** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q/A**

**(AmendmentNo.1)**

 

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

 

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

** **

**or**

 

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

 

**For theTransition Period From                   To                   **

 

**CommissionFile Number:  0-27024**

 

**METRO ONETELECOMMUNICATIONS, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

(Address ofprincipal executive offices) (zip code)

 

**(503)643-9500**

(Registrant’stelephone number, including area code)

 

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

 

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

 
| **Large accelerated filer ****o** | **Accelerated filer ****o** | **Non-accelerated filer ****o** | **Smaller Reporting Company ****x** |
|----------------------------------------|----------------------------------|--------------------------------------|------------------------------------------|

 

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

 

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

 

 

----

 

**METRO ONETELECOMMUNICATIONS, INC.**

 

**INDEX TO FORM 10 -Q/A**

** **
| ** **       | ** **                                                                                                             | **Page No.** |
|------------------|------------------------------------------------------------------------------------------------------------------------|-------------------|
|             |                                                                                                                   |              |
| Explanatory Note |                                                                                                                   | 1                 |
|             |                                                                                                                   |              |
| Part I      | Financial Information                                                                                                  |              |
|             |                                                                                                                   |              |
| Item 1.          | Financial Statements  (Unaudited)                                                                                      |              |
|             |                                                                                                                   |              |
|             | Condensed Consolidated  Statements of Operations for the three and nine months ended  September 30, 2007 and 2006 | 2                 |
|             |                                                                                                                   |              |
|             | Condensed Consolidated  Balance Sheets as of September 30, 2007 and December 31, 2006                        | 3                 |
|             |                                                                                                                   |              |
|             | Condensed Consolidated  Statement of Shareholders’ Equity for the nine months ended  September 30, 2007      | 4                 |
|             |                                                                                                                   |              |
|             | Condensed Consolidated  Statements of Cash Flows for the nine months ended September 30, 2007  and 2006           | 5                 |
|             |                                                                                                                   |              |
|             | Notes to Condensed  Consolidated Financial Statements                                                                  | 6                 |
|             |                                                                                                                   |              |
| Item 2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            | 15                |
|             |                                                                                                                   |              |
| Item 4.          | Controls and Procedures                                                                                                | 20                |
|             |                                                                                                                   |              |
| Part II     | Other Information                                                                                                      |              |
|             |                                                                                                                   |              |
| Item  6.         | Exhibits                                                                                                               | 22                |
|             |                                                                                                                   |              |
|             | Signatures                                                                                                             | 23                |

 

----

 

**EXPLANATORYNOTE**

 

Metro OneTelecommunications, Inc. (the “Company”, “our” or “we”) filed a QuarterlyReport on Form 10-Q for the quarterly period ended September 30, 2007(the “Quarterly Report”) with the Securities and Exchange Commission (“SEC”) onNovember 14, 2007. On February 20, 2008, management concluded thatthe Unaudited Condensed Consolidated Balance Sheet as of September 30,2007, and the related Unaudited Condensed Consolidated Statements of Operationsfor the three and nine month periods ended September 30, 2007, aspresented in the Quarterly Report, contained errors with respect to the accountingfor the issuance of Series A convertible preferred stock (“convertiblepreferred stock”) and related stock purchase warrants (“warrants”) in afinancing transaction, and that those Unaudited Condensed ConsolidatedFinancial Statements should be amended and restated. The errors arising fromthe issuance of the convertible preferred stock and warrants did not materiallyaffect the Unaudited Condensed Consolidated Financial Statements presented inour Quarterly Report on Form 10-Q for the quarterly period ended June 30,2007.

 

As more fully describedin Note 6 of Notes to Condensed Consolidated Financial Statements (Unaudited),the following adjustments have been made in the restated consolidated financialstatements contained in this Amendment No. 1 to the Quarterly Report:

 

·                 Theconvertible preferred stock has been reclassified as non-permanent equity inour Unaudited Condensed Consolidated Balance Sheet due to certain rightsgranted to the holders, pursuant to guidance prescribed by Rule 5-02.28 ofSEC Regulation S-X and further clarified by the Emerging Issues Task ForceIssue No. D-98;

 

·                 Thewarrants have been reclassified as long-term liabilities, also due to certainrights granted to the holders, under guidance from the Financial AccountingStandards Board Staff Position FAS 150-5;

 

·                 Thebeneficial conversion feature has been reclassified to common stock;

 

·                 Thefair value calculation of the convertible preferred stock, warrants and therelated beneficial conversion feature has been corrected;

 

·                 Thewarrants have been revalued to market as of the balance sheet date, as requiredby SFAS 150;

 

·                 Thediscounts to convertible preferred stock created by the valuation of thewarrants and costs associated with the issuance of the convertible preferredstock and warrants have been accreted as required by Emerging Issues Task ForceIssue No. D-98, and;

 

·                  Theearnings per common share have been adjusted to reflect the dividends, deemeddividends and accretion costs associated with the convertible preferred stockas required by SFAS 128.

 

These errors have had nomaterial effect on the Unaudited Condensed Consolidated Statement of Cash Flowsfor the nine months ended September 30, 2007, because the mark-to-marketadjustment pertaining to the warrants would have been reflected as a non-cashcharge.

 

In addition to restatingthe condensed consolidated financial statements in this Amendment No. 1,we have revised Part I, Item 2 “Management Discussion and Analysis ofFinancial Condition and Results of Operations” to reflect the changes made inthe restatement; revised Part I, Item 4 “Controls and Procedures”based upon management’s reassessment of the disclosure controls and proceduresin effect at September 30, 2007, and implemented since that date; andincluded Part II, Item 6 “Exhibits” to reflect the filing of currentlydated certifications of our principal executive officer and our principalfinancial and accounting officer.

 

This Amendment No. 1 continues to speak as of the date of theQuarterly Report, and we have not updated or amended the disclosures containedherein to reflect events that have occurred since the filing of the QuarterlyReport, or modified or updated those disclosures in any way, other than asdescribed in the preceding paragraphs. Accordingly, this Amendment No. 1should be read in conjunction with our filings made with the SEC subsequent to thefiling of the Quarterly Report on November 14, 2007, as information insuch filings may update or supersede certain information contained in this AmendmentNo. 1.

 

1

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** **

**MetroOne Telecommunications, Inc.**

**CondensedConsolidated Statement of Operations (Unaudited)**

** **
| ** **                                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands, except per share data)**                                    | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                            | ** ** | **As Restated**                                 | ** ** | ** **                                          | ** ** | **As Restated** | ** ** | ** ** | ** ** |
|                                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Revenues                                                                                              |       | $                                                    | 4,198      |                                                | $          | 5,205 |   | $ | 14,378 |   | $ | 25,553 |   |
|                                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Costs and  expenses:                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Direct operating                                                                                      |       | 3,724                                                |       | 3,789                                               |       | 12,002 |   | 15,319 |   |
| Selling, general  and administrative                                                                  |       | 3,583                                                |       | 4,465                                               |       | 11,016 |   | 16,813 |   |
| Depreciation and  amortization                                                                        |       | 514                                                  |       | 686                                                 |       | 1,670 |   | 3,040 |   |
| Restructuring  charges                                                                                |       | 221                                                  |       | 453                                                 |       | 1,130 |   | 6,230 |   |
|                                                                                                  |       | 8,042                                                |       | 9,393                                               |       | 25,818 |   | 41,402 |   |
|                                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Loss from  operations                                                                                 |       | (3,844                                               | )          | (4,188                                              | )          | (11,440 | ) | (15,849 | ) |
|                                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Other income,  net                                                                                    |       | 69                                                   |       | 187                                                 |       | 297 |   | 599 |   |
| Loss associated  with revaluation of warrants                                                         |       | (214                                                 | )          | —                                              |       | (214 | ) | — |   |
|                                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Loss before  income taxes                                                                             |       | (3,989                                               | )          | (4,001                                              | )          | (11,357 | ) | (15,250 | ) |
| Income tax  (benefit) expense                                                                         |       | (6                                                   | )          | —                                              |       | (8 | ) | 50 |   |
|                                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss                                                                                              |       | $                                                    | (3,983     | )                                                   | $          | (4,001 | ) | $ | (11,349 | ) | $ | (15,300 | ) |
|                                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Preferred stock  dividends                                                                            |       | (122                                                 | )          | —                                              |       | (128 | ) | — |   |
| Preferred stock  deemed dividends                                                                     |       | (2,115                                               | )          | —                                              |       | (2,115 | ) | — |   |
| Accretion on  preferred stock                                                                         |       | (136                                                 | )          | —                                              |       | (136 | ) | — |   |
| Net loss  attributable to common shareholders                                                         |       | $                                                    | (6,356     | )                                                   | $          | (4,001 | ) | $ | (13,728 | ) | $ | (15,300 | ) |
|                                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss per  share attributable to common shareholders:                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                                                                 |       | $                                                    | (1.02      | )                                                   | $          | (0.64 | ) | $ | (2.20 | ) | $ | (2.45 | ) |
| Diluted                                                                                               |       | $                                                    | (1.02      | )                                                   | $          | (0.64 | ) | $ | (2.20 | ) | $ | (2.45 | ) |
|                                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average  shares outstanding used in computing net loss attributable to common  shareholders: |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                                                                 |       | 6,233                                                |       | 6,233                                               |       | 6,233 |   | 6,233 |   |
| Diluted                                                                                               |       | 6,233                                                |       | 6,233                                               |       | 6,233 |   | 6,233 |   |

 

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

 

2

----

 

**MetroOne Telecommunications, Inc.**

**CondensedConsolidated Balance Sheet (Unaudited)**

 
| ** **                                                                                                                                                                                                                                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In thousands, except share  amounts)**                                                                                                                                                                                                                        | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                                                                                                       | ** ** | **As Restated**        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                                                                                       | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                                                                                                       | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Current assets:                                                                                                                                                                                                                                                  |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                       |       | $                      | 11,267     |                  | $          | 11,965 |   |
| Restricted cash                                                                                                                                                                                                                                                  |       | 3,000                  |       | 4,741                 |       |
| Accounts  receivable, net                                                                                                                                                                                                                                        |       | 2,621                  |       | 2,179                 |       |
| Prepaid costs  and other current assets                                                                                                                                                                                                                          |       | 705                    |       | 961                   |       |
|                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Total current  assets                                                                                                                                                                                                                                            |       | 17,593                 |       | 19,846                |       |
|                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Furniture,  fixtures and equipment, net                                                                                                                                                                                                                          |       | 1,730                  |       | 3,014                 |       |
| Intangible  assets, net                                                                                                                                                                                                                                          |       | 4,210                  |       | 4,666                 |       |
| Other assets                                                                                                                                                                                                                                                     |       | 84                     |       | 86                    |       |
|                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Total assets                                                                                                                                                                                                                                                     |       | $                      | 23,617     |                  | $          | 27,612 |   |
|                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                                                                                                                                   |       |                   |       |                  |       |
|                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Current  liabilities:                                                                                                                                                                                                                                            |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                                 |       | $                      | 692        |                  | $          | 983 |   |
| Accrued  liabilities                                                                                                                                                                                                                                             |       | 1,595                  |       | 1,685                 |       |
| Accrued payroll  and related costs                                                                                                                                                                                                                               |       | 2,405                  |       | 3,898                 |       |
| Preferred stock  dividend payable                                                                                                                                                                                                                                |       | 128                    |       | —                |       |
|                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Total current  liabilities                                                                                                                                                                                                                                       |       | 4,820                  |       | 6,566                 |       |
|                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Preferred stock  warrants                                                                                                                                                                                                                                        |       | 813                    |       | —                |       |
| Other long-term  liabilities                                                                                                                                                                                                                                     |       | 381                    |       | 470                   |       |
|                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Total  liabilities                                                                                                                                                                                                                                               |       | 6,014                  |       | 7,036                 |       |
|                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                                                                                   |       |                   |       |                  |       |
|                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Redeemable  preferred stock:                                                                                                                                                                                                                                     |       |                   |       |                  |       |
| Preferred stock,  no par value, 10,000,000 shares authorized:                                                                                                                                                                                                    |       |                   |       |                  |       |
| Series A  convertible preferred stock, 1,385 shares authorized 1,000 and 0 shares  issued and outstanding at September 30, 2007 and December 31, 2006,  respectively; liquidation preference of $10,000 plus cumulative unpaid  dividends of $128 |       | 8,607                  |       | —                |       |
|                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Shareholders’  equity:                                                                                                                                                                                                                                      |       |                   |       |                  |       |
| Common stock, no  par value; 50,000,000 shares authorized, 6,233,326 shares issued and  outstanding at September 30, 2007 and December 31, 2006,  respectively                                                                                         |       | 122,215                |       | 120,067               |       |
| Accumulated  deficit                                                                                                                                                                                                                                             |       | (113,219               | )          | (99,491               | )          |
|                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Total  shareholders’ equity                                                                                                                                                                                                                                 |       | 8,996                  |       | 20,576                |       |
|                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Total  liabilities, redeemable preferred stock and shareholders’ equity                                                                                                                                                                                     |       | $                      | 23,617     |                  | $          | 27,612 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

3

----

 

**MetroOne Telecommunications, Inc.**

**Condensed Consolidated Statementof Shareholders’ Equity (Unaudited)**

 
| ** **                                                                                                                                                           | ** ** | **Shareholders’ Equity** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                           | ** ** | **Common Stock**              | ** ** | **Accumulated** | ** ** | **Shareholders’** | ** ** |
| **(In thousands)**                                                                                                                                                   | ** ** | **Shares**                         | ** ** | **Amount** | ** ** | **(Deficit) Earnings** | ** ** | **Equity** | ** ** |
| ** **                                                                                                                                                           | ** ** | ** **                         | ** ** | **As Restated** | ** ** | **As Restated** | ** ** | **As Restated** | ** ** |
|                                                                                                                                                                 |       |                               |       |   |   |   |   |   |   |
| Balances at  December 31, 2006                                                                                                                                  |       | 6,233                              |       | $ | 120,067 |   | $ | (99,491 | ) | $ | 20,576 |   |
|                                                                                                                                                                 |       |                               |       |   |   |   |   |   |   |
| Stock  compensation expense                                                                                                                                          |       | —                             |       | 33 |   | — |   | 33 |   |
| Beneficial  conversion feature associated with the June 5, 2007 and August 15,  2007 issuance of 1,000 shares of Series A convertible preferred stock |       | —                             |       | 2,115 |   | — |   | 2,115 |   |
| Preferred stock  dividends                                                                                                                                           |       | —                             |       | — |   | (128 | ) | (128 | ) |
| Preferred stock  deemed dividends                                                                                                                                    |       | —                             |       | — |   | (2,115 | ) | (2,115 | ) |
| Accretion on  preferred stock                                                                                                                                        |       | —                             |       | — |   | (136 | ) | (136 | ) |
| Net loss                                                                                                                                                             |       | —                             |       | — |   | (11,349 | ) | (11,349 | ) |
|                                                                                                                                                                 |       |                               |       |   |   |   |   |   |   |
| Balances at  September 30, 2007                                                                                                                                 |       | 6,233                              |       | $ | 122,215 |   | $ | (113,219 | ) | $ | 8,996 |   |

** **

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

4

----

 

**MetroOne Telecommunications, Inc.**

**CondensedConsolidated Statements of Cash Flows for the nine months endedSeptember 30, 2007 and 2006 (Unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(In thousands)**                                                      | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| ** **                                                                   | ** ** | **As Restated**                                    | ** ** | ** ** | ** ** |
| ** **                                                                   | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Cash flows used  in operating activities:                                    |       |                                                    |       |   |   |
| Net loss                                                                     |       | $                                                       | (11,349    | ) | $ | (15,300 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                                    |       |   |   |
| Depreciation and  amortization                                               |       | 1,670                                                   |       | 3,040 |   |
| Loss on disposal  of fixed assets                                            |       | 99                                                      |       | 1,117 |   |
| Deferred rent                                                                |       | (89                                                     | )          | 56 |   |
| Stock  compensation expense                                                  |       | 33                                                      |       | 92 |   |
| Loss associated  with revaluation of warrants                                |       | 214                                                     |       | — |   |
| Changes in  certain assets and liabilities:                                  |       |                                                    |       |   |   |
| Accounts  receivable                                                         |       | (442                                                    | )          | 9,146 |   |
| Prepaid costs  and other current assets                                      |       | 267                                                     |       | 575 |   |
| Accounts payable  and other liabilities                                      |       | (1,874                                                  | )          | (5,390 | ) |
|                                                                         |       |                                                    |       |   |   |
| Net cash used in  operating activities                                       |       | (11,471                                                 | )          | (6,664 | ) |
|                                                                         |       |                                                    |       |   |   |
| Cash flows from  investing activities:                                       |       |                                                    |       |   |   |
| Decrease in cash  restricted to secure letter of credit                      |       | 1,741                                                   |       | 1,144 |   |
| Capital  expenditures                                                        |       | (60                                                     | )          | (233 | ) |
| Proceeds from  sale of assets                                                |       | 22                                                      |       | 817 |   |
|                                                                         |       |                                                    |       |   |   |
| Net cash  provided by investing activities                                   |       | 1,703                                                   |       | 1,728 |   |
|                                                                         |       |                                                    |       |   |   |
| Cash flows from  financing activities:                                       |       |                                                    |       |   |   |
| Proceeds from  issuance of convertible preferred stock and warrants, net     |       | 9,070                                                   |       | — |   |
|                                                                         |       |                                                    |       |   |   |
| Net cash  provided by financing activities                                   |       | 9,070                                                   |       | — |   |
|                                                                         |       |                                                    |       |   |   |
| Net decrease in  cash and cash equivalents                                   |       | (698                                                    | )          | (4,936 | ) |
|                                                                         |       |                                                    |       |   |   |
| Cash and cash  equivalents, beginning of period                              |       | 11,965                                                  |       | 17,769 |   |
|                                                                         |       |                                                    |       |   |   |
| Cash and cash  equivalents, end of period                                    |       | $                                                       | 11,267     |   | $ | 12,833 |   |
|                                                                         |       |                                                    |       |   |   |
| Supplemental  disclosure of cash flow information:                           |       |                                                    |       |   |   |
| Cash paid for  income taxes, net                                             |       | $                                                       | 8          |   | $ | 109 |   |

 

**Non-cashfinancing activities:**

 

For the three andnine month periods ended September 30, 2007, the Company accrued aliability of approximately $128 related to accumulated dividends payable on theconvertible preferred stock.

 

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

 

5

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**MetroOne Telecommunications, Inc.**

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

 

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

 

**Basis ofPresentation**

 

The accompanyingunaudited interim condensed consolidated financial statements have been preparedby Metro One Telecommunications, Inc. in conformity with accountingprinciples generally accepted in the United States of America (“US GAAP”) forinterim financial information. Accordingly, certain financial information andfootnotes have been omitted or condensed. In the opinion of management, thecondensed financial statements include all adjustments necessary for a fairpresentation of the results for the interim periods. These condensedconsolidated financial statements and notes thereto should be read inconjunction with our audited financial statements included in our Annual Reporton Form 10-K for the year ended December 31, 2006. The results 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. Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

 

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

 

**Cash,Cash Equivalents, and Restricted Cash**

 

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

 

**Stock-BasedCompensation**

 

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

 

Stock compensationexpense recognized in accordance with SFAS No. 123R for the three and ninemonth periods ended September 30, 2007 was approximately $12,000 and$33,000, respectively. Stock compensation expense recorded was approximately$92,000 for both the three and nine month periods ended September 30,2006. The effect of recording stock-based compensation on basic and dilutedearnings per share for the three and nine month periods ended September 30,2007 and 2006 was not material to our per share loss in those periods. Costsrelated to stock-based compensation are recorded in selling, general, andadministrative expenses in the statements of operations.

 

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

 

6

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** **

**Metro One Telecommunications, Inc.**

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

 

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

 

Estimatesof fair value are not intended to predict actual future events or the valueultimately realized by people who receive equity awards.

 

**RecentAccounting Pronouncements.**

 

In February 2007,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities* (“SFAS159”). SFAS 159 provides companies with an option to report selectedfinancial assets and liabilities at fair value. SFAS 159 also establishespresentation and disclosure requirements designed to facilitate comparisonsbetween companies that choose different measurement attributes for similartypes of assets and liabilities and to provide additional information that willhelp investors and other financial statement users to more easily understandthe effect of a company’s choice to use fair value on its earnings. Finally,SFAS 159 requires entities to display the fair value of those assets andliabilities for which a company has chosen to use fair value on the face of thebalance sheet. SFAS 159 is effective as of the beginning of an entity’s firstfiscal year beginning after November 15, 2007. We are currently assessingthe impact of SFAS 159 which we will be required to adopt in the first quarterof our 2008 fiscal year.

 

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

 

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

 

In September 2006,the FASB issued SFAS No. 157, “*Fair Value Measurements*”(“SFAS 157”), which establishes a framework for measuring the fair value ofassets and liabilities. This framework is intended to increase consistency inhow fair value determinations are made under various existing accountingstandards that permit, or in some cases require, estimates of fair market value.SFAS 157 also expands financial statement disclosure requirements about acompany’s use of fair value measurements, including the effect of such measureson earnings. SFAS 157 is effective for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. We do not expect theadoption of this statement to have a material effect on our consolidatedfinancial position or results of operations.

 

7

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**Metro One Telecommunications, Inc.**

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

 

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

 

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

 

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

 

Costsincurred in our restructuring activities during the third quarter and firstnine months of 2007 are shown in the following table (in thousands).

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

 

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

 
| ** **                          | ** ** | **One-time**

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

 

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

 

8

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**Metro One Telecommunications, Inc.**

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

 

**3.****             ****Net Loss Per Share (Restated, seeNote 6):**

 

Basic net loss per share is computed by dividing netloss attributable to common shareholders by the weighted average number ofshares of common stock outstanding during the period. Diluted net loss pershare is computed by dividing net loss attributable to common shareholders bythe weighted average number of shares of common stock and the dilutivepotential common stock equivalents outstanding. Potential common stockequivalents consist of stock options, warrants and common shares available toconvertible preferred stockholders. For all periods presented in thesefinancial statements, the calculation of weighted-average outstanding shares isthe same on both a basic and diluted basis because inclusion of potentialcommon stock equivalents would be anti-dilutive.

 

Options to purchase approximately 513,000 and 568,000shares of common stock were outstanding at September 30, 2007 and 2006,respectively, but were not included in the computation of diluted net loss pershare because their effect would be anti-dilutive.  In addition,approximately 5,618,000 common shares available from conversion of convertiblepreferred stock and approximately 1,966,300 shares resulting from the exerciseand conversion of warrants described in Note 5 under “Financing arrangement”below were not included in the computation of diluted net loss per sharebecause their effect would be anti-dilutive.

 

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

 

From time to time, we are party to various legalactions and administrative proceedings arising in the ordinary course ofbusiness. 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 ourbusiness, we issue standby letters of credit and bank guarantees. At September 30,2007, we had one letter of credit outstanding in the amount of $3,000,000related to our workers’ compensation program. The letter of credit is securedby a certificate of deposit for the same amount that is recorded as restrictedcash. This letter of credit expires in March 2008. In August 2007,the benefactor of the letter of credit agreed to a reduction in the amount ofthe letter of credit from $4.7 million to $3.0 million based on lower thanexpected workers’ compensation claims. The result was a reduction in therestricted cash balance and certificate of deposit securing the letter whichreleased $1.7 million of funds for our use.

 

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

 

**Financingarrangement (Restated, see Note 6)**

 

On June 5, 2007, we entered into a privatefinancing transaction (“financing transaction”) pursuant to a SecuritiesPurchase Agreement (the “Purchase Agreement”) by and among Metro One andColumbia Ventures Corporation (“Columbia”) and Everest Special Situations FundL.P. (“Everest”, together with Columbia, the “investors”).  Pursuant tothe Purchase Agreement, on June 5, 2007, we issued to the investors (i) 220shares of our newly authorized Series A Convertible Preferred Stock, nopar value (the “convertible preferred stock”), at a stated value of $10,000 pershare, (ii) Stock Purchase Warrants to purchase an additional 77 shares ofthe convertible preferred stock at an initial exercise price of $10,000 pershare of convertible preferred stock (the “warrants”) and (iii) SeniorSecured Convertible Revolver Bridge Notes having a maximum principal amount of$7.8 million and, subject to approval of our shareholders, convertible intoshares of convertible preferred stock (the “notes” and together with theconvertible preferred stock and the warrants, the “securities”). We received$2.2 million in gross proceeds in the initial closing.

 

At the annual meeting of shareholders held on August 14,2007, the holders of our common stock approved, among other things, theissuance of additional shares in the financing, permitting the second closingto take place. At a second closing held on August 15, 2007, we drew downthe maximum principal amount of $7.8 million under the notes, and the noteswere immediately converted into 780 shares of convertible preferred stock andthe security interest we granted in certain of our assets as security forrepayment of the notes was released. No amounts had been drawn under the notesprior to the second closing. In addition, we issued warrants to the investorsfor the purchase 

 

9

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**Metro One Telecommunications, Inc.**

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

 

of an additional 273 shares of convertible preferredstock at an initial exercise price of $10,000 per share. We received $7.8million in gross proceeds at the second closing.

 

The number of shares of convertible preferred stockthat can be purchased on exercise of the warrants represents 35% of the numberof shares of convertible preferred stock issued in the financing. The warrantsare currently exercisable over a two year period at an initial all cashexercise price of $10,000 per share. If all of the convertible preferred stockissued to the investors is converted into shares of common stock, the warrantswill be exchanged for warrants to purchase common stock.

 

At the initial conversion price, the 1,000 shares ofconvertible preferred stock currently outstanding are convertible into anaggregate of 5,617,977 shares of our common stock and, if the warrants areexercised in full, we will receive an additional $3.5 million and the 350shares of convertible preferred stock purchased on exercise of the warrantswill be convertible into an aggregate of 1,966,292 shares of common stock atthe initial conversion price. A cumulative dividend of 4% is payable on eachshare of outstanding convertible preferred stock on June 5th ofeach year with the first dividend payment due on June 5, 2008.

 

In connection with the sale of the securities to theinvestors, we entered into a Registration Rights Agreement with the investorsdated as of June 5, 2007 (the “Registration Rights Agreement”), whichrequires us to use our best efforts to register on Form S-3 under theSecurities Act of 1933, as amended (the “Securities Act”), the shares of commonstock issuable upon conversion of the convertible preferred stock (includingthose shares of convertible preferred stock issuable on exercise ofwarrants). Should it be determined that we are not eligible to registerthese shares on Form S-3, we will be required to register the shares on Form S-1and will be required to file the Form S-1 within 60 days after it isdetermined that the Form S-3 registration is not available. Under theRegistration Rights Agreement, as currently amended, we will incur penaltiesif, among other things, the Form S-3 registration statement is notdeclared effective by the Securities and Exchange Commission (“SEC”) on orprior to March 31, 2008, or if the registration is on Form S-1,within 120 days after being first filed on Form S-1. The penalties,payable to the holders of the convertible preferred stock and warrantsproportionately to their holdings, is 1.25% of the purchase price of thepreferred stock (or $125,000) for each 30-day period during which theeffectiveness of the registration statement is delayed beyond the applicablefinal date, which amount is prorated for any partial period of delay. Penaltiesmay not exceed 20% of the purchase price of the convertible preferred stock (or$2,000,000). The Registration Rights Agreement also provides the investors withdemand and piggyback registration rights under the Securities Act for shares ofcommon stock issuable upon conversion of the convertible preferred stock(including shares of convertible preferred stock issuable on exercise ofwarrants or conversion of the notes).

 

Due to certain rights granted to its holders, theconvertible preferred stock is classified as non-permanent equity in theCondensed Consolidated Balance Sheets, pursuant to Rule 5-02.28 of theSecurities and Exchange Commission’s Regulation S-X and as further clarified bythe Emerging Issues Task Force Issue No. D-98, *Classificationand Measurement of Redeemable Securities.* The fair value of thewarrants, as based on intrinsic value, was approximately $598,000 at the timeof their issuance. Pursuant to FASB Staff Position FAS 150-5, *Issuer’s Accounting Under FAS 150 for Freestanding Warrants and OtherSimilar Instruments That Are Redeemable*, the warrants are classifiedas liabilities also due to certain rights granted to its holders. The warrantsare subject to periodic mark-to-market adjustments which are recorded in theUnaudited Condensed Consolidated Statements of Operations.

 

The convertible preferred stock is convertible intoshares of our common stock at an initial conversion price of $1.78 pershare.  In accordance with EITF Issue 98-5, *Accountingfor Convertible Securities with Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios* we had evaluated if the convertiblepreferred stock had a beneficial conversion feature as the conversion price wasless than the fair value of our common stock on the measurement date. Underparagraph 6 of EITF 98-5, the discount related to the beneficial conversionfeature would be calculated based on its intrinsic value which wasapproximately $2.1 million. The value of the beneficial conversion feature wasrecorded in Common stock and the offsetting discount to the convertiblepreferred stock was immediately written-off to Accumulated deficit as a deemeddividend to preferred shareholders because the convertible preferred stock isimmediately convertible.

 

10

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**Metro One Telecommunications, Inc.**

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

 

We incurred costs of approximately $930,000 related tothe issuance of the convertible preferred stock. These costs were recorded as adiscount to the convertible preferred stock and, along with the discountassociated with the warrants, will be accreted to Accumulated deficit over the2-year non-redemption period of the convertible preferred stock. This accretionreduces net income available to common shareholders.

 

**Nasdaqlisting issues**

 

On June 27, 2007, wereceived a Nasdaq Staff Deficiency Letter informing us that we no longer complywith Nasdaq’s audit committee requirements for continued listing as set forthin Marketplace Rule 4350. Marketplace Rule 4350(d)(2)(A) requiresthat the audit committee of each Nasdaq issuer have at least three members,each of whom, among other things, must be independent as defined underMarketplace Rule 4200(a)(15) and meets the criteria for independence setforth in SEC Rule 10A-3(b)(1) under the Securities Exchange Act of1934, as amended. Currently, our Audit Committee is comprised of twoindependent members.

 

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

 

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

 

**Terminationof contract**

 

In February 2005, weentered into a Master Services Agreement for Directory Assistance Services (the“Services Agreement”) with Nextel Operations, Inc., acting on behalf ofcertain affiliates (collectively “Nextel”) of Nextel Communications, Inc. TheServices Agreement superseded our previous services agreement dated in June 1999.Under the Services Agreement, we agreed to provide directory assistanceservices to Nextel’s customers on a non-exclusive basis, and 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 effective January 9, 2006. In February 2006, we enteredinto a Settlement Agreement and Disentanglement Transition Plan (the “Plan”)with Nextel that resolved certain disputed matters in connection with thetermination of the Services Agreement. Under the Plan, we continued to provideservices to Nextel callers through March 31, 2006 in return for thepayment 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 Metro One to Nextel callers through thetransition period. Calls from Nextel were substantially transitioned away fromus by March 31, 2006, and we have received all amounts due from Nextel asof the date of this filing. Including the $5.75 million received in the firstquarter of 2006 as part of the settlement payments, Nextel representedapproximately 44% of our revenues for the first nine months of 2006.

 

Termination of theServices Agreement and other customer losses has had, and will continue tohave, a significant adverse impact on our results of operations and cash flows.We have experienced net losses in each of the quarterly and annual periods beginningwith the second quarter of 2003. It is likely that we will continue toexperience operating losses in the fourth quarter of 2007 and parts or all of2008. Our management is working to aggressively pursue new and additionalsources of revenues to support our reduced cost structure, further reduce thedirect cost of delivering our services and reduce our general andadministrative overhead, and develop and grow our data services business. Therecan be no assurance that management’s plans will be successful. In that case,we may need additional cash to fund our operations and/or pursue our businessinitiatives during 2008. We may attempt to establish borrowing arrangements orotherwise raise additional funds in order to maintain adequate liquidity. We cannotprovide assurance that borrowing or other funding will be available in amountsor on terms acceptable to us. If we are unable to execute our operationsaccording to our plan or obtain additional financing, we may be forced to ceaseoperations. For the remainder of 2007, we expect to meet our cash requirementsusing our existing cash and cash equivalents including proceeds from ourrecently completed sale of convertible preferred stock.

 

 

11

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**Metro One Telecommunications, Inc.**

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

 

**Significant new contract**

 

In August 2006, we entered into a TelecomInformation Services Agreement (the “Agreement”) with Jingle Networks, Inc.(“Jingle”). Under the Agreement, we are a preferred directory assistanceprovider for “1-800-FREE411.”  Inaddition to per call charges, the Agreement includes financial commitments fromJingle based on call volume expansion and other financial incentives. TheAgreement is for three years and will automatically renew annually for up totwo additional years unless either party provides notice of termination atleast 60 days prior to the commencement of such renewal period. Under theAgreement, as a preferred directory provider we will be allocated no fewercalls than any other vendor providing similar services. The Agreement providesthat our status as a preferred provider may be terminated by Jingle but, insuch event, the warrants described below will be terminated. Jingle accountedfor approximately 18% and 33% of our revenue in the third quarter and firstnine months of 2007, respectively. As a result of Jingle’s increased automationof its call volume in September 2007, revenues in October declined to$0. We do not expect to service additional Jingle calls for the remainder of2007.

 

In connection with the Agreement, we issued to Jingletwo warrants to purchase shares of our common stock. The first warrant was forthe purchase of up to 623,250 shares of common stock at an exercise price of$2.60 per share. The warrant was exercisable under the condition that Jinglemeet certain revenue and payment thresholds through February 28, 2007. We concluded that there was no cost relatedto issuance of these warrants to a nonemployee due to the fact that futureservices were required to be performed and it was not probable that the revenuetargets would be met. The revenue and payment targets were not met,and accordingly, the first warrant expired and terminated unexercised effectiveas of February 28, 2007.

 

The second warrant is for the purchase of up to870,075 shares of our common stock; provided, however, that shares representedby the sum of the first and second warrants, if exercised, cannot exceed 19.98%of our total shares outstanding after the warrants are exercised. The exerciseprice for the second warrant is $4.55, which was the July 1, 2006 bookvalue of our common stock determined on the basis of our US GAAP financialstatements. 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. Since we are not obligated to accept call volume from Jingle in any monththat exceed by a certain percentage the call volume from Jingle in theimmediately preceding month, unless we were to waive this limitation onincreased call volume, Jingle will not be able to meet the revenue and paymentthresholds necessary for the second warrant to become exercisable. Since Jingledid not meet the revenue targets necessary for the first warrants to becomeexercisable and it is not likely that they will meet the revenue targets forthe second warrants to become exercisable, we have not recognized any expenseamounts in our financial statements related to the value of the first or thesecond warrants.

 

**6.****    ****Restatement of Previously IssuedFinancial Statements**

 

As part of management’s analysis of comments made byBDO Seidman in BDO Seidman’s review of a draft of an amendment to aregistration statement previously filed by us with the SEC, we discoverederrors in the accounting treatment of the financing transaction in theUnaudited Condensed Consolidated Balance Sheet as of September 30, 2007,and the related Unaudited Condensed Consolidated Statements of Operations forthe three and nine months ended September 30, 2007, that were presented inour Quarterly Report on Form 10-Q for the quarterly period ended September 30,2007. Accordingly, management determined on February 20, 2008, that theseUnaudited Condensed Consolidated Financial Statements should be restated. Theseerrors were as follows:

 

a)              We did not correctlyclassify the securities in the Unaudited Condensed Consolidated Balance Sheetat September 30, 2007. We erroneously classified the convertible preferredstock and related warrants in the Shareholders’ equity section of the UnauditedCondensed Consolidated Balance Sheet. However, pursuant to Rule 5-02.28 ofthe SEC’s Regulation S-X and as further clarified by the Emerging Issues TaskForce (“EITF”) Issue No. D-98: *Classification andMeasurement of Redeemable Securities*, the convertible preferredstock should be classified as Non-permanent equity due to certain rightsgranted to its holders. Secondarily, in accordance with the FinancialAccounting Standards Board (the “FASB”) Staff Position 150-5: *Issuer’s Accounting under FASB Statement No. 150 for FreestandingWarrants and Other Similar Instruments on Shares That Are Redeemable (FSP150-5)*, the warrants should be reclassified as Long-termliabilities, also due to certain rights granted to the holders. As such, we didnot re-value the warrants to market value at September 30, 2007 asrequired by SFAS 150: *Accounting for CertainFinancial Instruments*

 

12

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**Metro One Telecommunications, Inc.**

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

** **

*Characteristics of bothLiabilities and Equity*. The revaluation amount of $214,000 at  September 30, 2007 should have beenrecorded as a charge to Other income, net in the Unaudited CondensedConsolidated Statements of Operations.

 

b)             Wedid not correctly assess the fair market value of the securities and related “beneficialconversion feature” at the time of issuance. The Black-Sholes method was usedin the valuation of the warrants; however errors were made in the utilizationof that model which, in addition to incorrectly assessing the fair market valueof the warrants, led to an incorrect calculation of the intrinsic value of boththe warrants and the beneficial conversion feature. These intrinsic values areinterrelated due to the “relative fair market value” concept for calculatingthe beneficial conversion feature as prescribed by EITF Issue No. 98-05: *Accounting for Convertible Securities with Beneficial ConversionFeatures*, and clarified by EITF Issue No. 00-27: *Application of Issue No.98-5 to Certain Convertible Instruments*.Further, EITF 00-27 was incorrectly applied to the calculation of the intrinsicvalue of beneficial conversion feature. These errors collectively also affectedthe fair value calculation of the convertible preferred stock. Finally, thebeneficial conversion feature should have been recorded as a credit to Common stock.

 

c)              We did not accretethe discounts to convertible preferred stock created by the valuation of thewarrants and costs associated with the issuance of the securities (the “IssuanceCosts”) as required by EITF Issue No. D-98: *Classificationand Measurement of Redeemable Securities*. The convertible preferredstock is conditionally redeemable by us anytime on or after the two-yearanniversary of the first issuance. Therefore, the discounts to the convertiblepreferred stock should be written-off ratably over the two-year non-redemptionperiod to Accumulated deficit. We had previously written-off the full value ofthe discount to convertible preferred stock created by the warrants directly toAccumulated deficit and did not accrete any of the discount to convertiblepreferred stock created by the Issuance Costs. This accretion increases netloss attributable to common shareholders and should have been recorded as aline-item on the face of the Unaudited Condensed Consolidated Statements ofOperations as noted in item d) below.

 

d)             Net loss per commonshare as presented on the face of the Unaudited Condensed ConsolidatedStatements of Operations did not include the charges against Accumulateddeficit for both accrued dividends and deemed dividends to preferredshareholders and was incorrectly stated.

 

13

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**Metro One Telecommunications, Inc.**

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

 

The effect of the above errors on the UnauditedCondensed Consolidated Financial Statements as previously presented  in our Form 10-Q for the quarterlyperiod ended September 30, 2007 was as follows:

 
| *((Dollar  amounts in thousands except per share amounts)*    | ** ** |
|---------------------------------------------------------------|------------|
| **Line items on the  Condensed Consolidated   Balance Sheet** | ** ** | **As Reported as of   September 30, 2007** | ** ** | **As Restated as of  September 30, 2007** | ** ** | **Difference** | ** ** |
| ** **                                                    | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| Liabilities:                                                  |       |   |   |   |   |   |   |
| Preferred stock  warrants                                     |       | $ |   | $ | 813 |   | $ | 813 |   |
| Redeemable  Preferred Stock:                                  |       |   |   |   |   |   |   |
| Preferred stock                                               |       |   |   | 8,607 |   | 8,607 |   |
| Shareholders’  equity:                                   |       |   |   |   |   |   |   |
| Preferred stock                                               |       | 9,070 |   |   |   | (9,070 | ) |
| Preferred stock  discount and beneficial conversion feature   |       | 3,472 |   |   |   | (3,472 | ) |
| Common stock                                                  |       | 120,100 |   | 122,215 |   | 2,115 |   |
| Accumulated  deficit                                          |       | (114,226 | ) | (113,219 | ) | 1,007 |   |
|                                                               |            |  |  |  |  |  |  |  |  |

 
| **Line items on the   Condensed Consolidated Statements   Of Operations** | ** ** | **As Reported for the   Three Months Ended  September 30, 2007** | ** ** | **As Reported for the   Three Months Ended  September 30, 2007** | ** ** | **Difference** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                                                                   | ** ** | **(Unaudited)**                                                                                          | ** ** | **(Unaudited)**                                                                                          | ** ** | ** **     | ** ** |
| Net loss                                                                                                     |       | $                                                                                                        | (3,769     | )                                                                                                        | $          | (3,983         | )          | $ | (214 | ) |
| Preferred stock  dividends                                                                                   |       |                                                                                                     |       | (122                                                                                                     | )          | (122           | )          |
| Preferred stock  deemed dividends                                                                            |       |                                                                                                     |       | (2,115                                                                                                   | )          | (2,115         | )          |
| Accretion on  preferred stock                                                                                |       |                                                                                                     |       | (136                                                                                                     | )          | (136           | )          |
| Net loss  attributable to common shareholders                                                                |       | $                                                                                                        | (3,769     | )                                                                                                        | $          | (6,356         | )          | $ | (2,587 | ) |
|                                                                                                         |       |                                                                                                     |       |                                                                                                     |       |           |       |
| Net loss per  common share:                                                                                  |       |                                                                                                     |       |                                                                                                     |       |           |       |
| Basic                                                                                                        |       | $                                                                                                        | (0.60      | )                                                                                                        | $          | (1.02          | )          | $ | (0.42 | ) |
| Diluted                                                                                                      |       | $                                                                                                        | (0.60      | )                                                                                                        | $          | (1.02          | )          | $ | (0.42 | ) |

 
| **Line Items on the   Condensed Consolidated Statements  Of Operations** | ** ** | **As Reported for the   Nine Months Ended   September 30, 2007 ** | ** ** | **As Reported for the  Nine Months Ended   September 30, 2007 ** | ** ** | **Difference** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                                                             | ** ** | **(Unaudited)**                                                                                                     | ** ** | **(Unaudited)**                                                                                               | ** ** | ** **     | ** ** |
| Net loss                                                                                               |       | $                                                                                                                   | (11,135    | )                                                                                                             | $          | (11,349        | )          | $ | (214 | ) |
| Preferred stock  dividends                                                                             |       |                                                                                                                |       | (128                                                                                                          | )          | (128           | )          |
| Preferred stock  deemed dividends                                                                      |       |                                                                                                                |       | (2,115                                                                                                        | )          | (2,115         | )          |
| Accretion on  preferred stock                                                                          |       |                                                                                                                |       | (136                                                                                                          | )          | (136           | )          |
| Net loss  attributable to common shareholders                                                          |       | $                                                                                                                   | (11,135    | )                                                                                                             | $          | (13,728        | )          | $ | (2,593 | ) |
|                                                                                                   |       |                                                                                                                |       |                                                                                                          |       |           |       |
| Net loss per  common share:                                                                            |       |                                                                                                                |       |                                                                                                          |       |           |       |
| Basic                                                                                                  |       | $                                                                                                                   | (1.79      | )                                                                                                             | $          | (2.20          | )          | $ | (0.41 | ) |
| Diluted                                                                                                |       | $                                                                                                                   | (1.79      | )                                                                                                             | $          | (2.20          | )          | $ | (0.41 | ) |

 

Therewas no material effect on the Unaudited Condensed Consolidated Statement ofCash Flows as a result of these changes because the mark-to-market adjustmentpertaining to the warrants would have been reflected as a non-cash charge.

#### ** **

14

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

#### ** **

All statements and trend analyses contained in thisitem and elsewhere in this report on Form 10-Q relative to the futureconstitute “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements may,but do not necessarily, also include words such as “believes,” “expects,” “anticipates,”“plans,” “estimates,” “may,” “will,” “should,” “could,” “continue” or similarexpressions. Forward-looking statements are 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 andother factors include the expiration or pricing of customer contracts, thesuccessful execution of our cost reduction efforts and current businessstrategy, and our ability to generate cash from operations, and other risks,including those discussed in our most recent Annual Report on Form 10-Kfiled with the Securities and Exchange Commission (the “SEC”) and thosedescribed in our other filings with the SEC, press releases and othercommunications. Any forward-looking statement in this report reflects ourexpectations at the time of this report only. We undertake no obligation topublicly release any revisions to these forward-looking statements to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events.

 

#### **Overview**

#### ** **

We are a provider of Enhanced Directory Assistance®and other information services delivered through live operators and byelectronic means. We contract primarily with wireless carriers, Voice overInternet Protocol (“VoIP”) providers, cable companies, Competitive LocalExchange Carriers (“CLEC”), Incumbent Local Exchange Carriers (“ILEC”), freedirectory assistance providers, prepaid carriers, and payphone operators toprovide our services to their subscribers and users. Our proprietary EnhancedDirectory Assistance platform provides comprehensive directory assistance listingsand other informational content and services. Other non-directory assistanceservices and content include access to movie listings and a variety of otherunique services. Our special return-to-operator features, StarBack® andAutoBack®, make the telephone easier to use and are offered exclusively byMetro One. All of our services are provided by operators located only in theUnited States or electronically. Many of our features or aspects thereof arethe subject of patents or pending patent applications. Revenues are derivedprincipally through fees charged to telecommunications carriers and othercustomers.

 

In addition to voice-based services, we also provideEnhanced Directory Assistance services in electronic format. These services areprovided to customers who electronically issue directory assistance queries anduse the returned information to complete and correct their own data records. Wecurrently provide electronic directory assistance services in a number ofdelivery formats to meet customer needs including automated file processing andreal-time individual look ups. We contract with a broad range of companies thatrequire electronic directory assistance including companies in the service,marketing, and financial sectors. Our data services business represents anemerging business based on infrastructure originally developed to support ourvoice-based call center business.

 

Under a typical wholesale contract, a carrier agreesto route some or all of their directory assistance calls to us. We offer ourservices to multiple carriers within the same market. When a carrier’ssubscribers dial a typical directory assistance number, such as “411,” “555-1212”or “00,” the calls are routed to and answered by our live operators or theautomated equivalent, identifying the service by that carrier’s brand name.

 

Each carrier customer establishes its own directoryassistance fee structure for its subscribers. Wireless subscribers typicallypay fees ranging from $1.25 to $1.79 plus airtime charges for our services. Webear no subscriber collection risk with respect to carrier subscribers;however, there may be collection risk to the extent growth and profitability inthe telecommunications industry decreases and to the extent we provide servicesto other types of customers.

 

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

 

As discussed in Note 5 of Notes to CondensedConsolidated Financial Statements (Unaudited), as a result of the terminationof contracts with significant customers, we have experienced significantfinancial losses and reduction of cash flows over the last several years. Theselosses have had, and will continue to have, a significant adverse impact

 

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on our results ofoperations and cash flows.  We haveexperienced net losses in each of the quarterly and annual periods beginningwith the second quarter of 2003.  It islikely that we will continue to experience operating losses in the fourthquarter of 2007 and parts or all of 2008. Our management is working to aggressively pursue new and additionalsources of revenues to support our reduced cost structure, further reduce thedirect cost of delivering our services and reduce our general and administrativeoverhead, and develop and grow our data services business.  There can be no assurance that management’splans will be successful.  In that case,we may need additional cash to fund our operations and/or pursue our businessinitiatives during 2008.  We may attemptto establish borrowing arrangements or otherwise raise additional funds inorder to maintain adequate liquidity.  Wecannot provide assurance that borrowing or other funding will be available inamounts or on terms acceptable to us.  Ifwe are unable to execute our operations according to our plan or obtainadditional financing, we may be forced to cease operations.  For the remainder of 2007, we expect to meetour cash requirements using our existing cash and cash equivalents includingproceeds from our recently completed sale of convertible preferred stock.

 

**SignificantEvents****Restructuring.**

 

In the third quarter andfirst nine months of 2007, we have continued to focus our efforts on reducingour operating costs and establishing long-term viability and stability.  To that end, we incurred approximately$221,000 of restructuring expenses in the third quarter of 2007, whichconsisted primarily of payments to our strategic advisors for assistance withour operational, strategic and financial initiatives.  During the first nine months of 2007, weincurred approximately $1.1 million of restructuring expenses primarilyassociated with one-time termination benefits related to head-count reductionsas well as other costs primarily associated with efforts to select and engageour strategic advisors.

 

**Other significant events.**

 

See Note 5 of Notes toCondensed Consolidated Financial Statements (Unaudited) for a discussion of thefinancing arrangement, Nasdaq listing issues, termination of contract, and significantnew contract.

 

**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,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                          |       | **As Restated**                                 |       |                                                |       | **As Restated** |   |   |   |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Revenues                                      |       | 100.0                                                | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |
| Direct operating  costs                       |       | 88.7                                                 |       | 72.8                                                |       | 83.5 |   | 59.9 |   |
| Selling, general  and administrative costs    |       | 85.4                                                 |       | 85.8                                                |       | 76.6 |   | 65.8 |   |
| Depreciation and  amortization                |       | 12.2                                                 |       | 13.2                                                |       | 11.6 |   | 11.9 |   |
| Restructuring  charges                        |       | 5.3                                                  |       | 8.7                                                 |       | 7.9 |   | 24.4 |   |
| Loss from  operations                         |       | (91.6                                                | )          | (80.5                                               | )          | (79.6 | ) | (62.0 | ) |
| Other income,  net                            |       | 1.6                                                  |       | 3.6                                                 |       | 2.1 |   | 2.3 |   |
| Loss associated  with revaluation of warrants |       | (5.0                                                 | )          | —                                              |       | (1.5 | ) | — |   |
| Loss before  income taxes                     |       | (95.0                                                | )          | (76.9                                               | )          | (79.0 | ) | (59.7 | ) |
| Income tax  (benefit)                         |       | (0.1                                                 | )          | 0.0                                                 |       | (0.1 | ) | 0.2 |   |
| Net loss                                      |       | (94.9                                                | )%         | (76.9                                               | )%         | (78.9 | )% | (59.9 | )% |

 

*Comparisonof third quarter 2007 to third quarter 2006*

 

Revenues decreased 19.3% to $4.2 million from $5.2million due to lower average revenue per call offset by a slight increase incall volume.  Average revenue per callwas approximately $0.20 in the third quarter of 2007 compared with $0.25 in thethird quarter of 2006.  Call volume was19.5 million and 19.2 million in the third quarter of 2007 and 2006,respectively.  Average revenue per callwas lower in the third quarter of 2007 reflecting the effect of new customeradditions and existing customer contract renewals, both at rates below theaverage revenue per call earned in third quarter of 2006.  We expect market rates will continue to trenddownward in the near term and to negatively affect our average revenue per callas we continue to sign new agreements.

 

 

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Direct operatingcosts consist of salaries, wages, benefits and payroll taxes relating to callcenter personnel plus the costs of listings data and content acquisition.  These costs decreased 1.7% to $3.7 million inthe third quarter of 2007 compared with $3.8 million in the third quarter of2006.  This decrease was due to anapproximate 10% decrease in the average hourly fully loaded labor rate forservicing those calls offset by an approximate 9% decrease in operator productivity.  As a percentage of revenues, direct operatingcosts increased to approximately 88.7% from 72.8% in the third quarter of 2007,primarily resulting from the decrease in the average revenue per call.  We will continue to work to find the optimalbalance between labor rates and productivity in our efforts to reduce costsfaster than the declines in average revenue per call.

 

Selling, generaland administrative costs decreased 19.8% to $3.6 million from $4.5million.  This decrease resultedprimarily from continued overall efforts to reduce administrative costsincluding network and facilities costs, legal and other professional servicesand administrative payroll.  As apercentage of revenues, selling, general and administrative costs wereunchanged due to lower revenue.

 

Depreciation andamortization expense decreased 25.1% to $ 514,000 from $686,000.  The decrease in depreciation and amortizationwas due primarily to the overall reduction in acquisition of fixed assets inthe last several years as operations have been reduced.  Depreciation and amortization decreased to12.2% from 13.2% of revenue as a result of our reduced operations facilities inplace.

 

Restructuringcharges in the quarter ended September 30, 2007 were $221,000 andconsisted primarily of payments to our strategic advisors for assistance withour operational, strategic and financial initiatives.  Net restructuring costs in the third quarterof 2006 were $453,000 and consisted primarily of one-time termination benefitsfor employees of approximately $342,000, and dismantling costs related to theclosed call centers of approximately $171,000, partially offset by lower costsincurred on lease settlements than were previously accrued for those leases.

 

Other income was$69,000 and $187,000 in the third quarter of 2007 and 2006, respectively, andconsisted primarily of interest income earned on cash and cashequivalents.  The reduction in interestincome was due to a decrease in cash available for investing.  Loss associated with revaluation of warrantswas $214,000 in the third quarter of 2007 and $-0- in the third quarter of 2006and represents the mark-to-market value of the warrant liability incurred inconnection with the issuance of 1,000 shares of convertible preferredstock.  See Note 5 of Notes to CondensedConsolidated Financial Statements (Unaudited).

 

Because of ouroperating losses in the third quarters of 2007 and 2006, we recorded no netfederal or state income tax expense.  Wehave a valuation allowance against deferred tax assets associated withoperating losses in this and prior quarters and other deferred tax assetsbecause it is deemed more likely than not that these assets will not berealized.  Accordingly, no federal incometax benefit has been recorded with respect to these deferred tax assets.

 

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

#### ** **

As of September 30,2007, we had approximately $14.3 million in cash and cash equivalents andrestricted cash (including $3.0 million of restricted cash) compared toapproximately $16.7 million (including $4.7 million of restricted cash) at December 31,2006.  As noted above under “Financingarrangement” in Note 5 of Notes to Condensed Consolidated Financial Statements(Unaudited), during the second and third quarters of 2007, we received netproceeds of approximately $9.1 million from our convertible preferred stocksale.  In addition, during the thirdquarter of 2007, we received a release of $1.7 million from the restricted cashaccount that secures our letter of credit for our formerly self-insured workers’compensation program.  Excluding thesenon-recurring events, our operations consumed approximately $11.5 million ofcash in the first nine months of 2007 primarily from net operating losses andrestructuring costs.  Management’s goalis to restructure our operations to achieve positive, sustainable cash flow andearnings and we believe we have made significant progress toward thatgoal.  There can be, however, noassurances that our cash resources will be sufficient to achieve that goal inthe near term or ever.

 

Cash and cashequivalents and restricted cash are recorded at cost which approximates theirfair market value.  We have nooutstanding debt, but we must pay a 4% cumulative dividend on the outstandingconvertible preferred stock on June 5th of each year beginningin 2008.

 

*Cash flow from operations. *Net cash used in operationswas $11.5 million in the first nine months of 2007 compared to net cash used inoperations of $6.7 million in the first nine months of 2006.  This difference of approximately $4.8 millionresulted primarily from a net decrease in cash received from customers ofapproximately $20.8 million partially offset by net decreases in cash paid toor on behalf of employees of $7.9 million, decrease of $3.8 million in 

 

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cash paid to suppliers and cash paid for restructuring activities of$4.2 million.

 

*Cash flow from investing activities. *Cash flow from investingactivities was $1.7 million in the first nine months of 2007 resultingprimarily from the release of cash securing our letter of credit as discussedabove.  Cash flow from investingactivities was $1.7 million in the first nine months of 2006 as well, primarilyresulting from the release of $1.1 million of cash securing our letter ofcredit and receipt of proceeds from the sale of assets of approximately$800,000.

 

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

 

*Future capital needs and resources. *The uses of our capital inthe near future are expected to be primarily for working capital.  We expect to adjust personnel, call centersand network capacities in order to address varying business circumstances,including changes in volume and pricing and other provisions of customercontracts.

 

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

 

We have experienced net losses in each of the quarterly and annualperiods beginning with the second quarter of 2003.  Excluding non-recurring events describedabove, our operations consumed approximately $11.5 million of cash in the firstnine months of 2007 primarily from net operating losses and restructuring costs.  Our independent registered public accountingfirm included a going concern explanatory paragraph in its report on ourconsolidated financial statements as of and for the year ended December 31,2006. The high ratio of cash used in operations compared to our current cashresources will likely result in a similar going concern explanatory paragraphfrom our independent registered public accounting firm in its report on ourconsolidated financial statements as of and for the year ended December 31,2007.

 

Our management is working to aggressively pursue new and additionalsources of revenues to support our reduced cost structure, further reduce thedirect cost of delivering our services and reduce our general andadministrative overhead, and develop and grow our data services business.  There can be no assurance that management’splans will be successful. ** **In that case, we may needadditional cash to fund our operations and/or pursue our business initiativesduring 2008.**** We may attempt to establish borrowingarrangements or otherwise raise additional funds in order to maintain adequateliquidity.  We cannot provide assurancethat borrowing or other funding will be available in amounts or on termsacceptable to us.  If we are unable toexecute our operations according to our plan or obtain additional financing, wemay be forced to cease operations.

 

#### **Critical Accounting Policies**

#### ** **

We prepare our financial statements in conformity with accountingprinciples generally accepted in the United States of America.  As such, we are required to make certain estimates,judgments and assumptions that we believe are reasonable based upon theinformation available.  These estimatesand assumptions affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the periods presented. Management believes that of our significant accounting policies (seeNote 1 of Notes to Condensed Consolidated Financial Statements (Unaudited)),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.*Our wholesale customer base has primarilyconsisted of large telephone carriers in the United States.  As such, we have had minimal risk ofuncollectibility, at any point in time, related to outstanding accountsreceivable with these customers.  We havenot experienced significant collection issues or write-offs related to thesecustomers.  Since our accounts receivableare concentrated 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 operatingresults.  In addition, our data servicesbusiness is generating receivables from customers that may not be asfinancially stable as our large carrier customers which to date has not, butmay in the future, expose us to greater risk of uncollectible receivables thanwe have experienced in the past.

 

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*Long-livedassets and intangibles.* We evaluate the remaining life andrecoverability of equipment and other assets, including patents and trademarksand internally developed software, whenever events or changes in circumstancesindicate that the carrying amount of the assets may not be recoverable.  At such time, we estimate the future cashflows expected from use of such assets and their eventual disposition and, iflower than the carrying amounts, adjust the carrying amount of the assets totheir estimated fair value.  Because ofour changing business conditions, including lower wholesale prices anddependence on a relatively small number of customers for a significant portionof our revenues, our estimates of future cash flows to be generated from ouroperations could change materially, resulting in the need for us to recordadditional impairment charges.  In addition,as a result of our changing business conditions, we expect to adjust personnel,call centers and network capacities.  Ifany of these activities result in certain of our assets no longer being used inoperations, we may need to record an additional impairment charge.  As a result of the decision by Nextel toterminate its contract with us, as discussed under “Termination of contract” inNote 5 of Notes to Condensed Consolidated Financial Statements (Unaudited), andbecause of continuing operating losses, we evaluated our fixed assets and intangiblesas of December 31, 2006 for impairment in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 144.  Our evaluation determined that the assetswere not impaired as of December 31, 2006.

 

*Self-insurancereserves. *In the past,we have self-insured a portion of our workers’ compensation and employeemedical insurance programs.  In some periods we purchased stop losscoverage at varying levels in order to mitigate our potential futurelosses.  The nature of the liabilities associated with theseself-insurance programs, which may not fully manifest themselves for severalyears, requires significant judgment.  We evaluate open workers’compensation and medical claims under these policies periodically to determinethe reasonableness of the reserves we have recorded for such claims.  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 be more than the recordedreserves.  At September 30, 2007, wehave reserved approximately $1.2 million and $147,000 related to theseself-insured workers’ compensation and medical programs, respectively.  While we believe that the amounts reservedfor these obligations are sufficient, any significant change in the status ofopen claims or costs associated with claims made under these plans could have amaterial adverse effect on our financial position, results of operations orcash flows.

 

*Incometaxe*s.  Accounting for income taxes requires us toestimate our income taxes in each jurisdiction in which we operate.  Dueto differences in the recognition of items included in income for accountingand tax purposes, temporary differences arise which are recorded as deferredtax assets or liabilities.  We estimate the likelihood of recovery ofthese assets, which is dependent on future levels of profitability and enactedtax rates.  Should any amounts be determined not to be recoverable, orassumptions change, we would be required to take a charge to establish avaluation allowance against such deferred tax assets, which could have amaterial effect on our financial position, results of operations or cashflows.  At September 30, 2007 and2006, a valuation allowance reduced net deferred tax assets to zero.

 

#### **Recent Accounting Pronouncements**

#### ** **

In February 2007,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialStandards (“SFAS”) No. 159, *The FairValue Option for Financial Assets and Financial Liabilities*(“SFAS 159”)*. *SFAS 159 provides companieswith an option to report selected financial assets and liabilities at fairvalue.  SFAS 159 also establishespresentation and disclosure requirements designed to facilitate comparisons betweencompanies that choose different measurement attributes for similar types ofassets and liabilities and to provide additional information that will helpinvestors and other financial statement users to more easily understand theeffect of a company’s choice to use fair value on its earnings.  Finally, SFAS 159 requires entities todisplay the fair value of those assets and liabilities for which a company haschosen to use fair value on the face of the balance sheet.  SFAS 159 is effective as of the beginning ofan entity’s first fiscal year beginning after November 15, 2007.  We are currently assessing the impact of SFAS159 which we will be required to adopt in the first quarter of our 2008 fiscalyear.

 

In May 2007, theFASB issued FSP FIN 48-1, *Definition ofSettlement in FASB Interpretation No. 48* (“FSP FIN 48-1”).  FSPFIN 48-1 clarifies when a tax position is considered settled under FIN48.  Per FSP FIN 48-1, a tax position is considered “effectively settled”upon completion of the examination by the taxing authority without beinglegally extinguished.  For “effectively settled” tax positions, a companycan recognize the full amount of the tax 

 

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benefit.  FSP FIN48-1 is effective upon a company’s adoption of FIN 48.  See furtherdiscussion of FIN 48 below.  FSP FIN 48-1 did not have a material impacton our consolidated financial position or results of operations.

 

In July 2006, theFASB issued Interpretation No. 48, “*Accounting for Uncertaintyin Income Taxes – an interpretation of FASB Statement No. 109*”(“FIN 48”).  FIN 48 prescribes arecognition threshold and measurement attribute for financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  FIN 48 also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. FIN 48 is effective for our fiscal year beginning January 1,2007.  The adoption of this statement hasnot had a material effect on our consolidated financial position or results ofoperations.

 

In September 2006,the FASB issued SFAS No. 157, “*Fair Value Measurements*”(“SFAS 157”), which establishes a framework for measuring the fair value ofassets and liabilities.  This frameworkis intended to increase consistency in how fair value determinations are madeunder various existing accounting standards that permit, or in some casesrequire, estimates of fair market value. SFAS 157 also expands financial statement disclosure requirements abouta company’s use of fair value measurements, including the effect of suchmeasures on earnings.  SFAS 157 iseffective for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years.  We donot expect the adoption of this statement to have a material effect on ourconsolidated financial position or results of operations.

 

### **ITEM 4.                  CONTROLSAND PROCEDURES**

#### ** **

Under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, we conducted an evaluation ofour disclosure controls and procedures (as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended) as of the end of theperiod covered by our Quarterly Report on Form 10-Q for the quarterlyperiod ended September 30, 2007. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures werenot effective as of the end of the period covered by that Quarterly Report on Form 10-Qbecause of the material weakness discussed below.

 

**Identificationof a Material Weakness**

 

A material weakness is asignificant deficiency, or combination of significant deficiencies, thatresults in more than a remote likelihood that a material misstatement of theannual or interim financial statements will not be prevented or detected.

 

As part of management’sanalysis of comments made by BDO Seidman in BDO Seidman’s review of a draft ofan amendment to a registration statement previously filed by us with theSecurities and Exchange Commission, our Chief Financial Officer began aninternal review of the accounting treatment of the issuance of Series Aconvertible preferred stock and related warrants in a financingtransaction.  Based on the results ofthis internal review, on February 20, 2008, our management concluded thatthe Unaudited Condensed Consolidated Balance Sheet as of September 30,2007, and the related Unaudited Condensed Consolidated Statements of Operationsfor the three and nine month periods ended September 30, 2007, that werepresented in our Quarterly Report on Form 10-Q for the quarterly periodended September 30, 2007, contained errors relating to the accounting ofthis financing transaction, and that these Unaudited Condensed ConsolidatedFinancial Statement should be amended and restated.  See Note 6 of Notes to Condensed ConsolidatedFinancial Statements for a discussion of the nature of these errors.

 

As a result of the restatementdescribed above, our management has determined that a material weakness existedin our internal controls over financial reporting with respect to the analysisof and accounting for the financing transaction.  Due to this material weakness in internalcontrol over financial reporting, our Chief Executive Officer and our ChiefFinancial Officer concluded that, as of September 30, 2007, our disclosurecontrols and procedures were not effective.

 

**Remediationof Material Weakness**

 

In January 2008, weidentified the need to establish a part-time position of Director of FinancialReporting. At that time, we began discussions with a professional financialservices consulting firm and engaged Tatum LLC to provide a part-timeprofessional to fulfill the role of Director of Financial Reporting.  Tatum LLC provided a  candidate who is a CPAwith extensive experience with ‘‘big four’’ public accounting firms as well assubstantial public company experience at the management level in the areas offinance and accounting, including the accounting for and 

 

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reporting of complexfinancial transactions. In January 2008, the candidate began performingconsulting services for us on a part-time basis as Director of FinancialReporting.  The Director of FinancialReporting is performing a major role in ensuring the accuracy and completenessof our financial reporting and the effectiveness of our disclosure controls andprocedures. We believe that the addition of this individual in this keyposition has remediated the material weakness in internal control overfinancial reporting described above.

 

Other than that described above, there has not been any change in ourinternal control over financial reporting, that occurred during the fiscalquarter covered by this Quarterly Report on Form 10-Q, that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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### **PART II.                OTHERINFORMATION**

### ** **

### **ITEM 6.                  EXHIBITS**

#### ** **

| (a)  Exhibits |                                                                                                                                                                                                   |
|-------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |                                                                                                                                                                                                   |
| **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:     March 19,  2008 |                                          |
|---------------------------------------------------------|-----------------------------------------------|
|                                                    | METRO ONE TELECOMMUNICATIONS,  INC.           |
|                                                    |                                          |
|                                                    | By:                                           | /s/ William K.  Hergenhan |
|                                                    | William K. Hergenhan                          |
|                                                    | Senior Vice President,                        |
|                                                    | Chief Financial Officer                       |
|                                                    | (Principal Financial  and Accounting Officer) |

 

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