees of$7.9 million, decrease of $3.8 million in cash paid to suppliers and cash paidfor restructuring activities of $4.2 million.

 

*Cash flow from investing activities.*Cashflow from investing activities was $1.7 million in the first nine months of2007 resulting primarily from the release of cash securing our letter of creditas discussed above. Cash flow from investing activities was $1.7 million in thefirst nine months of 2006 as well, primarily resulting from the release of

 

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$1.1 million of cash securing our letter of credit andreceipt of proceeds from the sale of assets of approximately $800,000.

 

*Cash flow from financing activities*.Cash flow from financing activities was $9.1 million in the first nine monthsof 2007 resulting from the financing transaction noted above. Cash flow fromfinancing activities was not significant in the first nine months of 2006.

 

*Future capital needs and resources.*Theuses of our capital in the near future are expected to be primarily for workingcapital. We expect to adjust personnel, call centers and network capacities inorder to address varying business circumstances, including changes in volumeand pricing and other provisions of customer contracts.

 

Cash on hand (including restricted cash) andshort-term investments at September 30, 2007 was approximately $14.3 million. However,our operations and future activities, including additional restructuringefforts, if any, will likely reduce available cash.

 

We have experienced net losses in each of thequarterly and annual periods beginning with the second quarter of 2003. Excludingnon-recurring events described above, our operations consumed approximately$11.5 million of cash in the first nine months of 2007 primarily from netoperating losses and restructuring costs. Our independent registered publicaccounting firm included a going concern explanatory paragraph in its report onour consolidated financial statements as of and for the year ended December 31,2006. The high ratio of cash used in operations compared to our current cashresources will likely result in a similar going concern explanatory paragraph fromour independent registered public accounting firm in its report on ourconsolidated financial statements as of and for the year ended December 31,2007.

 

Our management is working to aggressively pursue newand additional sources of revenues to support our reduced cost structure,further reduce the direct cost of delivering our services and reduce ourgeneral and administrative overhead, and develop and grow our data servicesbusiness. There can be no assurance that management’s plans will be successful.In that case, we may need additional cash to fund our operations and/or pursueour business initiatives during 2008. We may attempt to establish borrowingarrangements or otherwise raise additional funds in order to maintain adequateliquidity. We cannot provide assurance that borrowing or other funding will beavailable in amounts or on terms acceptable to us. If we are unable to executeour operations according to our plan or obtain additional financing, we may beforced to cease operations.

 

#### **Critical Accounting Policies**

#### ** **

We prepare our financial statements in conformity withaccounting principles generally accepted in the United States of America. Assuch, we are required to make certain estimates, judgments and assumptions thatwe believe are reasonable based upon the information available. These estimatesand assumptions affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the periods presented. Management believes that of oursignificant accounting policies (see Note 1 to the Condensed ConsolidatedFinancial Statements (Unaudited)), those governing accounts receivable, thelives and recoverability of the carrying amount of equipment and otherlong-lived assets, such as existing intangibles, estimates involving the levelsof our contingent liabilities for workers’ compensation and medicalself-insurance and estimates of current and deferred taxes owed may involve ahigher degree of judgment, estimation and uncertainty.

 

*Accountsreceivable.*Our wholesale customer base has primarilyconsisted of large telephone carriers in the United States. As such, we havehad minimal risk of uncollectibility, at any point in time, related tooutstanding accounts receivable with these customers. We have not experiencedsignificant collection issues or write-offs related to these customers. Sinceour accounts receivable are concentrated in relatively few of these wholesalecustomers, a significant change in the liquidity or financial position of anyone of them could adversely impact collection of our accounts receivable andtherefore have a material adverse effect on our financial position and futureoperating results. In addition, our data services business is generatingreceivables from customers that may not be as financially stable as our largecarrier customers which to date has not, but may in the future, expose us togreater risk of uncollectible receivables than we have experienced in the past.

 

*Long-livedassets and intangibles.*We evaluate the remaining life andrecoverability of equipment and other assets, including patents and trademarksand internally developed software, whenever events or changes in circumstancesindicate that the carrying amount of the assets may not be recoverable. At suchtime, we estimate the future cash 

 

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flows expected from useof such assets and their eventual disposition and, if lower than the carryingamounts, adjust the carrying amount of the assets to their estimated fair value.Because of our changing business conditions, including lower wholesale pricesand dependence on a relatively small number of customers for a significantportion of our revenues, our estimates of future cash flows to be generatedfrom our operations could change materially, resulting in the need for us torecord additional impairment charges. In addition, as a result of our changingbusiness conditions, we expect to adjust personnel, call centers and networkcapacities. If any of these activities result in certain of our assets nolonger being used in operations, we may need to record an additional impairmentcharge. As a result of the decision by Nextel to terminate its contract withus, as discussed under “Termination of contract” in Note 5 to the CondensedConsolidated Financial Statements (Unaudited), and because of continuingoperating losses, we evaluated our fixed assets and intangibles as of December31, 2006 for impairment in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 144. Our evaluation determined that the assets were notimpaired as of December 31, 2006.

 

*Self-insurancereserves.*In the past, we have self-insured a portion of ourworkers’ compensation and employee medical insurance programs.  In someperiods we purchased stop loss coverage at varying levels in order to mitigateour potential future losses.  The nature of the liabilities associatedwith these self-insurance programs, which may not fully manifest themselves forseveral years, requires significant judgment.  We evaluate open workers’compensation and medical claims under these policies periodically to determinethe reasonableness of the reserves we have recorded for such claims. Ourevaluation includes estimates of potential incurred-but-unreported claims aswell as factors that may cause original estimates of such claims to increaseover time, such as available claims data and historical trends and experience,as well as future projections of ultimate losses, expenses, premiums andadministrative costs.  We adjust these reserves if events or changes incircumstances indicate that ultimate payments related to the claims will bemore than the recorded reserves. At September 30, 2007, we have reservedapproximately $1.2 million and $147,000 related to these self-insured workers’compensation and medical programs, respectively. While we believe that theamounts reserved for these obligations are sufficient, any significant changein the status of open claims or costs associated with claims made under theseplans could have a material adverse effect on our financial position, resultsof operations or cash flows.

 

*Incometaxe*s.  Accounting for income taxes requires us toestimate our income taxes in each jurisdiction in which we operate.  Dueto differences in the recognition of items included in income for accountingand tax purposes, temporary differences arise which are recorded as deferredtax assets or liabilities.  We estimate the likelihood of recovery ofthese assets, which is dependent on future levels of profitability and enactedtax rates.  Should any amounts be determined not to be recoverable, orassumptions change, we would be required to take a charge to establish avaluation allowance against such deferred tax assets, which could have amaterial effect on our financial position, results of operations or cash flows.At September 30, 2007 and 2006, a valuation allowance reduced net deferred taxassets to zero.

 

#### **Recent Accounting Pronouncements**

#### ** **

In February 2007,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialStandards (“SFAS”) No. 159, *The FairValue Option for Financial Assets and Financial Liabilities*(“SFAS 159”)*.*SFAS 159 provides companies with an option to report selectedfinancial assets and liabilities at fair value. SFAS 159 also establishespresentation and disclosure requirements designed to facilitate comparisonsbetween companies that choose different measurement attributes for similartypes of assets and liabilities and to provide additional information that willhelp investors and other financial statement users to more easily understandthe effect of a company’s choice to use fair value on its earnings. Finally,SFAS 159 requires entities to display the fair value of those assets andliabilities for which a company has chosen to use fair value on the face of thebalance sheet. SFAS 159 is effective as of the beginning of an entity’s firstfiscal year beginning after November 15, 2007. We are currently assessingthe impact of SFAS 159 which we will be required to adopt in the first quarterof our 2008 fiscal year.

 

In May 2007, the FASBissued FSP FIN 48-1, *Definition ofSettlement in FASB Interpretation No. 48* (“FSP FIN 48-1”).  FSPFIN 48-1 clarifies when a tax position is considered settled under FIN48.  Per FSP FIN 48-1, a tax position is considered “effectively settled”upon completion of the examination by the taxing authority without beinglegally extinguished.  For “effectively settled” tax positions, a companycan recognize the full amount of the tax benefit.  FSP FIN 48-1 iseffective upon a company’s adoption of FIN 48.  See further discussion ofFIN 48 below.  FSP FIN 48-1 did not have a material impact on ourconsolidated financial position or results of operations.

 

15

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In July 2006, the FASBissued Interpretation No. 48, “*Accounting for Uncertaintyin Income Taxes – an interpretation of FASB Statement No. 109*”(“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attributefor financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. FIN 48 is effective for our fiscal yearbeginning January 1, 2007. The adoption of this statement has not had amaterial effect on our consolidated financial position or results ofoperations.

 

In September 2006, theFASB issued SFAS No. 157, “*Fair Value Measurements*”(“SFAS 157”), which establishes a framework for measuring the fair value ofassets and liabilities. This framework is intended to increase consistency inhow fair value determinations are made under various existing accountingstandards that permit, or in some cases require, estimates of fair market value.SFAS 157 also expands financial statement disclosure requirements about acompany’s use of fair value measurements, including the effect of such measureson earnings. SFAS 157 is effective for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. We donot expect the adoption of this statement to have a material effect on ourconsolidated financial position or results of operations.

 

#### **ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

#### ** **

Substantially all of our liquid resources are invested in money marketinstruments and short-term debt securities. However, these funds were investedin overnight money market instruments or debt securities with short-termeffective maturities at September 30, 2007 and were redeemable on a daily ormonthly basis. Therefore, the fair market value of these investments is notmaterially affected by changes in market interest rates. All of the underlyinginvestments in the money market fund had maturities of three months or less. Ahypothetical 1% fluctuation in interest rates would not have a material adverseeffect on our financial position, results of operations or cash flows.

 

#### **ITEM 4.                  CONTROLS AND PROCEDURES**

#### ** **

Under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, we conductedan evaluation of our disclosure controls and procedures (as such term isdefined under Rule 13a-15(e) promulgated under the Securities Exchange Act of1934, as amended) as of the end of the period covered by this quarterly report.Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective asof the end of the period covered by this quarterly report.

 

There has not been any change in our internal control over financialreporting, that occurred during the fiscal quarter covered by this report, thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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### **PART II.                OTHER INFORMATION**

### ** **

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

#### ** **

Therisks described below should be carefully considered. These risks are not theonly ones that we may face. Additional issues and uncertainties that we areunaware of, or that we currently deem immaterial, also may become importantfactors that affect us. If any of the following risks occur, our business,financial condition, results of operations or cash flows could be materiallyand adversely affected.

 

**RisksRelated to Our Company**

 

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

 

We have experienced netlosses in each of the quarterly and annual periods beginning with the firstquarter of 2003. In the years ended December 31, 2006 and 2005, weincurred losses of $19.2 million and $39.8 million, respectively. In the first ninemonths of 2007, we incurred losses of $11.1 million. At December 31, 2006,we had working capital of approximately $13.3 million, and at September 30,2007, we had working capital of approximately $12.9 million, including approximately$9.1 million (net of transaction costs) from the financing transaction. We willneed to generate additional revenue and continue to decrease our expendituresto achieve profitability. We can give no assurance that we will achievesufficient revenue or reduce expenditures to be profitable on a quarterly orannual basis in the future. These factors, among others, raise doubt about ourability to continue as a going concern. Even if we do ultimately achieveprofitability, we may not be able to sustain profitability on a quarterly orannual basis.

 

*We have to pay dividends and may have to pay liquidateddamages to our  investors, which willincrease our negative cash flows.*

 

On June 5th of each year, a 4% cumulative dividend must bepaid with respect to each outstanding share of convertible preferred stock.Based on the convertible preferred stock currently outstanding, a payment of$400,000 will be required on June 5th, 2008. In addition, we arecurrently awaiting a response from the Securities and Exchange Commission (the “SEC”)regarding our eligibility to use a Form S-3 registration. Should there be nodetermination with respect to the Form S-3 eligibility prior to December 3, 2007,or should it be determined after December 3, 2007 that we are not eligible touse an S-3 filing, we might be required to pay penalties to the holders of theconvertible preferred stock and warrants in the amount of $125,000 per monthuntil the earlier of (i) the passage of 16 months, or (ii) the necessaryregistration statement is declared effective by the SEC. There can be noassurance that the required registration will be declared effective by the SECwithin the time period necessary to avoid payment of these penalties to theholders of the convertible preferred stock and warrants.

 

*We will likely need additional capital in the future, and itmay not be available.*

 

Our unrestricted cashbalances at December 31, 2006 and September 30, 2007, were approximately$12.0 million and $11.3 million (including $9.1 million, net of financingcosts, from financing transaction and an additional $1.7 million of restrictedcash), respectively. It is likely that we will continue to experience operatinglosses in the fourth quarter of 2007 and parts or all of 2008. We may needadditional cash to fund our operations and/or pursue our business initiativesduring 2008. We may attempt to establish borrowing arrangements or otherwiseraise additional funds in order to maintain adequate liquidity. We cannotprovide assurance that borrowing or other funding will be available in amountsor on terms acceptable to us. If we are unable to execute our operationsaccording to our plan or obtain additional financing, we may be forced to ceaseoperations.

 

*We need to expand call volume, increase our efficiencies andsubstantially lower the cost of delivery of our services in order to besuccessful.*

 

In order to successfullyexecute our business strategies, we need to increase the volume of calls weservice. The loss of call volume from Jingle will make this need more urgent. Weintend to increase call volume by seeking additional customers, includinglandline carrier customers, as well as seeking additional business from ourexisting customers and by offering our services to other types of customers. Becauseof increasing competitive pressures and declining per call pricing, we need tosubstantially reduce the cost of delivery of our directory assistance servicesin order to compete with automated services, offshore contractors, and otherlow-cost providers. If we are unable to expand our wireless business or attractsignificant landline business revenues on a cost effective basis or at all, orif we are unable to substantially reduce the cost of delivering our services,we may be unable to achieve and maintain profitability.

 

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*We have been restructuring our business to focus onproviding directory assistance and information services on a wholesale basis. Evenafter giving effect to this restructuring, we may not have sufficient cash toexecute on our current business plan.*

 

We have taken steps torestructure certain aspects of our business, including closing call centers,reducing our work force, discontinuing our Infone retail service, andrenegotiating existing agreements with customers. We may be forced to takeadditional steps to lower our costs. However, restructuring (for examplesevering employees and terminating leases) takes resources and time toimplement. There can be no assurance that we will be successful in lowering ourcosts further or otherwise implementing the restructuring. There can also be noassurance that following any restructuring we will have sufficient cashreserves to achieve profitability. Furthermore, any restructuring could have amaterial adverse impact on our ability to execute on our business plan.

 

*We have contracts with a limited number of customers. If wefail to extend these contracts or sign new ones, or if these contracts areterminated prior to their expiration, our business could be adversely affected.*

 

A limited number ofcustomers account for a large percentage of our continuing revenues. Forexample, Jingle accounted for 33% of our revenue in the first nine months of2007 and is not expected to generate any call volume revenue in the fourthquarter of 2007. Some of our other contracts similiar to Jingle's contract arenon-exclusive, contain performance and other standards, and call volume may betransferred to alternative providers within the terms of the agreements. If wefail to extend or replace our contracts, or other contracts are terminatedprior to their expiration, our business could be adversely affected. Althoughwe seek to increase the number of our customers, opportunities to obtaincustomers with large call volumes are limited because a small number ofcompanies dominate the telecommunications market. This limits the potentialcarrier customer base and our expansion opportunities through carrierrelationships.

 

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

 

A customer’s decision tocontract for our directory assistance and information services involves asignificant commitment of technical and other resources. As a result, we have along sales cycle for both new contracts and contract extensions, particularlywith large customers. The selling process involves demonstrating thevalue-added benefits of outsourcing directory assistance and using our servicesrather than those of our competitors. Additionally, the effectiveness of ourmarketing to other types of customers, including businesses, governmental unitsor callers attracted through other means or affiliations, is difficult topredict at any given point in time, given a wide variety of potential businesscircumstances. Any delays due to lengthy sales cycles could significantlyaffect our revenue growth and operating results.

 

*Our inability to achieve desired pricing levels couldadversely affect our ability to return to profitability.*

 

We are subject tocompetitive pressures with respect to pricing that have affected our operationsand profitability and could adversely affect our ability to return toprofitability. Generally, our pricing levels have declined and, in the future,may continue to decline in response to competition in the industry. The pricesthat we charge our carrier customers are subject to the terms of our contracts.The changing telecommunications market, the relative leverage of thenegotiating parties and the overall competitive landscape can significantlyimpact contract pricing negotiations. In addition, other sources of directoryassistance, such as automation and those provided by offshore call centers andthe Internet provide low cost forms of competitive services. We charge ourcarrier customers on a per call basis, with prices varying in some cases basedon call volume. If we continue to reduce our prices without a correspondingincrease in call volume, there could be an adverse impact on our ability toachieve and maintain profitability.

 

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

 

Our revenues continue tocome primarily from providing Enhanced Directory Assistance and informationservices to telephone users. However, information can be transmitted in otherways, including more intelligent communications devices and other technologiesand protocols, and over the Internet. For example, as the Internet continues todevelop and becomes easier to use and access, technologies may be developedthat decrease or eliminate the demand for telephone-based or voice-baseddirectory or information services. Widespread acceptance of existing anddeveloping technologies and protocols, such as voice recognition and wirelessapplication protocol, could adversely affect our business. Our call volumecould decline if telephone users change their usage habits and rely on theInternet or other alternatives as their primary source for information.

 

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

 

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Many of our competitorsin the directory assistance market, including the regional Bell operatingcompanies, have far greater resources and better name recognition. The regionalBell operating companies also may have the advantage of being the localtelephone carrier in their area of operation. Some of these companies are ormay be developing their own versions of directory assistance services. We alsoface competition from a number of other independent directory assistanceproviders. Individual competitors may also seek to provide low cost domestic oroffshore service or to provide automation of directory assistance services. Ifwe are unable to compete successfully, it could have an adverse effect on ourbusiness, financial condition, results of operations or cash flows. Our abilityto compete successfully depends, in part, on our ability to anticipate andappropriately respond to many factors, including pricing decisions by carriers,decisions by carriers to force consumers to accept lower-quality informationservices products, the introduction of new services and products by our competitors,changes in subscriber preferences, changes in economic conditions and discountpricing strategies by our competitors.

 

*The rapidly changing telecommunications market couldunfavorably affect us.*

 

The telecommunicationsmarket is subject to rapid change and uncertainty that may result incompetitive situations which could unfavorably affect us. These changes anduncertainties are due to, among other factors, the following:

 

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

•                  Changesin the regulatory environment, which may affect us directly, by affecting ourability to access and update listings data at a reasonable cost, or indirectly,by restricting our carrier customers’ ability to operate or provide acompetitive service;

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

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

•                  Changesin retail prices offered to consumers for our services or for services perceivedto be substitutes for ours, in whole or in part.

 

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

 

In the future, as in thepast, our quarterly and annual operating results may vary significantly as aresult of a number of factors. We cannot control many of these factors, whichinclude, among others:

 

•                  Changesin the telecommunications market, including the addition or withdrawal ofcarriers from the market, changes in technology and increased competition fromexisting and new competitors;

•                  Thetiming and expense of our call center network expansion or contraction,including changing staffing and infrastructure expenses related to anticipatedcall volume changes;

•                  Theaddition or expiration of contracts with carrier customers;

•                  Changesin our or our competitors’ customers’ or suppliers’ pricing policies;

•                  Lengthysales cycles for new and extended contracts;

•                  Thetiming of the commencement of our services under new or existing contracts withour carrier customers, which depends in part on the customers’ ability to adapttheir networks and billing systems to allow them to transfer calls to us;

•                  Lackof market acceptance or delays or increased development costs related to theintroduction of our services or features; and

•                  Generaleconomic conditions.

 

For these reasons,investors should not rely on period-to-period comparisons of our financialresults as an indication of any future results. Our future operating resultscould fall below the expectations of securities industry analysts or investors.Any such shortfall could result in a decline in the market price of our commonstock. Fluctuations in our operating results and cash flows would likelyincrease the volatility of our common stock price.

 

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*Our operating results are significantly affected by ourability to accurately estimate the amount and timing of call volume, which isoften subject to factors outside of our control.*

 

Our operating results aresignificantly affected by costs incurred for expanding or contracting staffingand infrastructure. We incur significant staffing and general andadministrative costs in contracting or expanding operations, as necessary, andin anticipation of additional or reduced call volume under our customercontracts. If such call volume does not depart or arrive as scheduled, in theamount anticipated, or at all, our operating results can be adversely affected.This could increase our operating expenses without a corresponding increase inrevenues.

 

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

 

While in the past, ourprincipal business as a wholesale supplier of Enhanced Directory Assistance andinformation services for telecommunications common carriers has not beendirectly regulated, the offering of those services to the public by ourcustomers is regulated by various federal and state regulatory authorities. TheFederal Communications Commission (“FCC”) has jurisdiction over all U.S.telecommunications common carriers to the extent they provide interstate orinternational communications services, including, in our case, the use of ourlocal networks to originate or terminate such services. The application of theFCC’s current and/or future policies could have a material adverse effect onour business, operating results and financial condition.

 

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

 

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

 

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

 

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

 

Our success also dependson our ability to provide reliable services. Our operations could beinterrupted by significant damage to or failure of our network, our connectionsto third parties, our computer hardware or software or our customers’ orsuppliers’ computer hardware or software. Any such significant damage orfailure could disrupt the operations of our network and the provision of ourservices and result in the loss of current and potential customers. Inaddition, if call volume increases, we may need to expand and/or upgrade ourtechnology and network hardware and software in order to provide services. Capacitylimits on our technology and network hardware and software may make itdifficult for us to expand and upgrade our systems in a timely and economicalmanner.

 

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

 

Our operations depend onour access to the names, telephone numbers and other information that we supplydirectly to callers or we use in providing our services. The availability,cost, quality and usefulness of such data varies widely across geographicregions. If we are unable to obtain or update directory or information contentat an economical cost, we may be unable to provide current levels of service,improve our Enhanced Directory Assistance service, or provide new services andfeatures. Ultimately, the satisfaction of callers and our carrier customers,and our ability to renew and extend our current customer contracts and enterinto new customer contracts, depends on the quality of services we provide. Thequality of our services is directly related to the quality of our listings dataand other information content.

 

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

 

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We rely on some keysuppliers to provide us with programming and engineering services and tolicense us their technology. An abrupt loss of any current key supplier couldcause a disruption in our operations or a delay in our development efforts andcould adversely affect our business operations.

 

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

 

Our success depends to asignificant extent on the efforts and abilities of our senior management, salesand technical personnel and call center operators. The loss of the services ofour senior management and technical personnel could have a material adverseeffect on our business and our ability to meet our strategic objectives. Inaddition, increasing our revenues is critical to our success. If we are unableto attract and retain qualified and productive sales personnel, we may not beable to increase our revenues which would have an adverse effect on our plansand our business. We also depend on the continued service of our call centeroperators, who we hire from the available labor pool. The ability to attractand retain qualified senior management, sales and technical personnel,operators and other skilled employees is extremely important to the operationof our business. If we are unable to attract and retain qualified individuals,or we are required to pay significantly higher wages and other benefits to suchindividuals, or if our call center staff is unionized, it could adverselyaffect our business operations. We find it more difficult to recruit and retainqualified individuals during periods of low unemployment and, therefore, may besubject to increasing pressure to offer higher wages and other benefits duringsuch periods. In our call center hiring, we may also feel the effects of thetelecommunications industry in general, which has widespread union membershipamong its operators and other workers.

 

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

 

We regard aspects of ourEnhanced Directory Assistance, and their features and processes, to beproprietary. If we are unable to use and protect our intellectual property, wemay be unable to provide some of our Enhanced Directory Assistance and/or ourpersonal assistant services or profitably operate our business. To a limitedextent, we rely on a combination of trade secret, patent and other intellectualproperty law, nondisclosure agreements and other protective measures to protectour intellectual property. However, these measures may be difficult and costlyto meaningfully enforce. In addition, attempts to enforce our intellectualproperty rights may bring into question the validity of these rights. Litigationwith respect to patents or other intellectual property rights can result insubstantial costs and diversion of management attention and other resources.

 

**RisksRelated to Our Common Stock**

 

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

 

Our common stock listingwas transferred from the Nasdaq National Market to the Nasdaq Capital Market(formerly the Nasdaq SmallCap Market) on February 22, 2006 because we hadbeen unable to regain compliance with the $1.00 minimum bid price requirementfor continued listing on the Nasdaq National Market. In July, 2006 we effecteda one-for-four reverse stock split and regained compliance with the Nasdaqlisting requirements. However, on June 27, 2007, we received a NasdaqStaff Deficiency Letter informing us that we no longer comply with Nasdaq’saudit committee requirements for continued listing as set forth in MarketplaceRules 4350. The resignation of Mr. Murray Swanson from the AuditCommittee in connection with the financing transaction resulted in our AuditCommittee having less than Nasdaq’s audit committee requirement of threeindependent members. The letter stated that, consistent with MarketplaceRule 4350(d)(4), we will be provided a cure period until December 3,2007, in order to regain compliance. The letter also stated that, in the eventwe do not regain compliance within this period, the Staff will provide writtennotification that our securities will be delisted. It is the intention of ourBoard of Directors to take the necessary action to appoint an independent memberof the Audit Committee within the cure period provided so as to maintaincontinued Nasdaq listing. However, if we were unable to appoint an independentmember of the Audit Committee within the cure period and our common stock weredelisted from the Nasdaq Capital Market, the market liquidity of our commonstock could be reduced and an investor would find it more difficult to disposeof, or obtain accurate quotations for the price of, our common stock. Failureto achieve continued listing on the Nasdaq Capital Market will also likelyimpact our ability to raise additional capital.

 

*Our common stock price is volatile.*

 

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The market price of ourcommon stock has experienced volatility and is likely to continue to experiencesignificant fluctuations in response to a number of factors. These factorsinclude, among others, low trading volume, our quarterly and annual operatingresults and the following:

 

•                  Announcementsof extensions, expirations or changes in our contracts and the effects on ourcall centers and infrastructure of such activities;

•                  Announcementsrelating to material events concerning our customers;

•                  Actualor anticipated variations in our results of operations and liquidity;

•                  Securitiesfilings or other public announcements by our large shareholders;

•                  Announcementsof new product initiatives or growth strategies; and

•                  Generalmarket conditions.

 

From January 1, 2006through December 31, 2006, our common stock price fluctuated, on a postone-for-four reverse stock split basis, from a low of $1.32 per share to a highof $3.77 per share, and has on several occasions fluctuated more than 10%during a trading day. From January 1, 2007 through September 30, 2007, ourcommon stock price fluctuated, from a low of $1.55 per share to a high of $2.69per share. These trading prices may change significantly and arbitrarily. Inaddition, broad market factors affecting telecommunications or technologystocks may adversely affect the market price of our common stock. Generaleconomic, political and market conditions, including interest rate changes andrecession, may also adversely affect our stock price.

 

*The issuance of securities in the financing transaction hassubstantially reduced the relative equity ownership and influence of all othershareholders, which may put downward pressure on the trading price of ourcommon stock.*

 

On June 5, 2007, we enteredinto a private financing transaction with Columbia and Everest. Each of theinvestors held shares of our common stock prior to this financing transactionand these investors acquired a substantially greater equity ownership whichdiluted our other existing shareholders. If all the convertible preferred stockissued in the financing transaction were to be converted into common stock andif all the warrants were to be exercised and the underlying convertiblepreferred stock were to be converted at the initial conversion price of $1.78per share, our existing shareholders (exclusive of the investors in thefinancing transaction) would hold approximately 35.9% of our common stock, andColumbia and Everest would hold approximately 49.5% and 14.6% of our commonstock, respectively.

 

The holders ofconvertible preferred stock will have a claim against our assets senior to theclaim of the holders of our common stock in the event of a liquidation andcertain other events. Our existing shareholders will also have less influenceon our affairs and the ability to control major corporate decisions. Columbiawill be our largest shareholder with approximately 35.9% of the total votingpower of our outstanding capital stock, before giving effect to the conversionof convertible preferred stock into common stock or the exercise of thewarrants. For so long as at least 540 shares of convertible preferred stock areoutstanding, the holders of convertible preferred stock are entitled to elect amajority of the members of our Board. Accordingly, the investors in thefinancing transaction will have significant influence over matters submitted toour shareholders, including potential change-of-control transactions. Theirinterests may be different from your interests, and they may be in a positionto influence us to act in a way inconsistent with the interests of publicshareholders generally. This concentration of voting power may deter othercompanies from seeking to acquire us, which might depress the market price ofour common stock.

 

*The market price of our common stock may be reduced byfuture sales of our common stock in the public market.*

 

Sales of substantialamounts of our common stock in the public market that are not currently freelytradable, or even the potential for such sales, could have an adverse effect onthe market price for shares of our common stock and could impair the ability ofpurchasers of our common stock to recover their investment or make a profit.

 

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

#### ** **

At our annual meeting ofshareholders held on August 14, 2007, shareholders representing a total of5,641,598 shares of common stock and 220 shares of convertible preferred stockentitled to vote at the meeting, constituting a quorum, voted to approve thefollowing proposals by the margins indicated:

 

1. To elect the followingnominees as Class III directors to our Board of Directors until the 2010 annualmeeting of shareholders and until their successors are elected and qualified(with only the holders of convertible preferred stock voting basedapproximately 0.856 votes for each share of common stock into which theconvertible preferred stock could be converted).

 

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| ** **                | ** ** | **Number of Votes** | ** ** |
|---------------------------|------------|-------------------------------|------------|
| **Name**                  | ** ** | **For**                       | ** ** | **Withheld** | ** ** |
| Jonathan A. Ater          |       | 1,057,977                     |       | 0 |   |
| Kenneth D.  Peterson, Jr. |       | 1,057,977                     |       | 0 |   |

 

The following members of ourBoard of Directors will continue with their terms of office as directorsfollowing the 2007 annual meeting of shareholders:

 
| **Class I Directors (current term  expiring in 2008):** |
|---------------------------------------------------------|
| Elchanan (Nani) Maoz                                    |
| Mary H. Oldshue                                         |

 
| **Class II Director (current term  expiring in 2009):** |
|---------------------------------------------------------|
| Gary E. Henry                                           |

 

2. To approve theissuance of additional shares in connection with a financing transaction, asfurther described in our proxy statement for its 2007 annual meeting ofshareholders (with only the holders of common stock voting).

 

 
| ** **       | ** ** | **Number of Votes** | ** ** |
|------------------|------------|-------------------------------|------------|
| For              |       | 3,388,348                     |       |
| Against          |       | 179,151                       |       |
| Abstain          |       | 7,530                         |       |
| Broker Non-Votes |       | 2,066,569                     |       |

 

3. To ratify theselection of BDO Seidman, LLP as our independent registered public accountingfirm for the year ending December 31, 2007 (with the holders of common stockand convertible preferred stock, based on approximately 0.856 votes for eachshare of common stock into which the convertible preferred stock could beconverted, voting).

 
| ** **       | ** ** | **Number of Votes** | ** ** |
|------------------|------------|-------------------------------|------------|
| For              |       | 6,672,750                     |       |
| Against          |       | 8,153                         |       |
| Abstain          |       | 18,672                        |       |
| Broker Non-Votes |       | 0                             |       |

 

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#### **ITEM 6.  EXHIBITS**

#### ** **

(a)          Exhibits

 

**31.1**                           Certification of Principal Executive Officerpursuant to Securities and Exchange Commission Rule 13a-14(a)

** **

**31.2**                           Certification of Principal Financial Officerpursuant to Securities and Exchange Commission Rule 13a-14(a)

** **

**32.1**                           Certification of Principal Executive Officer andPrincipal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act Of 2002

 

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SIGNATURES

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
| Date:  | November 14, 2007                             |                      |
|--------|-----------------------------------------------|---------------------------|
|   | METRO ONE  TELECOMMUNICATIONS, INC.           |
|   |                                          |
|   | By:                                           | /s/ William K.  Hergenhan |   |
|   | William K. Hergenhan                          |
|   | Senior Vice President,                        |
|   | Chief Financial Officer                       |
|   | (Principal Financial  and Accounting Officer) |

 

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