**United StatesSecurities and 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 theQuarterly Period Ended September 30, 2006**

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

**CommissionFile Number 0-27024**

**METRO ONE TELECOMMUNICATIONS,INC.**

(Exact name ofregistrant as specified in its charter)

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

 

###### **11200 Murray Scholls Place, Beaverton,Oregon  97007**

(Address ofprincipal executive offices) (zip code)

**(503) 643-9500**

(Registrant’stelephone number, including area code)

Indicate by check markwhether the registrant has (1) filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  x    Noo

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

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

 

                Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).  Yes  o    No  x

Number of shares of common stock outstanding as ofNovember 10, 2006: 6,233,326 shares, no par value per share.

 

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**METRO ONETELECOMMUNICATIONS, INC.**

**INDEX TOFORM 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, 2006 and 2005 |       |       |
|     |       |                                                                                                              |       |       |
|     |       | Condensed Consolidated Balance  Sheets as of  September 30, 2006 and December 31, 2005                            |       |       |
|     |       |                                                                                                              |       |       |
|     |       | Condensed Consolidated Statements of  Cash Flows for the  nine months ended September 30, 2006 and 2005           |       |       |
|     |       |                                                                                                              |       |       |
|     |       | 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 6.  |       | Exhibits                                                                                                          |       |       |
|     |       |                                                                                                              |       |       |
|     |       | Signatures                                                                                                        |       |       |

 

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**Metro OneTelecommunications, Inc.Condensed Consolidated Statements of Operations (Unaudited)**
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In  thousands, except per share data)** | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                   |       | $                                | 5,205      |                            | $          | 19,211 |   | $ | 25,553 |   | $ | 57,739 |   |
|                                       |       |                             |       |                            |       |   |   |   |   |
| Costs and expenses:                        |       |                             |       |                            |       |   |   |   |   |
| Direct operating                           |       | 3,789                            |       | 15,390                          |       | 15,319 |   | 47,353 |   |
| Selling, general  and administrative       |       | 4,465                            |       | 11,255                          |       | 16,813 |   | 36,579 |   |
| Depreciation and  amortization             |       | 686                              |       | 1,528                           |       | 3,040 |   | 4,734 |   |
| Restructuring  charges                     |       | 453                              |       | 2,745                           |       | 6,230 |   | 4,020 |   |
|                                       |       | 9,393                            |       | 30,918                          |       | 41,402 |   | 92,686 |   |
| Loss from operations                       |       | (4,188                           | )          | (11,707                         | )          | (15,849 | ) | (34,947 | ) |
|                                       |       |                             |       |                            |       |   |   |   |   |
| Other income, net                          |       | 187                              |       | 235                             |       | 599 |   | 804 |   |
|                                       |       |                             |       |                            |       |   |   |   |   |
| Loss before income  taxes                  |       | (4,001                           | )          | (11,472                         | )          | (15,250 | ) | (34,143 | ) |
| Income tax expense                         |       | —                           |       | 423                             |       | 50 |   | 343 |   |
|                                       |       |                             |       |                            |       |   |   |   |   |
| Net loss                                   |       | $                                | (4,001     | )                               | $          | (11,895 | ) | $ | (15,300 | ) | $ | (34,486 | ) |
|                                       |       |                             |       |                            |       |   |   |   |   |
| Net loss per common  share:                |       |                             |       |                            |       |   |   |   |   |
| Basic                                      |       | $                                | (.64       | )                               | $          | (1.90 | ) | $ | (2.45 | ) | $ | (5.50 | ) |
| Diluted                                    |       | $                                | (.64       | )                               | $          | (1.90 | ) | $ | (2.45 | ) | $ | (5.50 | ) |
|                                       |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares  outstanding:      |       |                             |       |                            |       |   |   |   |   |
| Basic                                      |       | 6,233                            |       | 6,254                           |       | 6,233 |   | 6,268 |   |
| Diluted                                    |       | 6,233                            |       | 6,254                           |       | 6,233 |   | 6,268 |   |

 

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

1

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**Metro OneTelecommunications, Inc.Condensed Consolidated Balance Sheets (Unaudited)**
| ** **                                                                                                                                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In thousands)**                                                                                                                                         | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| **Assets**                                                                                                                                                      |       |                   |       |                  |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Current assets:                                                                                                                                                 |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                      |       | $                      | 12,833     |                  | $          | 17,769 |   |
| Restricted cash                                                                                                                                                 |       | 5,716                  |       | 6,860                 |       |
| Accounts  receivable, net                                                                                                                                       |       | 2,837                  |       | 11,982                |       |
| Prepaid costs  and other current assets                                                                                                                         |       | 1,438                  |       | 1,759                 |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Total current  assets                                                                                                                                           |       | 22,824                 |       | 38,370                |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Furniture, fixtures and  equipment, net                                                                                                                         |       | 3,662                  |       | 7,963                 |       |
| Intangible assets                                                                                                                                               |       | 4,857                  |       | 5,382                 |       |
| Other assets                                                                                                                                                    |       | 134                    |       | 302                   |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Total assets                                                                                                                                                    |       | $                      | 31,477     |                  | $          | 52,017 |   |
|                                                                                                                                                            |       |                   |       |                  |       |
| **Liabilities and Shareholders’  Equity**                                                                                                                  |       |                   |       |                  |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                            |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                |       | $                      | 539        |                  | $          | 534 |   |
| Accrued  liabilities                                                                                                                                            |       | 1,548                  |       | 2,637                 |       |
| Accrued payroll  and related costs                                                                                                                              |       | 4,361                  |       | 8,553                 |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Total current  liabilities                                                                                                                                      |       | 6,448                  |       | 11,724                |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Other long-term  liabilities                                                                                                                                    |       | 569                    |       | 626                   |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Total liabilities                                                                                                                                               |       | 7,017                  |       | 12,350                |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Commitments and  contingencies                                                                                                                                  |       |                   |       |                  |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Shareholders’ equity:                                                                                                                                      |       |                   |       |                  |       |
| Preferred stock,  no par value; 2,500 shares authorized, no shares issued or outstanding                                                                        |       | —                 |       | —                |       |
| Common stock, no  par value; 12,500 shares authorized, 6,233 shares and 6,237 issued and  outstanding at September 30, 2006 and December 31, 2005, respectively |       | 120,029                |       | 119,937               |       |
| Accumulated  deficit                                                                                                                                            |       | (95,569                | )          | (80,270               | )          |
|                                                                                                                                                            |       |                   |       |                  |       |
| Total shareholders’  equity                                                                                                                                |       | 24,460                 |       | 39,667                |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Total liabilities and shareholders’ equity                                                                                                                 |       | $                      | 31,477     |                  | $          | 52,017 |   |

 

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

2

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**Metro OneTelecommunications, Inc.Condensed Consolidated Statements of Cash Flows (Unaudited)**
| ** **                                                                   | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **September 30,**          | ** ** |
| **(In thousands)**                                                      | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                       |       |                            |       |   |   |
| Net loss                                                                     |       | $                               | (15,300    | ) | $ | (34,486 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                |       | 3,040                           |       | 4,734 |   |
| Loss on disposal of fixed assets, net                                        |       | 1,117                           |       | 160 |   |
| Deferred charges, net                                                        |       | 56                              |       | 382 |   |
| Stock-based compensation expense                                             |       | 92                              |       | — |   |
| Changes in assets and liabilities:                                           |       |                            |       |   |   |
| Accounts receivable                                                          |       | 9,146                           |       | 4,395 |   |
| Prepaid costs and other assets                                               |       | 575                             |       | 774 |   |
| Accounts payable and other liabilities                                       |       | (5,390                          | )          | (679 | ) |
|                                                                         |       |                            |       |   |   |
| Net cash used in operating activities                                        |       | (6,664                          | )          | (24,720 | ) |
|                                                                         |       |                            |       |   |   |
| Cash flows from  investing activities:                                       |       |                            |       |   |   |
| Decrease (increase) in cash restricted to secure  letter of credit           |       | 1,144                           |       | (1,960 | ) |
| Purchases of short-term securities                                           |       | —                          |       | (36,805 | ) |
| Sales of short-term securities                                               |       | —                          |       | 62,180 |   |
| Capital expenditures                                                         |       | (233                            | )          | (1,682 | ) |
| Proceeds from sale of assets                                                 |       | 817                             |       | 69 |   |
|                                                                         |       |                            |       |   |   |
| Net cash provided by investing activities                                    |       | 1,728                           |       | 21,802 |   |
|                                                                         |       |                            |       |   |   |
| Cash flows from  financing activities:                                       |       |                            |       |   |   |
| Common stock repurchased                                                     |       | —                          |       | (121 | ) |
| Proceeds from employee stock purchases                                       |       | —                          |       | 103 |   |
|                                                                         |       |                            |       |   |   |
| Net cash used in financing activities                                        |       | —                          |       | (18 | ) |
|                                                                         |       |                            |       |   |   |
| Net decrease in  cash and cash equivalents                                   |       | (4,936                          | )          | (2,936 | ) |
|                                                                         |       |                            |       |   |   |
| Cash and cash  equivalents, beginning of period                              |       | 17,769                          |       | 24,093 |   |
|                                                                         |       |                            |       |   |   |
| Cash and cash  equivalents, end of period                                    |       | $                               | 12,833     |   | 21,157 |   |
|                                                                         |       |                            |       |   |   |
| Supplemental  disclosure of cash flow information:                           |       |                            |       |   |   |
| Cash (paid) refunded for income taxes, net                                   |       | $                               | (109       | ) | $ | 2,973 |   |

 

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

3

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**Metro One Telecommunications, Inc.Notes to Condensed Consolidated Financial Statements (Unaudited)**

**1.    Summaryof Significant Accounting Policies**

**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 for interimfinancial information.  Accordingly,certain financial information and footnotes have been omitted orcondensed.  In the opinion of management,the condensed financial statements include all adjustments necessary for a fairpresentation of the results for the interim periods.  These condensed consolidated financialstatements and notes thereto should be read in conjunction with our auditedfinancial statements included in our Annual Report on Form 10-K for the yearended December 31, 2005.  The results ofoperations for the interim periods shown in this report are not necessarilyindicative of results 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 significant intercompany balances andtransactions have been eliminated in consolidation.

On July 6, 2006, we effected a one-for-four reverse split of our commonstock.  All share and per share datapresented in the accompanying financial statements and notes thereto have beenrestated for the reverse stock split.

**Advertising**

 

Costs of advertising areexpensed as incurred.  Advertisingexpense was not significant in the third quarter and first nine months of 2006and was approximately $900,000 and $2.7 million in the third quarter and firstnine months of 2005, respectively. Prior to 2006, advertising expense wasprimarily related to marketing and promotion of our Infone service, which wasdiscontinued in the fourth quarter of 2005. Advertising expenses are included in selling, general and administrativeexpenses in the condensed consolidated statements of operations.

**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 cash consists of cash restrictedto secure a letter of credit related to our workers’ compensation program andis 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,”under which compensation expense is recognized in the condensed consolidatedstatement of operations for the fair value of employee stock-basedcompensation.  We elected themodified-prospective transition method as permitted by SFAS No. 123R andaccordingly, prior periods have not been restated to reflect the effect of SFASNo. 123R.  The modified-prospectivetransition method requires that stock-based compensation expense recognized inthe Condensed Consolidated Statement 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 in accordancewith the provisions of SFAS No. 123R. In addition, pursuant to SFAS No. 123R, we estimate forfeitureswhen calculating stock-based compensation expense, rather than accounting forforfeitures as incurred, which was our previous method.  Compensation expense is recognized over therequisite service (vesting) period using the straight-line attribution method.

As a result of adoptingSFAS 123R, net loss for the three and nine months ended September 30, 2006was $92,000, lower than if we had continued to account for stock-basedcompensation under APB Opinion No. 25, as we did in the comparable periodsin 2005.  The effect of recordingstock-based compensation on basic and diluted earnings per share for the threeand nine month periods ended September 30, 2006 was a per share increasein our net loss of $0.01.  Costs relatedto stock-based compensation are recorded in selling, general, andadministrative expenses in the statement of operations.

4

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Prior to theJanuary 1, 2006 adoption of SFAS No. 123R we accounted for stock-basedcompensation using the intrinsic value method prescribed in AccountingPrinciples Board (APB) Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. Accordingly, under APB Opinion No. 25, no compensation expense wasrecognized because the exercise price of our employee stock options was equalto the market price of the underlying stock on the date of grant.  We applied the disclosure provisions of SFASNo. 123, “Accounting for Stock Based Compensation,” as amended by SFASNo. 148, “Accounting for Stock Based Compensation — Transition andDisclosure,” as if the fair value method had been applied in measuringcompensation expense.

The following tableillustrates the effect on net income and earnings per share for the three andnine month periods ended September 30, 2005 if we had applied the fair valuerecognition provisions of SFAS No. 123 to our stock-based compensation:
| ** **                                | ** ** | **Three months**            | ** ** | **Nine months** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|----------------------|------------|
| ** **                                | ** ** | **ended**                        | ** ** | **ended**            | ** ** |
| ** **                                | ** ** | **September 30, 2005** | ** ** |
| (in thousands,  except per share amounts) |       |                             |       |                 |       |
|                                      |       |                             |       |                 |       |
| Net loss, as  reported                    |       | $                                | (9,247     | )                    | $          | (22,591 | ) |
| Stock-based  compensation expense         |       | (39                              | )          | (2,006               | )          |
| Net loss, pro  forma                      |       | $                                | (9,286     | )                    | $          | (24,597 | ) |
|                                      |       |                             |       |                 |       |
| Basic net loss  per share, as reported    |       | $                                | (1.48      | )                    | $          | (3.61 | ) |
| Basic net loss  per share, pro forma      |       | $                                | (1.48      | )                    | $          | (3.93 | ) |
|                                      |       |                             |       |                 |       |
| Diluted net loss  per share, as reported  |       | $                                | (1.48      | )                    | $          | (3.61 | ) |
| Diluted net loss per  share, pro forma    |       | $                                | (1.48      | )                    | $          | (3.93 | ) |

 

Options to purchase ourcommon stock are granted at prices equal to or greater than the fair marketvalue on the date of grant.  Optionsgranted to directors generally vest immediately while options granted toemployees generally vest and become exercisable quarterly over a four yearperiod.  All options generally expire tenyears from the date of the grant.

We estimate the fairvalue of stock options using the Black-Scholes option pricing model.  Key input assumptions used to estimate thefair value of stock options include the exercise price of the award, theexpected option term, the expected volatility of our stock over the option’sexpected term, and the risk-free interest rate over the option’s expected termand the Company’s expected annual dividend yield.  The expected option term represents theestimated time until exercise and is based on our historical experience withsimilar awards, taking into consideration contractual terms, vesting schedulesand 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.  The risk-free interest rate is based on theU.S. Treasury yield curve in effect at the time of grant for periodscorresponding with the expected term of the option.  We have not yet paid a dividend, and thus thedividend yield is 0.0%.  Prospectively,the assumptions will be evaluated and revised as necessary to reflect changesin market conditions and our experience. Estimates of fair value are not intended to predict actual future eventsor the value ultimately realized by people who receive equity awards.

5

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In March 2005, our Board of Directors accelerated vesting on all of thethen outstanding stock options, of which all had fair market values that wereless than the exercise prices at that time. In determining to accelerate the vesting of these options, the Boardconsidered the effect on our reported stock option expense in future periods,the comparability of our statements of operations in prior and subsequentperiods, and the potential benefit to the Company and our shareholders inretaining the services of affected officers and employees.  The pro forma expense included in thestock-based compensation expense noted above associated with the acceleratedvesting was approximately $1,592,000.

**Recent Accounting Pronouncements**

 

In July 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in IncomeTaxes — an interpretation of FASB Statement No. 109.”  FIN 48 prescribes a recognition threshold andmeasurement attribute for financial statement recognition and measurement of atax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition.  FIN 48 iseffective for our fiscal year beginning January 1, 2007.  We are evaluating the impact that theadoption of FIN 48 will have on our consolidated financial position and resultsof operations.

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

In September 2006, the Securities and Exchange Commission (“SEC”)issued Staff Accounting Bulletin (“SAB”) No. 108 regarding the process ofquantifying financial statement misstatements. SAB No. 108 states that registrants should use both a balance sheetapproach and an income statement approach when quantifying and evaluating themateriality of a misstatement.  The interpretationsin SAB No. 108 contain guidance on correcting errors under the dualapproach as well as provide transition guidance for correcting errors.  This interpretation does not change therequirements within SFAS No. 154, “Accounting Changes and ErrorCorrections—a replacement of APB No. 20 and FASB Statement No. 3,”for the correction of an error on financial statements.  SAB No. 108 is effective for annual financialstatements covering the first fiscal year ending after November 15,2006.  We do not expect the adoption ofSAB No. 108 to have a material effect on our consolidated financial position orresults of operations.

**2.    RestructuringCharges and Exit Activities**

Primarily during the second and third quarters of 2005, as part of ourongoing efforts to cut costs and align expenses with reduced revenues, weclosed and consolidated the operations of 12 of our call centers.  Most significant costs associated withclosing those call centers were accrued and paid in 2005.

In thefirst nine months of 2006, we have undertaken additional restructuringactivities, due primarily to the departure of call volume from Nextel asdiscussed in Note 5.

6

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In thefirst nine months of 2006, we closed 13 call centers and significantly reducedthe number of call center and administrative employees.  As a result of the closure and otherrestructuring activities, we paid or accrued approximately $342,000 and $2.5 millionof termination benefits in the three and nine month periods ended September 30,2006, respectively.  We also recordedapproximately ($60,000) and $1.6 million of expenses related to termination oflease obligations of closed facilities in the three and nine month periodsended September 30, 2006, respectively. In addition, we recorded approximately $171,000 and $2.1 million ofother costs, primarily legal and advisory services and dismantling costs, inthe three and nine month periods ended September 30, 2006, respectively.  Included in the costs for the nine monthsended September 30, 2006 were losses incurred on disposal, in the secondquarter, of certain corporate and call center assets in the amount of$935,000.  These assets had a net bookvalue totaling $1,574,000 at the time of disposal, and we received proceeds of$639,000 from the sale.

AtSeptember 30, 2006, we had approximately $432,000 of accrued restructuringcosts, primarily related to remaining lease obligations of closed facilitiesand accrued termination benefits related to certain corporate employees.

Costs incurred in our restructuring activities during the third quarterand first nine months of 2006 are shown in the following table.
| ** **                     | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|--------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **September 30, 2006** | ** ** | **September 30, 2006** | ** ** |
| Major cost type                |       |                             |       |                             |       |
|                           |       |                             |       |                             |       |
| One-time  termination benefits |       | $                                | 342        |                             | $          | 2,488 |   |
| Lease  termination costs       |       | (60                              | )          | 1,608                            |       |
| Other                          |       | 171                              |       | 2,134                            |       |
|                           |       | $                                | 453        |                             | $          | 6,230 |   |

 

The following summarizes the provisions, payments,adjustments and liability for costs associated with our cost reduction effortsfor the period shown (in thousands):
| ** **                     | ** ** | **One-time  termination  benefits** | ** ** | **Lease  termination costs** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|-----------|------------|-----------|------------|
| Balance at  January 1, 2006    |       | $                                   | —     |                              | $          | 355       |       | $         | 143        |   | $ | 498 |   |
| Provisions                     |       | 1,764                               |       | 2,514                             |       | 738       |       | 5,016     |       |
| Payments                       |       | (1,764                              | )          | (566                              | )          | (764      | )          | (3,094    | )          |
| Balance at March  31, 2006     |       | —                              |       | 2,303                             |       | 117       |       | 2,420     |       |
| Provisions                     |       | 382                                 |       | (846                              | )          | 1,225     |       | 761       |       |
| Payments                       |       | (102                                | )          | (458                              | )          | (269      | )          | (829      | )          |
| Adjustments and non-cash items |       | —                              |       | —                            |       | (1,065    | )          | (1,065    | )          |
| Balance at June  30, 2006      |       | $                                   | 280        |                              | $          | 999       |       | $         | 8          |   | $ | 1,287 |   |
| Provisions                     |       | 342                                 |       | (60                               | )          | 171       |       | 453       |       |
| Payments                       |       | (380                                | )          | (770                              | )          | (63       | )          | (1,213    | )          |
| Adjustments and non-cash items |       | —                              |       | (19                               | )          | (76       | )          | (95       | )          |
| Balance at September  30, 2006 |       | $                                   | 242        |                              | $          | 150       |       | $         | 40         |   | $ | 432 |   |

 

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

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**3.    Net Loss Per Share**

Basic net loss per share is based on the weighted average number ofcommon shares outstanding.  Diluted netloss per share reflects the potential dilution that could occur if outstandingoptions to purchase common stock were exercised or converted into commonstock.  Basic and diluted weightedaverage shares outstanding were the same for the three and nine month periodsended September 30, 2006 and 2005 because inclusion of the potential dilutiveeffect of common stock options in the calculation would be anti-dilutive.  There were no adjustments to net loss for thecalculation of both basic and diluted net loss per share for either period.

Options to purchase 568,000 and 719,000 shares of common stock wereoutstanding at September 30, 2006 and 2005, respectively, but were not includedin the computation of diluted net loss per share for the three and nine monthsperiods ended September 30, 2006 and 2005 because their effect would beanti-dilutive.

**4.    Commitmentsand Contingencies**

We are party to various legal actions and administrative proceedingsarising in the ordinary course of business. We believe the disposition of these matters will not have a materialadverse effect 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, 2006, we had one letter of credit outstanding in theamount of $5,716,000 related to our workers’ compensation program.  The letter of credit is secured by acertificate of deposit for the same amount that is recorded as restrictedcash.  This letter of credit expires inApril 2007.

**5.**    **Significant Events**

**Termination of contract**

 

InFebruary 2005, we entered into a Master Services Agreement for DirectoryAssistance Services (the “Services Agreement”) with Nextel Operations, Inc.,acting on behalf of certain affiliates (collectively “Nextel”) of NextelCommunications, Inc.  The ServicesAgreement superseded our previous services agreement dated in June 1999.  Under the Services Agreement, we agreed toprovide directory assistance services to Nextel’s customers on a non-exclusivebasis, and Nextel could transition call volume away from us on short noticeand/or terminate services entirely.

InOctober 2005, we received notification from Nextel that it would be terminatingthe Services Agreement 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 provide services to Nextel callersthrough March 31, 2006 in return for the payment by Nextel of approximately$5.75 million.  Those payments were inaddition to $2.5 million previously paid by Nextel in December 2005 inconnection with the transition and in addition to the contractual payments byNextel for normal service provided by us to Nextel callers through thetransition period.  Calls from Nextelwere substantially transitioned away from us by March 31, 2006, and we havereceived all amounts due from Nextel as of the date of this filing.  Including the $5.75 million received in thefirst quarter of 2006 as part of the settlement payments, Nextel representedapproximately 44% of our revenues for the first nine months of 2006.  Nextel accounted for approximately 75% and73% of our revenues in the third quarter and first nine months of 2005,respectively.

Termination of theServices Agreement has had, and will continue to have, a significant adverseimpact on our results of operations and cash flows and raises doubt as towhether we can continue to operate as a going concern.  We have experienced net losses in each of thequarterly and annual periods since the first quarter of 2003.  We expect to meet our cash requirements inthe remainder of 2006 and in 2007 using our existing cash and cash equivalents.

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Our management hastaken steps to significantly reduce the direct cost of delivering our services,reduce our general and administrative overhead and is aggressively pursuing newand additional sources of revenues to support our reduced cost structure anddevelop and grow our data services business. There can be no assurance that management’s plans will besuccessful.  In such event, we mayattempt to establish borrowing arrangements or otherwise raise funds in orderto maintain adequate liquidity, although we cannot provide assurance that financingor other funding will be available in amounts or on terms acceptable tous.  If we are unable to execute ouroperations according to our plan or obtain additional financing, we may beforced to cease operations.

**Nasdaq listing issues**

 

Ourcommon stock listing was transferred from the Nasdaq National Market to theNasdaq Capital Market (formerly the Nasdaq SmallCap Market) on February 22,2006.  We elected to seek a transfer tothe Nasdaq Capital Market because we had been unable to regain compliance withthe $1.00 minimum bid price requirement for continued listing on the NasdaqNational Market.  By transferring to theNasdaq Capital Market, we were afforded an extended grace period in which wecould satisfy the $1.00 minimum bid price requirement.  At our annual meeting of shareholders, wereceived approval for, and on July 6, 2006 we effected, a one-for-four reversestock split.  In July 2006, we werenotified by Nasdaq that we regained compliance with the Nasdaq listingrequirements, and this matter is now closed.

**Significant new contract**

 

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

In connection with theAgreement, we issued to Jingle two warrants to purchase shares of our commonstock.  The first warrant is for thepurchase of up to 623,250 shares of common stock at an exercise price of $2.60per share.  The warrant will not be exercisableunless and until certain revenue and payment thresholds are achieved by Jingleduring specified time periods as outlined in the Agreement.  The first warrant terminates on June 30,2009.

The second warrant is forthe purchase of up to 870,075 shares of our common stock; provided, however,that shares represented by the sum of the first and second warrants, ifexercised, cannot exceed 19.98% of our total shares outstanding after thewarrants are exercised.  The exerciseprice for the second warrant will equal 115% of the average closing price pershare of the our common stock over the 20 consecutive trading days ending thelast trading day prior to July 1, 2007. The second warrant will not be exercisable unless and until certainrevenue and payment thresholds are achieved by Jingle during specified timeperiods as outlined in the Agreement. The second warrant terminates on July 1, 2009.

 

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#### **ITEM 2.****                                                     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

All statements and trendanalyses contained in this item and elsewhere in this report on Form 10-Qrelative to the future constitute “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements may, but donot necessarily, also include words such as “believes,” “expects,” “anticipates,”“plans,” “estimates,” “may,” “will,” “should,” “could,” “continue” or similarexpressions.  Forward-looking statementsare not guarantees.  They involve knownand unknown business and economic risks, uncertainties and other factors thatmay cause our actual results, performance or achievements to be materiallydifferent from any future results, performance or achievements expressed orimplied by such forward-looking statements. These risks, uncertainties and other factors include the expiration orpricing of customer contracts, the successful execution of our cost reductionefforts and current business strategy, and our ability to generate cash fromoperations, and other risks, including those discussed in our most recentAnnual Report on Form 10-K filed with the Securities and Exchange Commission (“theSEC”) and those described in our other filings with the SEC, press releases andother communications.  Anyforward-looking statement in this report reflects our expectations at the timeof this report only.  We undertake noobligation to publicly release any revisions to these forward-lookingstatements to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events.

#### **Overview**

We are a provider of Enhanced Directory Assistance® and otherinformation services through operators and electronically.  We contract primarily with wireless carriers,Voice over Internet Protocol (“VoIP”) providers, cable companies, CompetitiveLocal Exchange Carriers (“CLEC”) and prepaid carriers to provide our servicesto their subscribers.

In addition to voice-based services, we also provide directoryassistance services in electronic format. These services are provided to customers who electronically issuedirectory assistance queries and use the returned information to complete andcorrect 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.  Wecontract with a broad range of companies that require electronic directoryassistance, including companies in the service, marketing, and financialsectors.  Our Data Services businessrepresents an emerging business based on infrastructure originally developed tosupport our voice-based call center business.

We offer our voice-basedservices to a carrier’s subscribers under a brand name selected by thecarrier.  The carrier establishes its ownfee structure with its subscribers. Subscribers typically pay the carrier’s fees ranging from $1.25 to $1.99plus airtime charges for directory assistance services.  We charge carriers directly and, at present,bear no subscriber collection risk.  Wecharge our customers on a per call basis. Competitive pressures have caused our average revenue per call todecrease in the recent past and such pressures will likely continue.

We currently provide ourservices to several carriers and other customers.  The terms of these contracts are generallysimilar, with variations in the geographic market to be served, the servicesand features we are to provide the carriers’ subscribers and the term.  None of these contracts precludes us fromproviding services to others.

We have expanded ourcustomer base to include data services, specialized operator services, such aswith Motorola’s VIAMOTO application, and directory assistance services tocorporations with offices in the United States and Canada.

Competitionin the telecommunications industry, and in the directory assistance market inwhich we participate, has been intense. Carriers are looking to lower their costs of providing directoryassistance and other services through, among other ways, outsourcing to lowcost domestic or overseas operators and utilizing automation to reducecosts.  In response to these and otherissues, in May 2003, we launched Infone, a service that provided enhanceddirectory and personal assistant services directly to consumers.  The initial launch of Infone was accompaniedby a significant nationwide marketing and promotion campaign.  Revenues from Infone were not significant inrelation to total revenues since its inception. Because of our inability to attract a significant number of subscribersto this service, it was discontinued in December 2005.

In the recent past,several of our largest customers have transferred their calls away from us fora variety of reasons, primarily in order to obtain lower prices and/or as aresult of consolidation in the wireless industry.  As a result of the 

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loss of these customersand the associated revenues and operating losses, since the second quarter of2005 we have taken significant actions to restructure our operations to lowerour cost structure.  In addition, we haverefocused our efforts on the wholesale directory assistance and data servicesmarkets to pursue additional revenue sources in the voice-based and electronicdelivery-based directory assistance and information services markets.

**Significant Events**

**Termination of contract**

 

InFebruary 2005, we entered into a Master Services Agreement for DirectoryAssistance Services (the “Services Agreement”) with Nextel Operations, Inc.,acting on behalf of certain affiliates (collectively “Nextel”) of NextelCommunications, Inc.  The ServicesAgreement superseded our previous services agreement dated in June 1999.  Under the Services Agreement, we agreed toprovide directory assistance services to Nextel’s customers on a non-exclusivebasis, and Nextel could transition call volume away from us on short noticeand/or terminate services entirely.

InOctober 2005, we received notification from Nextel that it would be terminatingthe Services Agreement 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 provide services to Nextel callersthrough March 31, 2006 in return for the payment by Nextel of approximately$5.75 million.  Those payments were inaddition to $2.5 million previously paid by Nextel in December 2005 inconnection with the transition and in addition to the contractual payments byNextel for normal service provided by us to Nextel callers through thetransition period.  Calls from Nextelwere substantially transitioned away from us by March 31, 2006, and we havereceived all amounts due from Nextel as of the date of this filing.  Including the $5.75 million received in thefirst quarter of 2006 as part of the settlement payments, Nextel representedapproximately 44% of our revenues for the first nine months of 2006.  Nextel accounted for approximately 75% and73% of our revenues in the third quarter and first nine months of 2005,respectively.

Termination of theServices Agreement has had, and will continue to have, a significant adverseimpact on our results of operations and cash flows and raises doubt as towhether we can continue to operate as a going concern.  We have experienced net losses in each of thequarterly and annual periods since the first quarter of 2003.  We expect to meet our cash requirements inthe remainder of 2006 and 2007 using our existing cash and cash equivalents.

Our management hastaken steps to significantly reduce the direct cost of delivering our services,reduce our general and administrative overhead and is aggressively pursuing newand additional sources of revenues to support our reduced cost structure anddevelop and grow our data services business. There can be no assurance that management’s plans will besuccessful.  In such event, we mayattempt to establish borrowing arrangements or otherwise raise funds in orderto maintain adequate liquidity, although we cannot provide assurance thatfinancing or other funding will be available in amounts or on terms acceptableto us.  If we are unable to execute ouroperations according to our plan or obtain additional financing, we may beforced to cease operations.

**Restructuring**

 

As aresult of the termination of the Services Agreement, we have consolidated andreduced our operations significantly and may continue to close call centers andreduce the number of employees both in call centers and in corporate andadministrative staff now that the transition of calls from Nextel has beencompleted.

Primarily during the second and third quarters of 2005, as part of ourongoing efforts to cut costs and align expenses with reduced revenues, weclosed and consolidated the operations of 12 of our call centers.  Most significant costs associated with closingthose call centers were accrued and paid in 2005.

In thefirst nine months of 2006, we have undertaken additional restructuringactivities, due primarily to the departure of call volume from Nextel discussedabove. In the first nine months of 2006, we closed 13 call centers andsignificantly reduced the number of call center and administrativeemployees.  As a result of the closureand other restructuring activities, we paid or accrued approximately $342,000and 2.5 million of termination benefits in the three and nine month periodsended September 30, 2006, respectively. We also recorded approximately ($60,000) and $1.6 million of expensesrelated 

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totermination of lease obligations of closed facilities in the three and ninemonth periods ended September 30, 2006, respectively.  In addition, we recorded approximately$171,000 and $2.1 million of other costs, primarily legal and advisory servicesand dismantling costs, in the three and nine month periods ended September 30,2006, respectively.  Included in thecosts for the nine months ended September 30, 2006 were losses incurred ondisposal, in the second quarter, of certain corporate and call center assets inthe amount of $935,000.  These assets hada net book value totaling $1,574,000 at the time of disposal, and we receivedproceeds of $639,000 from the sale.

As ofSeptember 30, 2006, we continue to operate six call centers from leasedfacilities. In addition, we utilize four other leased facilities, including ourcorporate headquarters and other administrative properties.

**Nasdaq listing issues**

 

Ourcommon stock listing was transferred from the Nasdaq National Market to theNasdaq Capital Market (formerly the Nasdaq SmallCap Market) on February 22,2006.  We elected to seek a transfer tothe Nasdaq Capital Market because we had been unable to regain compliance withthe $1.00 minimum bid price requirement for continued listing on the NasdaqNational Market.  By transferring to theNasdaq Capital Market, we were afforded an extended grace period in which wecould satisfy the $1.00 minimum bid price requirement.  At our annual meeting of shareholders, wereceived approval for, and on July 6, 2006 we effected, a one-for-four reversestock split.  In July 2006, we werenotified by Nasdaq that we regained compliance with the Nasdaq listingrequirements, and this matter is now closed.

**Significant new contract**

 

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

In connection with theAgreement, we issued to Jingle two warrants to purchase shares of our commonstock.  The first warrant is for thepurchase of up to 623,250 shares of common stock at an exercise price of $2.60per share.  The warrant will not beexercisable unless and until certain revenue and payment thresholds areachieved by Jingle during specified time periods as outlined in theAgreement.  The first warrant terminateson June 30, 2009.

The second warrant is forthe purchase of up to 870,075 shares of our common stock; provided, however,that shares represented by the sum of the first and second warrants, ifexercised, cannot exceed 19.98% of our total shares outstanding after thewarrants are exercised.  The exercise pricefor the second warrant will equal 115% of the average closing price per shareof the our common stock over the 20 consecutive trading days ending the lasttrading day prior to July 1, 2007.  Thesecond warrant will not be exercisable unless and until certain revenue andpayment thresholds are achieved by Jingle during specified time periods asoutlined in the Agreement.  The secondwarrant terminates on July 1, 2009.

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**Results of Operations**

This table showsselected items from our statements of operations expressed as a percentage ofrevenues:

|                                            | ** ** | **Three Months Ended  September 30,**     | ** ** | **Nine Months Ended  September 30,**      | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                 | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
|                                       |       |                                                     |       |                                                     |       |   |   |   |   |
| Revenues                                   |       | 100.0                                                    | %          | 100.0                                                    | %          | 100.0 | % | 100.0 | % |
| Direct operating  costs                    |       | 72.8                                                     |       | 80.1                                                     |       | 59.9 |   | 82.0 |   |
| Selling, general  and administrative costs |       | 75.8                                                     |       | 58.6                                                     |       | 65.8 |   | 63.4 |   |
| Depreciation and  amortization             |       | 13.2                                                     |       | 8.0                                                      |       | 11.9 |   | 8.2 |   |
| Restructuring  charges                     |       | 8.7                                                      |       | 14.3                                                     |       | 24.4 |   | 7.0 |   |
| Loss from  operations                      |       | (80.5                                                    | )          | (60.9                                                    | )          | (62.0 | ) | (60.5 | ) |
| Other income,  net                         |       | 3.6                                                      |       | 1.2                                                      |       | 2.3 |   | 1.4 |   |
| Loss before  income taxes                  |       | (76.9                                                    | )          | (59.7                                                    | )          | (59.7 | ) | (59.1 | ) |
| Income tax  expense                        |       | —                                                   |       | 2.2                                                      |       | 0.2 |   | 0.6 |   |
| Net loss                                   |       | (76.9                                                    | )%         | (61.9                                                    | )%         | (59.9 | )% | (59.7 | )% |

 

*Comparison of third quarter 2006to third quarter 2005*

Revenues decreased 72.9% to $5.2 million from $19.2 million dueprimarily to a decrease in call volume and a decrease in our average revenueper call.  Call volume decreased toapproximately 19 million calls from approximately 59 million calls due primarilyto lower call volume from Nextel as a result of their early termination of theServices Agreement.  Average revenue percall was approximately $0.25 and $0.32 in the third quarter of 2006 and 2005,respectively, reflecting the change in call volume mix and competitivepressures.

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 decreased 75.4% to $3.8 millionfrom $15.4 million.  This decrease wasprimarily due to lower personnel and data costs associated with servicing lowercall volumes.  As a percentage ofrevenues direct operating costs decreased to 72.8% from 80.1% due primarily toincreased call processing efficiencies and decreased labor rates in the callcenters resulting from our ongoing cost reduction efforts.

Selling, general andadministrative costs decreased 60.3% to $4.5 million from $11.3 million.  This decrease resulted primarily fromreductions in facilities-related costs of approximately $1.8 million, personneland associated costs of approximately $2.4 million, network and systems-relatedcosts of $800,000, and marketing and promotion costs of approximately$900,000.  As a percentage of revenues,selling, general and administrative costs increased to 85.8% from 58.6%primarily due to lower revenues.

Depreciation andamortization expense decreased 55.1% to approximately $700,000 from $1.5million.  The decrease in depreciationand amortization was due primarily to the overall reduction in acquisition offixed assets in the last several years as operations have been reduced.  Depreciation and amortization increased to13.2% from 8.0% of revenue as a result of lower revenues.

Restructuring charges inthe quarter ended September 30, 2006 consisted primarily of one-timetermination benefits for employees of approximately $342,000 and dismantlingcosts related to the closed call centers of approximately $171,000.  In addition, during the third quarter of2006, we settled or otherwise disposed of lease obligations of several closedcall centers.  As a result of thesesettlement activities, we incurred actual costs that were $60,000 lower thanthe amounts we had previously accrued for those lease obligations.  Net restructuring costs were $453,000 in the thirdquarter of 2006.  Restructuring chargesof approximately $432,000, primarily related to remaining lease obligations ofclosed facilities and accrued termination benefits related to certain corporateemployees, have been accrued but not paid at September 30, 2006.

Other income was $187,000and $235,000 in the third quarter of 2006 and 2005, respectively, and consistedprimarily of interest income earned on cash and cash equivalents.

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Because of our operatinglosses in the third quarter of 2006, we recorded no federal income taxexpense.  We have a valuation allowanceagainst deferred tax assets associated with operating losses in this and priorquarters and other deferred tax assets because it is deemed more likely thannot that these assets will not be realized. Accordingly, no federal income tax benefit has been recorded withrespect to these deferred tax assets. Income tax expense in the third quarter of 2005 was approximately$423,000, reflecting a provision for federal income tax expense related to aproposed adjustment by the Internal Revenue Service (“IRS”) relating to a prioryear tax return under audit.

#### **Liquidityand Capital Resources**

As of September 30, 2006, we had approximately $18.6million in cash and cash equivalents and restricted cash (including $5.7million of restricted cash) compared to approximately $24.6 million (including$6.9 million of restricted cash) at December 31, 2005.  Our business has consumed approximately $6.1million of cash (including $4.9 million of cash and equivalents and$1.2 million of restricted cash) in the first nine months of 2006primarily from net operating losses. Management’s goal is to restructure our operations to achieve positive,sustainable cash flow and earnings and we believe we have made significantprogress toward that goal.  There can be,however, no assurances that our cash resources will be sufficient to achievethat goal in the near term or ever.  Cashand cash equivalents and restricted cash are recorded at cost which approximatestheir fair market value.  We have nooutstanding debt.

Working capital was $16.4million at September 30, 2006, compared to $26.6 million at December 31,2005.  This change was primarily due tonet operating losses in the first nine months of 2006.

*Cash flow from operations. *Net cash used in operationswas $6.7 million in the first nine months of 2006 compared to net cash used inoperations of $24.7 million in the first nine months of 2005.  This difference of approximately $18.0million resulted primarily from net decreases in cash paid to or on behalf ofemployees, cash paid to suppliers, and cash paid for advertising.  These net decreases in cash outflows werepartially offset by a decrease in cash received from customers and an increasein cash paid for restructuring activities. Cash paid to or on behalf of employees decreased by $34.6 million, cashpaid to suppliers decreased by $9.5 million, and cash paid for advertisingdecreased by $2.8 million.  Cash receivedfrom customers decreased by $28.6 million and cash paid for restructuringincreased by $2.4 million.

*Cash flow from investingactivities. *Cashprovided by investing activities was $1.7 million in the first nine months of2006, primarily resulting from receipt of proceeds from the sale of assets anda reduction in cash used to secure a letter of credit related to our workers’compensation program partially offset by cash used for capital purchases.  Cash provided by investing activities was$21.8 million in the first months of 2005 resulting primarily from short-terminvestments being converted to cash and used in operations partially offset bycapital expenditures for equipment purchased for upgrades of our corporate-wideinfrastructure and an increase in cash restricted to secure a letter of creditrelated to our workers’ compensation program.

*Cash flow from financingactivities*.  Cash flowfrom financing activities was not significant in the first nine months of 2006or 2005.

*Future capital needs andresources. *The primaryuse of our capital in the near future is expected to be for workingcapital.  Although cash on hand(including restricted cash) and short-term investments at September 30, 2006was approximately $18.6 million, our operations and future activities,including additional restructuring efforts, will likely reduce available cash.

We are aggressivelypursuing new and additional sources of revenue. We are also adjusting ouroperations and reducing various elements of our operating costs where feasible.We plan to continue to adjust call centers, personnel and network capacities tocare for varying business circumstances, including changes in call volumes, pricingand other provisions of current and future customer contracts.

We plan to meet our cashand working capital requirements using existing cash and cash equivalentsduring the remainder of 2006 and throughout 2007. However: 1) we haveexperienced net losses during each quarter since the second quarter of 2003;2) cash and cash equivalents and restricted cash decreased $6.1 millionduring the first nine months of 2006; 3) we anticipate additional netlosses during 2006 and 2007; and 4) future restructuring of our operationsmay further reduce available financial resources. As a result of these and/orother issues, there can be no assurance that our existing financial resourceswill be sufficient or that we will be able to raise sufficient funds from othersources to maintain adequate liquidity. Consequently, if we are unable toexecute our current operating plans or obtain additional financing, we may beforced to cease operations.

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**Critical Accounting Policies**

We prepare our financialstatements in conformity with accounting principles generally accepted in theUnited States of America.  As such, weare required to make certain estimates, judgments and assumptions that webelieve are reasonable based upon the information available.  These estimates and assumptions affect thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the periodspresented.  Management believes that ofour significant accounting policies (see Note 1 to the financial statements),those governing accounts receivable, the lives and recoverability of thecarrying amount of equipment and other long-lived assets, such as existingintangibles, estimates involving the levels of our contingent liabilities forworkers’ compensation and medical self-insurance and estimates of current anddeferred taxes owed may involve a higher degree of judgment, estimation anduncertainty.

*Accountsreceivable. *Ourwholesale customer base has primarily consisted of large wireless telephonecarriers in the United States.  As such,we have had minimal risk of uncollectibility, at any point in time, related tooutstanding accounts receivable with these customers.  We have not experienced significantcollection issues or write-offs related to these customers.  Since our accounts receivable areconcentrated in relatively few of these wholesale customers, a significantchange in the liquidity or financial position of any one of them could adverselyimpact collection of our accounts receivable and therefore have a materialadverse effect on our financial position and future operating results.  In addition, our emerging data servicesbusiness is expected to generate receivables from customers that may not be asfinancially stable as our large carrier customers which may expose us togreater risk of uncollectible receivables than we have experienced in the past.

*Long-livedassets and intangibles. *Weevaluate the remaining life and recoverability of equipment and other assets,including patents and trademarks and internally developed software, wheneverevents or changes in circumstances indicate that the carrying amount of theassets may not be recoverable.  At suchtime, we estimate the future cash flows expected from the use of such assetsand their eventual disposition and, if lower than the carrying amounts, adjustthe carrying amount of the assets to their estimated fair value.  Because of our changing business conditions,including lower wholesale prices and dependence on a relatively small number ofcustomers for a significant portion of our revenues, our estimates of futurecash flows to be generated from our operations could change materially,resulting in the need for us to record additional impairment charges.  In addition, as a result of our changingbusiness conditions, we expect to adjust personnel, call centers and networkcapacities.  If any of these activitiesresult in certain of our assets no longer being used in operations, we may needto record an additional impairment charge. As a result of the decision by Nextel to terminate its contract with us,as discussed under Significant Events above, we evaluated our fixed assets andintangibles as of December 31, 2005 for impairment in accordance with SFAS No.144 and SFAS No. 142.  Our evaluationdetermined that the assets were not impaired as of December 31, 2005.

*Self-insurancereserves. *We havehistorically self-insured a portion of our workers’ compensation and employeemedical insurance programs.  Under those arrangements we typicallypurchase stop loss coverage at varying levels in order to mitigate ourpotential future losses.  The nature of these liabilities, which may notfully manifest themselves for several years, requires significantjudgment.  We evaluate pending workers’ compensation and medical claimsperiodically to determine the reasonableness of the reserves we have recordedfor such claims.  Our evaluation includesestimates of potential incurred-but-unreported claims as well as factors thatmay cause original estimates of such claims to increase over time, such asavailable claims data and historical trends and experience, as well as futureprojections of ultimate losses, expenses, premiums and administrativecosts.  We adjust these reserves if events or changes in circumstancesindicate that ultimate payments related to the claims will be more than therecorded reserves.  At September 30,2006, we have reserved approximately $2.5 million and $489,000 related to ourworkers’ compensation and medical programs, respectively.  While we believe that the amounts reservedfor these obligations are sufficient, any significant increase in the number ofclaims and costs associated with claims made under these plans could have amaterial adverse effect on our financial position, results of operations orcash flows.

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*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 cashflows.  At September 30, 2006, avaluation allowance reduced net deferred tax assets to zero.

#### **Recent Accounting Pronouncements**

In July 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in IncomeTaxes — an interpretation of FASB Statement No. 109.”  FIN 48 prescribes a recognition threshold andmeasurement attribute for financial statement recognition and measurement of atax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition.  FIN48 is effective for our fiscal year beginning January 1, 2007.  We are evaluating the impact that the adoptionof FIN 48 will have on our consolidated financial position and results ofoperations.

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

 In September 2006, the Securities and Exchange Commission (“SEC”)issued Staff Accounting Bulletin (“SAB”) No. 108 regarding the process ofquantifying financial statement misstatements. SAB No. 108 states that registrants should use both a balance sheetapproach and an income statement approach when quantifying and evaluating themateriality of a misstatement.  Theinterpretations in SAB No. 108 contain guidance on correcting errors underthe dual approach as well as provide transition guidance for correcting errors.  This interpretation does not change therequirements within SFAS No. 154, “Accounting Changes and ErrorCorrections—a replacement of APB No. 20 and FASB Statement No. 3,”for the correction of an error on financial statements.  SAB No. 108 is effective for annual financialstatements covering the first fiscal year ending after November 15,2006.  We do not expect the adoption ofSAB No. 108 to have a material effect on our consolidated financial position orresults of operations.

#### **ITEM 3.                  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Substantially all of our liquid resources are invested in money marketinstruments and short-term debt securities, and therefore, the fair marketvalue of these investments is affected by changes in market interestrates.  However, these funds wereinvested in overnight money market instruments or debt securities withshort-term effective maturities at September 30, 2006 and were redeemable on adaily or monthly basis.  All of theunderlying investments in the money market fund had maturities of three monthsor less.  A hypothetical 1% fluctuationin interest rates would not have a material adverse effect on our financialposition, results of operations or cash flows.

#### **ITEM 4.                  CONTROLSAND 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 (the “Exchange Act”)) at the end of the period covered by thisquarterly report.  Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end of theperiod covered by this quarterly report.

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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.

### **PART II.                OTHERINFORMATION**

### **ITEM 6.                  EXHIBITS**

| (a)    | Exhibits   |                                                                                                                                                                                      |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.1† | Telecom Information  Services Agreement between Jingle Networks, Inc. and Metro One  Telecommunications, Inc. dated July 1, 2006.                                                         |
|   | 10.2       | Common Stock Warrant  No. 3 to purchase shares of common stock between Jingle Networks, Inc. and  Metro One Telecommunications, Inc., dated July 1, 2006.                                 |
|   | 10.3       | Common Stock Warrant  No. 4 to purchase shares of common stock between Jingle Networks, Inc. and  Metro One Telecommunications, Inc., dated July 1, 2006.                                 |
|   | 10.4       | Registration Rights  Agreement between Jingle Networks, Inc. and Metro One Telecommunications,  Inc., dated July 1, 2006.                                                                 |
|   | 31.1       | Certification of  Principal Executive Officer pursuant to Securities and Exchange Commission  Rule 13a-14(a).                                                                             |
|   | 31.2       | Certification of  Principal Financial Officer pursuant to Securities and Exchange Commission  Rule 13a-14(a).                                                                             |
|   | 32.1       | Certification of  Principal Executive Officer and Principal Financial Officer pursuant to 18  U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley  Act Of 2002. |

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†       Confidentialtreatment requested as to certain portions of this exhibit.

 

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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, 2006 |                                         |
|----------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------|
|                                                                                                                                               | METRO ONE TELECOMMUNICATIONS, INC.           |
|                                                                                                                                               |                                         |
|                                                                                                                                               |                                         |
|                                                                                                                                               | By:                                          | /s/ Duane C. Fromhart |   |
|                                                                                                                                               | Duane C. Fromhart                            |
|                                                                                                                                               | Senior Vice President                        |
|                                                                                                                                               | Chief Financial Officer                      |
|                                                                                                                                               | (Principal Financial and Accounting Officer) |

 

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### **INDEX TO EXHIBITS**

| Exhibit No. | ** ** | **Description** | ** ** |
|------------------|------------|-----------------|------------|
|             | 10.1† |            |       | Telecom Information  Services Agreement between Jingle Networks, Inc. and Metro One  Telecommunications, Inc. dated July 1, 2006. |   |
|             | 10.2  |            |       | Common Stock Warrant  No. 3 to purchase shares of common stock between Jingle Networks, Inc. and  Metro One Telecommunications, Inc., dated July 1, 2006. |   |
|             | 10.3  |            |       | Common Stock Warrant  No. 4 to purchase shares of common stock between Jingle Networks, Inc. and  Metro One Telecommunications, Inc., dated July 1, 2006. |   |
|             | 10.4  |            |       | Registration Rights  Agreement between Jingle Networks, Inc. and Metro One Telecommunications,  Inc., dated July 1, 2006. |   |
|             | 31.1  |            |       | Certification of  Principal Executive Officer pursuant to Securities and Exchange Commission  Rule 13a-14(a). |   |
|             | 31.2  |            |       | Certification of  Principal Financial Officer pursuant to Securities and Exchange Commission  Rule 13a-14(a). |   |
|             | 32.1  |            |       | Certification of Principal Executive Officer and Principal Financial  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act Of 2002. |   |

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†                     Confidentialtreatment requested as to certain portions of this exhibit.

 

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