**United StatesSecurities and Exchange Commission**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

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

 

**Forthe Quarterly Period Ended September 30, 2005**

** **

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

 

**Commission File Number 0-27024**

 

**METRO ONE TELECOMMUNICATIONS,INC.**

(Exact name of registrant as specified in its charter)

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

 

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

(Address of principal executive offices) (zip code)

 

**(503) 643-9500**

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.

 

Yes ý No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

Yes ý No o

 

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

 

Yes o No ý

 

**Number ofshares of common stock outstanding as of November 14, 2004: 24,947,552 shares,no par value per share.**

 

 

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**METRO ONE TELECOMMUNICATIONS, INC.**

 

**INDEXTO FORM 10 - Q**

** **
| Part I  | Financial  Information                                                                                                 |   |
|--------------|------------------------------------------------------------------------------------------------------------------------|--------|
|         |                                                                                                                   |   |
| Item 1.      | Financial  Statements (Unaudited)                                                                                      |   |
|         |                                                                                                                   |   |
|         | Condensed Consolidated  Statements of Operations for the three and nine months ended September 30,  2005 and 2004 |   |
|         |                                                                                                                   |   |
|         | Condensed Consolidated  Balance Sheets as of September 30, 2005 and December 31, 2004                        |   |
|         |                                                                                                                   |   |
|         | Condensed Consolidated  Statements of Cash Flows for the nine months ended September 30, 2005  and 2004           |   |
|         |                                                                                                                   |   |
|         | 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.**

**CondensedConsolidated Statements of Operations (Unaudited)**

 
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Revenues                                  |       | $                                          | 19,211     |                                      | $          | 27,694 |   | $ | 57,739 |   | $ | 114,762 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Costs and expenses:                       |       |                                       |       |                                      |       |   |   |   |   |
| Direct operating                          |       | 15,390                                     |       | 17,585                                    |       | 47,353 |   | 67,302 |   |
| Selling, general and administrative       |       | 12,783                                     |       | 21,119                                    |       | 41,313 |   | 72,103 |   |
| Restructuring charges                     |       | 2,745                                      |       | —                                    |       | 4,020 |   | — |   |
|                                      |       | 30,918                                     |       | 38,704                                    |       | 92,686 |   | 139,405 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Loss from operations                      |       | (11,707                                    | )          | (11,010                                   | )          | (34,947 | ) | (24,643 | ) |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Other income, net                         |       | 235                                        |       | 3,123                                     |       | 804 |   | 3,534 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Loss before income taxes                  |       | (11,472                                    | )          | (7,887                                    | )          | (34,143 | ) | (21,109 | ) |
| Income tax expense                        |       | 423                                        |       | —                                    |       | 343 |   | 124 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Net loss                                  |       | $                                          | (11,895    | )                                         | $          | (7,887 | ) | $ | (34,486 | ) | $ | (21,233 | ) |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Net loss per common share:                |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                     |       | $                                          | (.48       | )                                         | $          | (.32 | ) | $ | (1.38 | ) | $ | (.85 | ) |
| Diluted                                   |       | $                                          | (.48       | )                                         | $          | (.32 | ) | $ | (1.38 | ) | $ | (.85 | ) |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average shares outstanding:      |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                     |       | 25,014                                     |       | 24,898                                    |       | 25,070 |   | 24,839 |   |
| Diluted                                   |       | 25,014                                     |       | 24,898                                    |       | 25,070 |   | 24,839 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

1

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**Metro OneTelecommunications, Inc.**

**CondensedConsolidated Balance Sheets (Unaudited)**

 
| **(In thousands)**                                                                                                                                                          | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                  | ** ** | ** **                   | ** ** | ** **                  | ** ** |
|                                                                                                                                                                        |       |                         |       |                        |       |
| Current assets:                                                                                                                                                             |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                   |       | $                            | 21,157     |                        | $          | 24,093 |   |
| Short-term investments, available for sale                                                                                                                                  |       | —                       |       | 25,375                      |       |
| Restricted cash                                                                                                                                                             |       | 6,860                        |       | 4,900                       |       |
| Accounts receivable                                                                                                                                                         |       | 13,129                       |       | 17,524                      |       |
| Prepaid costs and other current assets                                                                                                                                      |       | 2,708                        |       | 4,850                       |       |
|                                                                                                                                                                        |       |                         |       |                        |       |
| Total current assets                                                                                                                                                        |       | 43,854                       |       | 76,742                      |       |
|                                                                                                                                                                        |       |                         |       |                        |       |
| Furniture, fixtures and equipment, net                                                                                                                                      |       | 9,943                        |       | 12,701                      |       |
| Intangible assets                                                                                                                                                           |       | 6,799                        |       | 5,916                       |       |
| Other assets                                                                                                                                                                |       | 433                          |       | 471                         |       |
|                                                                                                                                                                        |       |                         |       |                        |       |
| Total assets                                                                                                                                                                |       | $                            | 61,029     |                        | $          | 95,830 |   |
|                                                                                                                                                                        |       |                         |       |                        |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                               |       |                         |       |                        |       |
|                                                                                                                                                                        |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                                        |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                            |       | $                            | 1,271      |                        | $          | 1,107 |   |
| Accrued liabilities                                                                                                                                                         |       | 3,237                        |       | 2,003                       |       |
| Accrued payroll and related costs                                                                                                                                           |       | 10,812                       |       | 12,125                      |       |
|                                                                                                                                                                        |       |                         |       |                        |       |
| Total current liabilities                                                                                                                                                   |       | 15,320                       |       | 15,235                      |       |
|                                                                                                                                                                        |       |                         |       |                        |       |
| Other long-term liabilities                                                                                                                                                 |       | 776                          |       | 1,158                       |       |
|                                                                                                                                                                        |       |                         |       |                        |       |
| Total liabilities                                                                                                                                                           |       | 16,096                       |       | 16,393                      |       |
|                                                                                                                                                                        |       |                         |       |                        |       |
| Commitments and contingencies                                                                                                                                               |       |                         |       |                        |       |
|                                                                                                                                                                        |       |                         |       |                        |       |
| Shareholders’ equity:                                                                                                                                                  |       |                         |       |                        |       |
| Preferred stock, no par value; 10,000 shares  authorized, no shares issued or outstanding                                                                                   |       | —                       |       | —                      |       |
| Common stock, no par value; 50,000 shares  authorized, 24,948 and 24,984 shares issued and outstanding at September 30,  2005 and December 31, 2004, respectively |       | 119,930                      |       | 119,948                     |       |
| Accumulated deficit                                                                                                                                                         |       | (74,997                      | )          | (40,511                     | )          |
|                                                                                                                                                                        |       |                         |       |                        |       |
| Total shareholders’ equity                                                                                                                                             |       | 44,933                       |       | 79,437                      |       |
|                                                                                                                                                                        |       |                         |       |                        |       |
| Total liabilities and shareholders’ equity                                                                                                                             |       | $                            | 61,029     |                        | $          | 95,830 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

2

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**Metro OneTelecommunications, Inc.**

**CondensedConsolidated Statements of Cash Flows (Unaudited)**

 
| ** **                                                                                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(In thousands)**                                                                         | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                                                                       |       |                                     |       |   |   |
| Cash flows from operating activities:                                                      |       |                                     |       |   |   |
| Net loss                                                                                   |       | $                                        | (34,486    | ) | $ | (21,233 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities: |       |                                     |       |   |   |
| Depreciation and amortization                                                              |       | 4,734                                    |       | 16,560 |   |
| Loss on disposal of fixed assets                                                           |       | 160                                      |       | 158 |   |
| Deferred income taxes                                                                      |       | —                                   |       | 1,920 |   |
| Changes in certain assets and liabilities:                                                 |       |                                     |       |   |   |
| Accounts receivable                                                                        |       | 4,395                                    |       | 13,833 |   |
| Prepaid costs and other assets                                                             |       | 774                                      |       | 6,517 |   |
| Accounts payable and other liabilities                                                     |       | (297                                     | )          | (3,211 | ) |
|                                                                                       |       |                                     |       |   |   |
| Net cash (used in) provided by operating activities                                        |       | (24,720                                  | )          | 14,544 |   |
|                                                                                       |       |                                     |       |   |   |
| Cash flows from investing activities:                                                      |       |                                     |       |   |   |
| Purchases of short-term securities                                                         |       | (36,805                                  | )          | — |   |
| Sales of short-term securities                                                             |       | 62,180                                   |       | — |   |
| Restricted cash to secure letter of credit                                                 |       | (1,960                                   | )          | — |   |
| Capital expenditures                                                                       |       | (1,682                                   | )          | (3,163 | ) |
| Proceeds from sale of assets                                                               |       | 69                                       |       | 22 |   |
|                                                                                       |       |                                     |       |   |   |
| Net cash provided by (used in) investing activities                                        |       | 21,802                                   |       | (3,141 | ) |
|                                                                                       |       |                                     |       |   |   |
| Cash flows from financing activities:                                                      |       |                                     |       |   |   |
| Common stock repurchased                                                                   |       | (121                                     | )          | — |   |
| Proceeds from exercise of stock options and employee  stock purchases                      |       | 103                                      |       | 146 |   |
|                                                                                       |       |                                     |       |   |   |
| Net cash (used in) provided by financing activities                                        |       | (18                                      | )          | 146 |   |
|                                                                                       |       |                                     |       |   |   |
| Net (decrease) increase in cash and cash equivalents                                       |       | (2,936                                   | )          | 11,549 |   |
|                                                                                       |       |                                     |       |   |   |
| Cash and cash equivalents, beginning of period                                             |       | 24,093                                   |       | 44,381 |   |
|                                                                                       |       |                                     |       |   |   |
| Cash and cash equivalents, end of period                                                   |       | $                                        | 21,157     |   | $ | 55,930 |   |
|                                                                                       |       |                                     |       |   |   |
| Supplemental disclosure of cash flow information:                                          |       |                                     |       |   |   |
| Cash refunded for income taxes, net                                                        |       | $                                        | 2,973      |   | $ | 10,023 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

3

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**Metro OneTelecommunications, Inc.**

**Notes toCondensed Consolidated Financial Statements (Unaudited)**

 

**1.****    ****Summary of Significant AccountingPolicies**

 

**Basis ofPresentation**

 

The accompanying unaudited interim condensedconsolidated financial statements have been prepared by Metro OneTelecommunications, Inc. in conformity with accounting principlesgenerally accepted in the United States of America for interim financialinformation.  Accordingly, certainfinancial information and footnotes have been omitted or condensed.  In the opinion of management, the condensedfinancial statements include all adjustments necessary for a fair presentationof the results for the interim periods. These condensed consolidated financial statements and notes theretoshould be read in conjunction with our audited financial statements included inour Annual Report on Form 10-K for the year ended December 31,2004.  The results of operations for theinterim periods shown in this report are not necessarily indicative of resultsfor future interim periods or the entire fiscal year.

 

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

 

**Advertising**

 

Costs of advertising areexpensed as incurred except for commercial advertising production costs, whichare expensed at the time the related commercials are first run.  Advertising expense was approximately $900,000and $2.7 million in the three and nine month periods ended September 30,2005, respectively, and approximately $2.5 million and $14.4 million in thethree and nine month periods ended September 30, 2004, respectively.  These expenses were primarily related tomarketing and promotion of our Infone service and are included in selling,general and administrative expenses in the condensed consolidated statement ofoperations.

 

**Short-termInvestments**

 

Short-term investments,if any, are carried at fair value and typically consist of available-for-saleauction rate securities (“ARS”) that we classify as current assets based uponour intent and ability to use these funds as necessary to satisfy short-termliquidity requirements.  We had no suchshort-term investments at September 30, 2005.  Our portfolio at December 31, 2004consisted of two types of ARS.  We held$15.4 million of investment-grade taxable auction rate notes of municipalissuers, which are debt-securities with variable interest rates that resetthrough a Dutch auction with principal traded at par.  The rate typically resets on a periodicbasis, usually between 7 and 49 days. Actual maturities of the underlying securities are greater than tenyears.  In addition, at December 31,2004, we held $10.0 million of auction rate preferred securities which consistof shares of closed-end investment funds invested in long-term fixed incomesecurities.  These funds generally issueauction rate preferred shares that provide liquidity at par value every 28 daysthrough the auction rate market.  Thereset rate for both types of ARS is set by a modified Dutch auction process inwhich bids are filled from lowest yield bid to highest; the highest bid clearedsets the rate for all winning bidders. Although the underlying securities have long-term contractualmaturities, we can sell or buy the securities at par on auction dates.  Thus, they are classified as short-terminvestments since they are intended to be available to fund currentoperations.  Fair values are based onquoted market prices and at December 31, 2004, the fair value of these securitiesapproximated their carrying value.

 

**Stock-BasedCompensation**

 

We have elected toaccount for stock options and shares issued under our Employee Stock PurchasePlan (“ESPP”) according to Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and to furnish the pro forma disclosuresrequired under Statement of Financial Accounting Standards (“SFAS”) No. 148,“Accounting for Stock-Based Compensation — Transition and Disclosure — anamendment of FASB Statement No. 123.” Accordingly, no compensation cost has been recognized in the financialstatements related to stock options issued under our Stock Incentive Plan (the “Plan”)or shares issued under our ESPP.

 

4

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If compensation cost onstock options granted and ESPP shares issued in the three and nine monthperiods ended September 30, 2005 and 2004 under the Plan had beendetermined based on the fair value of the options and ESPP shares as of thegrant or issue date in a method consistent with that described in SFAS No. 123,“Accounting for Stock-Based Compensation,” our net loss and net loss per sharewould have been changed to the pro forma amounts indicated below for the threeand nine month periods ended September 30:

 
| ** **                               | ** ** | **Three Months Ended  September 30,**    | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                      | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(In thousands, except per share  amounts)** | ** ** |
| Net loss, as  reported                   |       | $                                             | (11,895    | )                                         | $          | (7,887 | ) | $ | (34,486 | ) | $ | (21,233 | ) |
| Stock-based  compensation expense        |       | (47                                           | )          | (839                                      | )          | (2,053 | ) | (2,545 | ) |
| Net loss, pro  forma                     |       | $                                             | (11,942    | )                                         | $          | (8,726 | ) | $ | (36,539 | ) | $ | (23,778 | ) |
|                                     |       |                                          |       |                                      |       |   |   |   |   |
| Basic net loss  per share, as reported   |       | $                                             | (0.48      | )                                         | $          | (0.32 | ) | $ | (1.38 | ) | $ | (0.85 | ) |
| Basic net loss  per share, pro forma     |       | $                                             | (0.48      | )                                         | $          | (0.35 | ) | $ | (1.46 | ) | $ | (0.96 | ) |
|                                     |       |                                          |       |                                      |       |   |   |   |   |
| Diluted net loss  per share, as reported |       | $                                             | (0.48      | )                                         | $          | (0.32 | ) | $ | (1.38 | ) | $ | (0.85 | ) |
| Diluted net loss  per share, pro forma   |       | $                                             | (0.48      | )                                         | $          | (0.35 | ) | $ | (1.46 | ) | $ | (0.96 | ) |

 

In March 2005,our Board of Directors accelerated vesting on all of the then outstanding stockoptions, of which all had fair market values that were less than the exerciseprices at that time.  In determining toaccelerate the vesting of these options, the Board considered the effect on ourreported stock option expense in future periods, the comparability of ourstatements of operations in prior and subsequent periods, and the potentialbenefit to Metro One and our shareholders in retaining the services of affectedofficers and employees.  The pro formaexpense included in the stock-based compensation expense noted above associatedwith the accelerated vesting was approximately $1,592,000.

 

**RecentAccounting Pronouncements**

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(Revised 2004), “Share-Based Payment” (“SFAS No. 123R”) an amendment of SFASNo. 123, “Accounting forStock-Based Compensation” and SFAS No. 95, “Statement of Cash Flows,” whichrequires companies to recognize in their statements of operations thegrant-date fair value of stock options and other equity-based compensationissued to employees.  We will adopt SFAS No. 123Rin our first quarter of 2006.  We arestill evaluating the effects that adoption of this statement will have on our condensedconsolidated financial statements.

 

**2.****    ****Restructuring Charges and ExitActivities**

 

In June 2005,we announced that, as part of our ongoing corporate-wide program to cut costsand align expenses with reduced revenues, we would be closing and consolidatingthe operations of 11 of our call centers during the second and third quartersof 2005.  We closed three call centers inthe second quarter of 2005 and we closed eight call centers in the thirdquarter of 2005, with call volume being transferred to our remaining 20 callcenters.

 

5

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Costsincurred to close the eight call centers and costs related to otherrestructuring activities during the third quarter and our cumulative costs forrestructuring activities to date are shown in the following table.  We do not expect significant additional costsrelated to the consolidation of the 11 call centers closed to date.

 

| ** **                     | ** ** | **Three months ended  September 30, 2005** | ** ** | **Nine months ended  September 30, 2005** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| Major cost type                |       |                                            |       |                                           |       |
|                           |       |                                            |       |                                           |       |
| One-time  termination benefits |       | $                                               | 1,110      |                                           | $          | 1,236 |   |
| Lease  termination costs       |       | 786                                             |       | 1,900                                          |       |
| Other                          |       | 849                                             |       | 884                                            |       |
|                           |       |                                            |       |                                           |       |
|                           |       | $                                               | 2,745      |                                           | $          | 4,020 |   |

 

Thefollowing summarizes the provisions, payments, adjustments and liability forcosts associated with our cost reduction efforts for the periods shown (inthousands):

 

| ** **                          | ** ** | **One-time  termination  benefits** | ** ** | **Lease  termination costs** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|-----------|------------|-----------|------------|
|                                |       |                                |       |                         |       |      |       |      |       |
| Balance at March 31,  2005     |       | $                                   | —     |                         | $          | —    |       | $         | —     |   | $ | — |   |
| Provisions                          |       | 126                                 |       | 1,114                        |       | 35        |       | 1,275     |       |
| Payments                            |       | (126                                | )          | (226                         | )          | (35       | )          | (387      | )          |
| Adjustments                         |       | —                              |       | —                       |       | —    |       | —    |       |
| Balance at June 30,  2005      |       | —                              |       | 888                          |       | —    |       | 888       |       |
| Provisions                          |       | 1,110                               |       | 786                          |       | 849       |       | 2,745     |       |
| Payments                            |       | (1,110                              | )          | (491                         | )          | (750      | )          | (2,351    | )          |
| Adjustments                         |       | —                              |       | 293                          |       | —    |       | 293       |       |
| Balance at September 30,  2005 |       | $                                   | —     |                         | $          | 1,475     |       | $         | 99         |   | $ | 1,574 |   |

 

Asdiscussed below in Note 5. Significant Events, in October 2005, wereceived notice that Nextel would be terminating its contract with us.  In response to this notice, we have acceleratedour ongoing efforts to reduce costs and restructure our operations to aligncosts with revenue.  These effortsinclude discontinuing our Infone service, our retail product offering,accelerating the closing of underutilized call centers and significantlyscaling back the number of employees and space at our corporate office.  We have closed one additional call center, reducedcorporate headcount by 42 employees and incurred approximately $421,000 ofseverance costs subsequent to September 30, 2005 related to theseefforts.  We expect to incur additionalseverance, call center exit costs, and other costs associated with the closingof additional call centers and other restructuring activities.  We are engaged in continuing discussions withNextel with regard to the timing of their transition of call volume away from us;therefore, our plans, and consequently, our ability to estimate future costsassociated with those plans, are still being developed and the amount andtiming of associated future costs cannot be accurately estimated at this time.

 

**3.****    ****Net Loss Per Share**

 

Basicnet loss per share is based on the weighted average number of common sharesoutstanding.  Diluted net loss per sharereflects the potential dilution that could occur if outstanding options topurchase common stock were exercised or converted into common stock.  Basic and diluted weighted average sharesoutstanding were the same for the three and nine month periods ending September 30,2005 and 2004 because inclusion of the potential dilutive effect of commonstock options in

 

6

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thecalculation would be anti-dilutive. There were no adjustments to net loss for the calculation of both basicand diluted net loss per share for all periods.

 

Options to purchase 2,874,000and 2,999,000 shares of common stock were outstanding at September 30,2005 and 2004, respectively, but were not included in the computation ofdiluted net loss per share for the three and nine months ended September 30,2005 and 2004, respectively, because their effect would be anti-dilutive.

 

**4.****    ****Commitments and Contingencies**

 

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

 

From time to time, in the normal course of ourbusiness, we issue standby letters of credit and bank guarantees.  At September 30, 2005, we had one letterof credit outstanding in the amount of $6,860,000 related to our workers’compensation program.  The letter ofcredit is secured by a certificate of deposit for the same amount that isrecorded as restricted cash.  This letterof credit expires in April 2006.

 

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

 

In February 2005, we entered into a MasterServices Agreement for Directory Assistance Services (the “Services Agreement”)with Nextel Operations, Inc., acting on behalf of certain affiliates(collectively “Nextel”) of Nextel Communications, Inc.  The Services Agreement superceded ourprevious services agreement dated in June 1999.  Under the Services Agreement, we agreed toprovide directory assistance services to Nextel’s customers on a non-exclusivebasis.  Under the agreement, Nextel couldtransition call volume away from us on short notice and/or terminate servicesentirely.

 

In October 2005, we received notification fromNextel that it would be terminating the Services Agreement discussed aboveeffective January 9, 2006.  A planfor transition of services is currently under discussion between theparties.  Nextel representedapproximately 75% and 73% of our revenue for the three and nine months ended September 30,2005, respectively, and 73% and 51% of our revenue for the three and ninemonths ended September 30, 2004, respectively.  As a result, in the near term, we will beconsolidating and reducing our operations including closing call centers andreducing our number of employees both in call centers and in corporate andadministrative staff.  Termination ofthis contract will have a significant adverse impact on our results ofoperations and cash flows and raises substantial doubt as to whether we cancontinue to operate as a going concern. If we are unable to reduce our costs in line with continuing revenues,increase our revenues to support our reduced cost structure or obtainadditional financing, we may be forced to cease operations.  As a result of the notification from Nextel,we will evaluate our fixed assets and intangible assets for impairment inaccordance with SFAS No. 144 and SFAS No. 142 during the fourthquarter of 2005.

 

Our contract with AT&T Wireless expired in December 2003,and our negotiations did not result in a new contract.  The call volume from AT&T Wirelesstransitioned away during the second and third quarters of 2004.  AT&T Wireless accounted for approximately5% and 34% of our revenues in the three and nine month periods ended September 30,2004, respectively.

 

In August 2005, weceased service for ALLTEL Communications, Inc. (“ALLTEL”).  ALLTEL represented approximately 6% and 10% ofthe our revenues for the three and nine months ended September 30, 2005,respectively, and represented approximately 14% and 10% of our revenues for thethree and nine months ended September 30, 2004, respectively.

 

7

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#### **ITEM2.**                  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Allstatements and trend analyses contained in this item and elsewhere in thisreport on Form 10-Q relative to the future constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  These forward-lookingstatements may, but do not necessarily, also include words such as “believes,” “expects,”“anticipates,” “plans,” “estimates,” “may,” “will,” “should,” “could,” “continue”or similar expressions.  Forward-lookingstatements are not guarantees.  Theyinvolve known and unknown business and economic risks, uncertainties and otherfactors that may cause our actual results, performance or achievements to bematerially different from any future results, performance or achievementsexpressed or implied by such forward-looking statements.  These risks, uncertainties and other factorsinclude the expiration or pricing of customer contracts, the successfulexecution of our cost reduction efforts and current business strategy, and ourability to generate cash from operations, and other risks, including thosediscussed in our 2004 Annual Report on Form 10-K filed with the Securitiesand Exchange Commission (“the SEC”) and those described in our other filingswith the SEC, press releases and other communications.  Any forward-looking statement in this reportreflects our expectations at the time of this report only.  We undertake no obligation to publiclyrelease any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.

 

#### **Overview**

#### ** **

We develop and provide EnhancedDirectory Assistance® and other information services for the telecommunicationsindustry.  We contract primarily withwireless carriers to provide our services to their subscribers.

 

Typically, under ourwholesale contracts, carriers agree to route some or all of their directoryassistance calls to us.  We offer ourservices to multiple carriers within the same market.  When a carrier’s subscribers dial a typicaldirectory assistance number, such as “411,” “555-1212” or “00,” the calls arerouted to and answered by our operators identifying the service by that carrier’sbrand name.

 

Each carrier customerestablishes its own directory assistance fee structure for itssubscribers.  Wireless subscriberstypically pay fees to their carrier ranging from $1.00 to $1.50 plus airtime chargesfor our services.  We bear no subscribercollection risk with respect to carrier subscribers; however, there may becollection risk to the extent growth and profitability in thetelecommunications industry decreases and to the extent we provide services toother types of customers, including businesses, governmental units.

 

We charge our customerson a per call basis.  Prices for servicesprovided to other types of customers, including individual consumers,businesses, governmental units or other callers, may vary based on the natureof the service, volume and other circumstances.

 

Competition in thetelecommunications industry, and in the directory assistance market in which weparticipate, is intense.  With slowingsubscriber growth and declining revenue per user, carriers are looking to lowertheir costs of providing directory assistance and other services through, amongother ways, outsourcing to low cost domestic or overseas operators andutilizing automation to reduce costs.  Inresponse to these and other issues, in May 2003, we launched Infone, intendedto provide enhanced directory and personal assistant services directly toconsumers.

 

The launch of Infone wasaccompanied by a significant nationwide marketing and promotion campaigndesigned to build brand awareness and encourage customers to sign up forInfone.  During the three and nine monthperiods ended September 30, 2005, we spent approximately $900,000 and $2.7million, respectively, on such marketing and promotion campaigns.  In October 2005, due to our inability toattract a significant number of users and generate significant revenues, wedecided to discontinue offering our Infone service.  Because the costs to operate and supportInfone have had a significant adverse impact on our financial position,operating results and cash flows, we expect the discontinuance of Infone willfurther our efforts to reduce costs.

 

8

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**Significant Events**

 

In February 2005, weentered into a Master Services Agreement for Directory Assistance Services (the“Services Agreement”) with Nextel Operations, Inc., acting on behalf ofcertain affiliates (collectively “Nextel”) of Nextel Communications, Inc.  The Services Agreement superceded ourprevious services agreement dated in June 1999.  Under the Services Agreement, we agreed toprovide directory assistance services to Nextel’s customers on a non-exclusivebasis.  Under the agreement, Nextel couldtransition call volume away from us on short notice and/or terminate servicesentirely.

 

In October 2005, wereceived notification from Nextel that it would be terminating the ServicesAgreement discussed above effective January 9, 2006.  A plan for transition of services iscurrently under discussion between the parties. Nextel represented approximately 75% and 73% of our revenue for thethree and nine months ended September 30, 2005, respectively, and 73% and51% of our revenue for the three and nine months ended September 30, 2004,respectively.  As a result, in the nearterm, we will be discontinuing our Infone service, our retail product offering,accelerating the closing of underutilized call centers and significantlyscaling back the number of employees and space at our corporate office.  We have closed one additional call center,reduced corporate headcount by 42 employees and incurred approximately $421,000of severance costs subsequent to September 30, 2005, related to theseefforts.  We expect to incur additionalseverance, call center exit costs, and other costs associated with the closingof additional call centers and other restructuring activities.  We are engaged in continuing discussions withNextel with regard to the timing of their transition of call volume away fromus; therefore, our plans, and consequently, our ability to estimate futurecosts associated with those plans, are still being developed, and the amountand timing of associated future costs cannot be accurately estimated at thistime.  Termination of this contract willhave a significant adverse impact on our results of operations and cash flows whichraises substantial doubt as to whether or not we can continue to operate as agoing concern.  If we are unable toreduce our costs in line with continuing revenues, increase our revenues tosupport our reduced cost structure or obtain additional financing, we may beforced to cease operations.  CreditSuisse First Boston LLC, our financial advisor, continues to assist the Boardof Directors in reviewing its financial plans and exploring avenues availableto enhance shareholder value.

 

Our contract withAT&T Wireless expired in December 2003, and our negotiations did notresult in a new contract.  The callvolume from AT&T Wireless transitioned away during the second and thirdquarters of 2004.  AT&T Wirelessaccounted for approximately 5% and 34% of our revenues in the three and nine monthperiods ended September 30, 2004, respectively.

 

In August 2005,we ceased service for ALLTEL Communications, Inc. (“ALLTEL”).  ALLTEL represented approximately 6% and 10%of the our revenues for the three and nine months ended September 30,2005, respectively, and represented approximately 14% and 10% of our revenuesfor the three and nine months ended September 30, 2004, respectively.

 

**Resultsof Operations**

 

Thistable shows selected items from our statements of operations expressed as apercentage of revenues:

 
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Revenues                                  |       | 100.0                                      | %          | 100.0                                     | %          | 100.0 | % | 100.0 | % |
| Direct operating costs                    |       | 80.1                                       |       | 63.5                                      |       | 82.0 |   | 58.7 |   |
| Selling, general and administrative costs |       | 66.5                                       |       | 76.3                                      |       | 71.6 |   | 62.8 |   |
| Restructuring charges                     |       | 14.3                                       |       | 0.0                                       |       | 6.9 |   | 0.0 |   |
| Loss from operations                      |       | (60.9                                      | )          | (39.8                                     | )          | (60.5 | ) | (21.5 | ) |
| Other income, net                         |       | 1.2                                        |       | 11.3                                      |       | 1.4 |   | 3.1 |   |
| Loss before income taxes                  |       | (59.7                                      | )          | (28.5                                     | )          | (59.1 | ) | (18.4 | ) |
| Income tax expense                        |       | 2.2                                        |       | 0.0                                       |       | 0.6 |   | 0.1 |   |
| Net loss                                  |       | (61.9                                      | )%         | (28.5                                     | )%         | (59.7 | )% | (18.5 | )% |

 

9

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*Comparisonof third quarter 2005 to third quarter 2004*

 

Revenues decreased 30.6%to $19.2 million from $27.7 million. Call volume decreased to approximately 59 million calls fromapproximately 60 million calls.  Thesedecreases resulted primarily from lower call volume from AT&T Wireless whosetransition away from us was substantially completed in the third quarter of2004, lower call volume from ALLTEL whose transition was substantiallycompleted in the third quarter of 2005 and a reduction in our average revenueper call.  These reductions werepartially offset by growth in call volume under other existing contracts andmarkets.  Our average revenue per calldecreased to approximately $0.32 in the third quarter of 2005 fromapproximately $0.46 per call in the third quarter of 2004.

 

Directoperating costs consist of salaries, wages, benefits and taxes relating to callcenter personnel and costs of listings data and content acquisition.  These costs decreased 12.5% to $15.4 millionfrom $17.6 million.  This decrease wasprimarily due to lower personnel and data costs associated with servicing lowercall volumes as well as a decrease in employee benefit costs.  As a percentage of revenues, direct operatingcosts increased to 80.1% from 63.5%, due primarily to decreased revenues as aresult of a reduction in our average revenue per call.

 

Selling,general and administrative costs decreased 39.5% to $12.8 million from $21.1million.  This decrease resultedprimarily from reductions in marketing and promotion costs of approximately $1.6million, a reduction in depreciation and amortization expenses of approximately$3.9 million resulting from our write-down of fixed assets in the fourthquarter of 2004 and reductions in other general and administrative expenses ofapproximately $2.8 million resulting from our ongoing corporate-wide program toreduce costs.  As a percentage ofrevenues, selling, general and administrative costs decreased to 66.5% from 76.3%primarily due to lower depreciation and amortization expenses and lowercorporate-wide operating costs.

 

Restructuringcharges in the quarter ended September 30, 2005 consisted primarily ofone-time termination benefits paid to employees of $1.1 million, leasetermination costs of $786,000and $849,000 of other costs primarily related tothe dismantling of the closed call centers resulting from of our ongoing costreduction plans.  Such charges primarily relatedto the eight call centers closed during the three months ended September 30,2005.  Restructuring charges ofapproximately $1.6 million, primarily related to continuing lease obligationson closed facilities, have been accrued but not paid at September 30,2005.

 

Depreciationand amortization expense, a component of selling, general and administrativecosts, decreased 71.8% to $1.5 million from $5.4 million and decreased to 8.0%from 19.6% of revenue.  The decrease indepreciation and amortization was due primarily to the write-down of fixedassets in the fourth quarter of 2004 and the overall reduction in acquisitionof fixed assets in the last several years as operations have been reduced.

 

Otherincome, consisting primarily of interest income earned on cash and cashequivalents, was $235,000 in the third quarter of 2005 compared to $3.1 millionin the third quarter of 2004.  In thethird quarter of 2004, we received a refund from SBC Communications in theamount of approximately $2.9 million which was the result of a California PUCdecision that SBC had overcharged for certain directory assistance data.

 

Incometax expense in the third quarter of 2005 was approximately $423,000, reflectinga provision for federal income tax expense related to a proposed adjustment bythe Internal Revenue Service (“IRS”) relating to a prior year tax return underaudit.  Because of our operating lossesin the third quarter of 2004, we recorded no income tax expense in that period.

 

*Comparisonof the first nine months of 2005 to the first nine months of 2004*

 

Revenues decreased 49.7%to $57.7 million from $114.8 million. Call volume decreased to approximately 178 million calls fromapproximately 248 million calls.  Thesedecreases resulted primarily from lower call volume from AT&T Wireless dueto expiration of its contract and to a reduction in our average revenue per call.  These reductions were partially offset bygrowth in call volume under other existing contracts and markets.  Our average revenue per call decreased toapproximately $0.32 in the first nine months of 2005 from approximately $0.46per call in the first nine months of 2004.

 

10

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Directoperating costs decreased 29.6% to $47.4 million from $67.3 million.  This decrease was primarily due to lowerpersonnel and data costs associated with servicing lower call volumes.  As a percentage of revenues, direct operatingcosts increased to 82.0% from 58.7%, due primarily to decreased revenues as aresult of a reduction in our average revenue per call.

 

Selling,general and administrative costs decreased 42.7% to $41.3 million from $72.1million.  This decrease resultedprimarily from reductions in marketing and promotion costs of approximately $11.7million, a reduction in depreciation and amortization expenses of approximately$11.9 million resulting from our write-down of fixed assets in the fourthquarter of 2004 and reductions in other general and administrative expenses ofapproximately $7.2 million resulting from our ongoing corporate-wide program toreduce costs.  As a percentage ofrevenues, selling, general and administrative costs, less restructuring costs increasedto 71.6% from 62.8% primarily due to lower revenues.

 

Restructuringcharges in the nine months ended September 30, 2005 consisted primarily ofone-time termination benefits paid to employees of $1.2 million, leasetermination costs of $1.9 million and $884,000 of other costs primarily relatedto the dismantling of the closed call centers resulting from of our ongoingcost reduction plans.  Such chargesprimarily related to the 11 call centers closed during the nine months ended September 30,2005.

 

Depreciationand amortization expense, a component of selling, general and administrativecosts, decreased 71.4% to $4.7 million from $16.6 million and decreased to 8.2%from 14.4% of revenue.  The decrease indepreciation and amortization was due primarily to the write-down of fixedassets in the fourth quarter of 2004 and the overall reduction in acquisitionof fixed assets in the last several years as operations have been reduced.

 

Otherincome, consisting primarily of interest income on cash and cash equivalents,was $804,000 in the first nine months of 2005 compared to $3.5 million in the firstnine months of 2004.  Other income in thefirst nine months of 2004 consisted primarily of a refund from SBCCommunications in the amount of approximately $2.9 million as noted above,interest income on cash and cash equivalents and other miscellaneous items totalingapproximately $605,000.

 

Incometax expense in the first nine months of 2005 was approximately $343,000,primarily related to the IRS adjustment noted above.  Because of our operating losses in the first ninemonths of 2004, we recorded no federal income tax expense in that period.  In the first nine months of 2004, income taxexpense was approximately $124,000, primarily due to adjustment of priorestimates to actual state income tax returns filed.

 

#### **Liquidity and CapitalResources**

#### ** **

As of September 30,2005, we had approximately $28.0 million in cash and cash equivalents andrestricted cash, including $6.9 million of restricted cash, compared to approximately$54.4 million in cash and cash equivalents, short-term investments andrestricted cash, including $4.9 million of restricted cash, at December 31,2004.  The net decrease of $26.4 millionresulted primarily from our operating losses for the nine months ended September 30,2005.  We have no outstanding debt.

 

Workingcapital was $28.5 million at September 30, 2005, compared to $61.5 millionat December 31, 2004.  This decreasewas primarily due to cash used in operations.

 

*Cash flowfrom operations. *Netcash used in operations was $24.7 million for the nine months ended September 30,2005 compared to net cash provided by operations of $14.5 million for the ninemonths ended September 30, 2004. This difference of $39.2 million resulted primarily from a decrease inthe amount of cash received from customers as a result of decreased revenue andthe receipt of a smaller refund of federal income taxes in the first ninemonths of 2005 as compared to the first nine months of 2004, partially offsetby decreases in cash paid for advertising and promotion expenses, cash paid toor on behalf of our employees and cash paid to vendors and suppliers.  Cash received from customers decreased byapproximately $66.5 million in the first nine months of 2005 and net federaland state income tax refunds decreased by approximately $7.1 million.  Cash paid to or on behalf of employees, cashpaid for advertising and promotion and cash paid to vendors and suppliersdecreased by approximately $20.9 million, $11.7 million and $4.8 million,respectively in the first nine months of 2005 compared to the first nine monthsof 2004.

 

11

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*Cash flowfrom investing activities. *Cashprovided by investing activities was $21.8 million in the first nine months of2005 resulting primarily from short-term investments being converted to cashand used in operations, partially offset by capital expenditures for equipmentpurchased for upgrades of our corporate-wide infrastructure and an increase incash restricted to secure a letter of credit related to our workers’compensation program.

 

*Cash flowfrom financing activities. *InJune 2005, our Board of Directors approved a share repurchase program thatauthorized the repurchase of up to 250,000 shares per month of our commonstock.  During the third quarter of 2005,we repurchased 151,000 shares of our common stock at an average purchase priceof $0.80 per share.  There was no othersignificant cash expended or generated related to financing activities in thefirst nine months of 2005.

 

*Futurecapital needs and resources. *Theprimary uses of our capital in the near future are expected to be for workingcapital, payment of costs incurred to restructure our operations, thedevelopment or acquisition of technologies, features and content complementaryto our business and for general corporate purposes.  These general corporate purposes couldinclude acquisitions, efforts to pursue and market new growth strategies andother corporate development activities.

 

Thetermination of our contract with Nextel will have a material adverse impact onour liquidity and financial position.  Weare accelerating our restructuring efforts to reduce our operations and relatedexpenses.  We have reduced personnel andclosed 11 of our call centers in the last two quarters.  We expect to further reduce our employees andcall centers over the next several months in efforts to bring our expenses inline with our remaining revenues after the departure of Nextel.  Because of the significant decrease inrevenue we have and will be experiencing, there is substantial doubt as towhether or not our existing cash and cash equivalents and cash from operationswill be sufficient to fund our operations for the next twelve months.  Future operations and restructuringactivities as well as activities designed to develop new revenue sources willlikely reduce available cash.  If ourcost reduction efforts combined with efforts to develop new sources of revenueare not successful, we may be unable to continue operations.  We cannot be certain that we will be able toestablish borrowing arrangements or otherwise raise additional capital on termsfavorable to us or at all.

 

On July 20,2005, we received a notice from the Nasdaq Stock Market stating that for thelast 30 consecutive business days, the bid price of our common stock had closedbelow the minimum $1.00 per share requirement for continued inclusion underMarketplace Rule 4450(a)(5).  Under Marketplace Rule 4450(e)(2),we have 180 calendar days, or until January 17, 2006, to regain complianceby having a closing bid price for our common stock of at least $1.00 per sharefor a minimum of ten consecutive business days. After the initial 180 calendar day compliance period, we can apply to transferour listing to The Nasdaq SmallCap Market if, on January 17, 2006, we meetThe Nasdaq SmallCap Market initial inclusion criteria set forth in Marketplace Rule 4310(c),except for the $1.00 minimum bid price requirement.  If such a transfer were approved, we would beprovided with an additional 180 calendar day compliance period to demonstratecompliance.

 

On October 21,2005, we received a Nasdaq Staff Deficiency Letter informing us that we nolonger comply with Nasdaq’s independent director and audit committeerequirements for continued listing as set forth in Marketplace Rules 4350.  Theletter stated that, consistent with Marketplace Rules 4350(c)(1) and4350(d)(4), we will be provided a cure period until the earlier of our nextannual shareholders’ meeting or October 4, 2006, in order to regaincompliance.  The letter also stated that,in the event we do not regain compliance within this period, the Staff willprovide written notification that our securities will be delisted.

 

Failureto achieve continued listing on the Nasdaq National Market will likely impactour ability to raise additional capital.

 

#### **Critical AccountingPolicies**

#### ** **

Weprepare our financial statements in conformity with accounting principlesgenerally accepted in the United States of America.  As such, we are required to make certainestimates, judgments and assumptions that we believe are reasonable based uponthe information available.  Theseestimates and assumptions affect the reported amounts of assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the periods presented. Management believes that of our significant accounting policies (seeNote 1 to the financial statements in our Annual Report on Form 10-K forthe year ended December 31, 2004), those governing accounts receivable,the lives and recoverability of the carrying amount of equipment and otherlong-lived

 

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assets, such as existingintangibles, estimates involving the levels of our contingent liabilities forworkers’ compensation and medical self-insurance and estimates of current anddeferred taxes may involve a higher degree of judgment, estimation anduncertainty.

 

*Accounts receivable. *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 couldadversely impact collection of our accounts receivable and therefore have amaterial adverse effect on our financial position and future operating results.

 

*Long-lived assets. *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 use of such assets andtheir eventual disposition and, if lower than the carrying amounts, adjust thecarrying 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 certain of the circumstances noted above, we evaluatedour fixed assets for impairment in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” as of December 31, 2004.  We determined that the value of our fixedassets was impaired; thus, in the fourth quarter of 2004, we recorded a $32.2million write-down of those assets to their estimated fair market value.  As a result of the decision by Nextel toterminate its contract with us, as discussed under Significant Events above, wewill evaluate our fixed assets and intangibles for impairment in accordancewith SFAS No. 144 and SFAS No. 142 in the fourth quarter of 2005.

 

*Self-insurancereserves*.  We self-insure a portion of our workers’compensation and employee medical insurance programs.  We purchase stoploss coverage at varying levels in order to mitigate our potential futurelosses.  The nature of these liabilities, which may not fully manifestthemselves for several years, requires significant judgment.  We evaluatepending workers’ compensation and medical claims periodically to determine thereasonableness of the reserves we have recorded for such claims.  Our evaluation includes estimates ofpotential incurred-but-unreported claims as well as factors that may causeoriginal estimates of such claims to increase over time, such as availableclaims data and historical trends and experience, as well as future projectionsof ultimate losses, expenses, premiums and administrative costs.  Weadjust these reserves if events or changes in circumstances indicate thatultimate payments related to the claims will differ significantly from therecorded reserves.  At September 30,2005, we have reserved approximately $5.4 and $1.3 million related to ourworkers’ compensation and medical programs, respectively.  While we believe that the amounts reservedfor these obligations are reasonable estimated, any significant increase in thenumber of claims and costs associated with claims made under these plans couldhave a material effect on our financial position, results of operations or cashflows.

 

*Income taxes.*  Accountingfor income taxes requires us to estimate our income taxes in each jurisdictionin which we operate.  Due to differences in the recognition of itemsincluded in income for accounting and tax purposes, temporary differences arisewhich are recorded as deferred tax assets or liabilities.  We estimate thelikelihood of recovery of these assets, which is dependent on future levels ofprofitability and enacted tax rates. As a result, we have recorded a valuationallowance against our net deferred tax assets. Should any further amounts be determined not to be recoverable, orassumptions change, we would be required to take a charge, which could have amaterial effect on our financial position, results of operations or cash flows.  We are also subject to examination by the IRSand other taxing authorities.  To theextent that such authorities take exception to a tax position taken on a filedreturn, we may need to recognize additional income tax expense.  Such amounts could be material to ourfinancial position, results of operations or cash flows.

 

 

### **Recent AccountingPronouncements**

### ** **

In December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(Revised 2004), “Share-Based Payment” (“SFAS No. 123R”) an amendment of SFASNo. 123, “Accounting forStock-Based Compensation” and SFAS No. 95, “Statement of Cash Flows,” which requires companies to recognizein their statements of operations the grant-date fair value of stock optionsand other equity-based compensation issued to

 

13

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employees.  Wewill adopt SFAS No. 123R in our first quarter of 2006.  We are still evaluating the effects thatadoption of this statement will have on our condensed consolidated financialstatements.

 

#### **ITEM3.**                  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

#### ** **

Substantially all of ourliquid investments are invested in money market instruments, and therefore, thefair market value of these investments is affected by changes in marketinterest rates.  However, theseinvestments were invested in overnight money market instruments at September 30,2005 and were redeemable on a daily basis. All of the underlying investments in the money market fund hadmaturities of three months or less.  As aresult, we believe the market risk arising from our holdings of financialinstruments is minimal.  A hypothetical1% fluctuation in interest rates would not have a material adverse effect onour financial position, results of operations or cash flows.

 

#### **ITEM4.**                  CONTROLS ANDPROCEDURES

#### ** **

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we conducted an evaluation of our disclosurecontrols and procedures (as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,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.

 

There has not been anychange in our internal control over financial reporting, that occurred duringthe fiscal quarter covered by this report, that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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

 

### **ITEM 2.          UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

(c)           Issuer Purchase of Equity Securities

 
| **Period**                         | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) or  Shares that May  Yet Be Purchased  Under the Plans or  Programs (1)** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| July 1 to July  31, 2005           |       | 65,246                                 |       | $                                  | 0.84       |                                                                                     | 65,246     |                                                                                                                       |       |   |
| August 1 to  August 31, 2005       |       | 86,055                                 |       | 0.77                               |       | 86,055                                                                                   |       |                                                                                                                       |       |
| September 1 to  September 30, 2005 |       | 0                                      |       | —                             |       | 0                                                                                        |       |                                                                                                                       |       |
| Total                              |       | 151,301                                |       | $                                  | 0.80       |                                                                                     | 151,301    | (1)                                                                                                                        |       |   |

 

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(1)           On June 192005, the Company publicly announced a share repurchase program that authorizedthe repurchase of up to 250,000 shares per month of the common stock of theCompany.

 

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

#### ** **

| **Exhibits No.** | ** ** | **Description**                                                                                                                                                                                         |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                    |
| **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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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,  2005 |                                          |
|------------------------------------------------------------|-----------------------------------------------|
|                                                       | METRO ONE  TELECOMMUNICATIONS, INC.           |
|                                                       |                                          |
|                                                       | By:                                           | /s/ Duane C.  Fromhart |   |
|                                                       | Duane C.  Fromhart                            |
|                                                       | Senior Vice  President,                       |
|                                                       | Chief Financial  Officer                      |
|                                                       | (Principal  Financial and Accounting Officer) |

 

15

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