UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)
[X]   ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
      ACT OF 1934

                    For the fiscal year ended March 31, 2000
                                       OR

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

       For the transition period from ______________ to _________________

                         Commission file number 0-15205
                                                -------

                                  ELCOTEL, INC.
             (Exact name of registrant as specified in its charter)

                  Delaware                                   59-2518405
      (State or other jurisdiction of                     (I.R.S. Employer
       incorporation or organization)                  Identification Number)

         6428 Parkland Drive
          Sarasota, Florida                                    34243
(Address of  principal executive offices)                    (Zip Code)

                                 (941) 758-0389
                         (Registrant's telephone number,
                              including area code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                     Common Stock, Par Value, $.01 Per Share
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 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  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.      Yes X     No __

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.     [X]

The aggregate market value of the voting Common Stock held by  non-affiliates of
the  Registrant  at June 9, 2000,  computed by reference to the closing price of
the  Registrant's  Common  Stock on such date as quoted by the  National  Market
System of NASDAQ, was approximately $25,014,899.  Shares of Common Stock held by
each officer,  director and holder of 5% or more of the outstanding Common Stock
have been  excluded in that such  persons may be deemed to be  affiliates.  This
determination of affiliate status is not necessarily a conclusive  determination
for other purposes.

At June 17, 2000, there were 13,742,391 shares of the Registrant's  Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None


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                                     PART I

Item 1. THE COMPANY'S BUSINESS

The following  description of the Company's  business  contains  forward looking
information  regarding  its  financial  position,   business  strategy,   plans,
projections  and  future   performance  based  on  the  beliefs,   expectations,
estimates, intentions or anticipations of management as well as assumptions made
by and information currently available to management.  Such information reflects
the Company's current view with respect to future events and is subject to risks
and uncertainties related to various factors that could cause its actual results
to  differ  materially  from  those  expected,  including  competitive  factors,
customer relations, the risk of obsolescence of its products, relationships with
suppliers,  the risk of adverse  regulatory action affecting its business or the
business  of its  customers,  changes  in the  international  business  climate,
product  introduction  and  market  acceptance,   general  economic  conditions,
seasonality,  changes in industry practices,  the outcome of litigation to which
it is a party,  and other  uncertainties  detailed  herein and in the  Company's
other filings with the Securities and Exchange Commission.

Overview of the Company

      Elcotel,  Inc. and its  subsidiaries,  which are referred to herein as the
Company, we, us or our, was incorporated in 1985 to design, develop, manufacture
and market  microprocessor-based  "smart"  payphone  electronics  with  embedded
operating  software and back office payphone  management  software  systems with
features and functions  required for  independent  providers to compete with the
Regional  Bell  Telephone  Operating  Companies  ("RBOCs")  in the  provision of
payphone terminals and related public telephone services. We have since expanded
our payphone business through internal  development and through  acquisitions to
supply   payphone    terminals   that   operate   in   wireless   and   wireline
telecommunications  networks,  and to supply payphone terminals,  smart payphone
electronics,  management software systems and other products and services to the
RBOCs,  interexchange  carriers  (IXCs) and other  domestic  and foreign  public
communications  providers.  In addition, we have developed what we believe to be
the first non-PC Internet appliances (the "Grapevine(TM)  terminals") for use in
a public  communications  environment,  which will enable the on-the-go  user to
gain  access  to  internet-based   content  through  our  client-server  network
supported  by  the  e-Prism(TM)  back  office  software  system.  Our  Grapevine
terminals,  supported  by the  e-Prism  system,  were  designed  to provide  the
features of the traditional smart payphone terminal,  to provide  internet-based
content,  to support e-mail and e-commerce  services,  and to generate  revenues
from display advertising,  sponsored content and other applications and services
in addition to traditional revenues from public payphones.  The e-Prism software
was designed to manage and deliver display advertising  content,  internet-based
content and  personalized  services to the  Grapevine  terminals.  Our  Internet
appliance  business is  presently in the  development  stage and to date has not
generated any significant revenues.

The Domestic Public Communications Industry

      We market  our  products  and  services  to the public  communications  or
"payphone" industry. Public telecommunications services in the United States are
provided by regulated  telephone  companies (or "local exchange carriers") which
include  GTE and the  RBOCs;  long  distance  carriers  ("IXCs"),  such as AT&T;
independent payphone service providers;  and competitive local exchange carriers
("CLECs"),  all of which are collectively referred to herein as Payphone Service
Providers  ("PSPs").  The  operations  of regulated  telephone  companies,  long
distance  carriers  and CLECs  (collectively  referred  to herein as  "telephone
companies")  are subject to extensive  regulation by the Federal  Communications
Commission ("FCC") and state regulatory agencies (see "Government Regulation and
the Telecommunications Act," below). Virtually all services offered by telephone
companies,  including payphone services, are provided


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<PAGE>

in accordance with tariffs filed with appropriate regulatory agencies, including
the FCC.  Independent  payphone service  providers are subject to regulations of
state regulatory agencies.

      The  Telecommunications Act of 1996 (the  "Telecommunications  Act" or the
"Act"), the most comprehensive  reform of communications law since the enactment
of the  Communications  Act of 1934,  eliminated  long-standing  legal  barriers
separating local exchange carriers, long distance carriers, and cable television
companies and preempted  conflicting  state laws in an effort to foster  greater
competition in all  telecommunications  market  sectors,  improve the quality of
services,  and lower prices.  In addition the Act included  specific  provisions
relating to the payphone  operations  of telephone  companies and the payment of
compensation by long distance carriers to other PSPs for toll free (800, 877 and
888) calls and access code ("10xxx") calls  (collectively  "dial-around"  calls)
made  from  payphones  to  the  networks  of the  long  distance  carriers.  See
"Government Regulation and the Telecommunications Act," below.

      As a result of the regulatory  changes  created by the Act and regulations
adopted by the FCC to implement its provisions and competition from cellular and
other wireless forms of communication, we believe that the public communications
industry is  undergoing  fundamental  changes.  The rapid growth in cellular and
wireless  telephone usage has resulted in declining payphone usage and revenues.
In  addition,  the  growth in  dial-around  calls  from  payphones  has  further
compressed  payphone  revenues.  The RBOCs,  which  control a major share of the
payphone market,  are no longer permitted to subsidize losses generated by their
public  communications  businesses with profits from their regulated businesses.
As a result of these market factors,  the PSPs are eliminating marginal payphone
sites,  building  inventories of payphone equipment,  using these inventories to
maintain  their  installed  base,  and  curtailing  new equipment  purchases and
programs to upgrade the installed base while repairing and refurbishing existing
equipment.  In  addition,  there  have  been  widespread  consolidations  in the
telecommunications  industry.  These  consolidations  have  also  resulted  in a
decline in the number of installed payphone terminals and in the number of PSPs.
Further,  coin  collection  expense is growing  while coin revenue is declining,
further  compressing  profit  margins of PSPs. The embedded base of payphones in
the United  States has  contracted  from an estimated  2.4 million  terminals in
operation in 1998 to an estimated 2 million  terminals  today and is expected to
contract further beyond 2000. These industry  conditions are adversely affecting
the  business of the PSPs as well as the  suppliers  of products and services to
the PSPs, including us.

      We  believe  that  six  PSPs  control  approximately  80% of the  payphone
terminals  in  service in the United  States.  These  PSPs,  which  include  SBC
Communications,   Inc.  ("SBC")  (which  acquired  Pacific  Telesis,   Inc.  and
Ameritech,  Inc.),  Bell Atlantic,  Inc.  (which acquired NYNEX and is acquiring
GTE), BellSouth Corporation,  US West, AT&T and Davel Communications,  Inc., are
reevaluating  their business  strategies,  considering  divestitures of all or a
portion of their  installed base and are also seeking new service  solutions and
revenue sources, such as advertising,  e-mail and content, to combat competition
from cellular and other wireless forms of  communication  and stimulate usage of
public terminals.

The Internet and Public Access Interactive Media Market

      The explosive growth of the Internet,  which is revolutionizing how, when,
where  and  why  people   communicate   is   beginning   to  impact  the  public
communications industry. Consumers now have easy access to news, information and
services of value to them through some personalized  service, such as the Yahoo!
Inc.  connectivity  portal.  As a  result,  telecommunications  today  is  about
personal  connectivity on a twenty-four hour basis seven days a week.  Consumers
increasingly  demand access to "content" anytime,  anywhere,  not just the voice
communications   provided  by  wireline  or  wireless  phones.   Content  equals
information,   ranging  from  voice  calls  to  local  news,  local  hotels  and
transportation,  mapped directions,  weather forecasts and investment updates to
e-commerce transactions and e-mail.


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<PAGE>

      For consumers  on-the-go,  however, the technology to deliver this content
connectivity  on a  twenty-four  hour basis  seven days a week is still  largely
bound to the home or office.  Today,  fifty or more  companies  have  introduced
Internet  kiosks in order to stimulate  industry demand and generate new revenue
streams for PSPs. These kiosks, at which educated  consumers can surf the web in
a public  access  environment  at their  leisure,  are built  upon a "top  down"
technology  consisting of hardware and software  containing  all of the features
and  functionality of a personal  computer ("PC").  The consumer must figure out
how and what  information  and content to access  from the  Internet.  Also,  we
believe that Internet  kiosks are  intimidating,  cumbersome,  and difficult and
expensive to deploy.  Consequently,  we do not believe these kiosks  effectively
respond to the emerging need of the  "on-the-go"  consumer for easy,  simple and
widespread public access content  connectivity.  Further,  these Internet kiosks
are not  physically  configured so that they can serve as a replacement  for the
hundreds of thousands of payphones  located in suitable sites.  As a result,  we
believe that only about 20,000 Internet kiosks have been sold worldwide  through
the end of 1999.

      The  Internet  is an  increasingly  significant  global  mass  medium  for
conducting  business,   collecting  and  exchanging  information,   facilitating
communication  and  providing  entertainment.   International  Data  Corporation
estimates  that  the  number  of  Internet   users   worldwide  will  grow  from
approximately  142 million users at the end of 1998 to 502 million by the end of
2003. We expect the growth in Internet  usage to translate into growth in demand
for devices to access Internet-based content. Also, we believe that the emerging
non-PC  Internet  appliance  market is growing  rapidly and  gaining  focus with
consumers,  especially  business  travelers.  It is  estimated  that the  non-PC
Internet  appliance  market,  which includes the Palm Pilot,  Casio Casiopia and
Compaq and other thin client based technology  devices,  totaled $3.5 billion in
1999,  will grow at a compound annual growth rate of 36 percent to $16.2 billion
by 2004 and will exceed the PC market within five years.

      Travel  is part of the  American  psyche.  Technology  and  infrastructure
improvements  have created travel  products that are easy to use and affordable.
It is estimated that the total  person-trips  made in 1998 were 1.3 billion.  So
the potential for out-of-home,  electronic interactive  advertising,  e-mail and
Internet-based  content delivery is substantial.  Advertisers and businesses now
view the Internet as a new medium that effectively  targets  consumers,  enables
instantaneous  transactions  and offers new,  easily  updateable  services  that
stimulate sales.  Content-based,  transaction-oriented  Internet  advertising is
expected to  increase in the coming  years.  In the third  quarter of 1999,  the
Internet  Advertising Bureau recorded  web-advertising  revenue of $1.2 billion,
three times greater than in the third quarter of the previous year. On an annual
basis, Internet advertising revenues are expected to exceed $4 billion for 1999.
A recent report from Forrester Research, Inc. estimates that content advertising
will  account  for $22  billion,  or about 8  percent  of all  U.S.  advertising
spending  by the year 2004 and grow to $50  billion  in 2005.  That  would  make
content  advertising the fourth highest  spending  category  behind  television,
newspapers and direct mail.

      The public access  interactive media market is a hybrid of the out-of-home
media market (which includes local promotions) and interactive media market that
targets  consumers  personally.  We  believe  that  the  current  public  access
interactive  media market has been  limited to a small  number of niche  product
providers primarily offering Internet kiosk-type  workstations.  We also believe
that  out-of-home  media  advertisers  are searching for new ways to improve the
value of their  advertising,  and that solutions that offer  interactivity,  the
ability to place an order and track  consumer  response  command a  premium.  In
addition, we believe that targeting specific demographics with local advertising
and information is more valuable than mass media, banner advertising.

      The interactivity, reporting and ability to generate immediate demand from
the Grapevine terminals are similar to Internet offers in the home or office. On
the Internet,  as in traditional media, there are two widely recognized types of
advertising  -  brand  advertising  and  response-oriented   advertising.


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<PAGE>

Brand  advertising  is intended to generate  awareness  of and create a specific
image  for  a   particular   company,   product   or   service.   In   contrast,
response-oriented  advertising,  or direct marketing,  is intended to generate a
specific   response  or  action  from  the   consumer   after   exposure  to  an
advertisement.  Response-oriented advertisers focus on the short-term benefit of
advertising and seek to maximize the number of desired responses per advertising
dollar.

Our Domestic Market Strategy

      Over the past 100 years,  the  public  telecommunications  industry,  more
commonly known as the "payphone industry",  has made "on-the-go"  communications
possible for millions of people  daily.  A decade ago, the payphone was the only
way most people on the go kept  connected to home or office.  Although  payphone
usage and revenues have declined with the growth of wireless services, payphones
still command the preferred communications site locations,  particularly in high
profile, high traffic locations, such as airports, malls and convention centers.
We  plan  to  continue  to  provide  smart  payphone  electronics,   replacement
components  and repair  and  refurbishment  services  to PSPs and  maximize  the
performance  of our payphone  business  while the installed  base of traditional
payphones and payphone usage revenues  contract and enter into  customer/partner
relationships  with the PSPs to deploy our Grapevine  non-PC  Internet  terminal
appliances in high profile, high traffic locations.  We also plan to develop our
Internet-based content,  information and consumer services business to provide a
content-driven personal communications portal in a public access environment. We
believe that the successful  implementation  of our Internet  business  strategy
will  enable  PSPs  to  generate  display  advertising  revenues  from  targeted
demographic specific advertisements, revenues from sponsored-paid content banner
advertisements  and other sources of service revenues that are two to four times
greater  than the  revenues  generated  from  traditional  payphones.  With this
strategy,  we believe that the public  communications  payphone industry and our
$100 million to $200 million-estimated  payphone equipment market can now expand
to encompass the $3 billion Internet and interactive media market.

      In our  Internet  appliance  business,  we intend to  manage  and  deliver
specialized  and  personalized  services to  consumers  in a public  environment
through our Grapevine terminals.  We are focusing on real-world content, such as
directories,  classified  advertisements,  e-mail,  real-time  stock  quotes and
sports results,  weather forecasts,  horoscopes,  maps, and information on local
hotels,  restaurants,  transportation  and  events.  We believe  that  combining
reformatted  Internet-based content from information aggregators integrated with
related   content  using  our  proprietary   technology  and  service   delivery
capabilities   will  increase  the  convenience,   relevance  and  enjoyment  of
consumers'  visits  to our  Grapevine  terminals,  thereby  promoting  increased
traffic and repeat usage. We also believe that increased  traffic and usage will
enhance  the  value of  advertising  and other  services  provided  through  the
Grapevine terminal network.

      We intend to deliver and support the sending and  receiving of emails with
our  Grapevine  terminals in various  forms,  visually on the  display,  audibly
through the handset using voice attachments (send) and text-to-speech (receive),
to or from personal  digital  assistants  ("PDAs") or wireless phones through an
infra-red  data  ("IrDA")  port,  and to or from a PC. We also intend to support
directory and information  transfers from any of our Grapevine terminals to PDAs
used by the traveling public.

      The cornerstone of our content  solution is the distribution of content to
consumers  in  airport  concourses  and  airline  lounges,  convention  centers,
shopping malls, hotel lounges and suites, gas stations,  factories and fast food
chains.  This  distribution  would be provided from the same sites that now host
payphones.  Using our proprietary technology,  we intend to integrate real-world
content for  consumers to easily and rapidly  access for their  immediate  needs
without  having to surf the  Internet or hook up their PC. In a business  model,
which assumes that consumers have less than 20 minutes to make,  collect,  store
or use updated  information  from  e-mails,  and to make phone calls,  Grapevine
terminals would help


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consumers in public areas find interesting  personalized and generic information
easily.  As examples,  the Grapevine  terminals are designed to offer  immediate
delivery  of  e-mail,  personal  speed-dial  numbers  or e-mail  addresses  with
automated access allowing consumers to complete a transaction while on-the-go.

      We have designed our Grapevine  terminals,  content and telephone services
to be highly flexible and customizable, enabling our customers/partners to offer
a broad range of feature  options.  We believe that our approach of  integrating
off-the-shelf  technology with our internally developed technology enables us to
employ a  scalable  architecture  adapted  specifically  for our  Internet-based
delivery of  services.  We can  maintain  the same look and feel and  navigation
features across a broad geographical deployment base of Grapevine terminals, but
create  the  impression  to  consumers  that each  customer/partner  has its own
branded and packaged information  offering.  Our back-office  management systems
have been  designed to include the  capability  to manage both the  content-rich
multimedia  Grapevine terminals and the existing embedded bases of payphones for
the same customer/partner. By leveraging off the shelf technology, we believe we
will be able to focus on management and  distribution of content and back office
services to consumers in a public access environment.

      Our revenues in this Internet service business may include a percentage of
the total revenues  generated from advertising,  sponsorships,  promotions,  and
electronic commerce transactions from the Grapevine terminals; sale of Grapevine
terminals to our customers/partners; management fees from collecting, analyzing,
and  reporting on phone  performance  data;  managing  delivery of  advertising,
sponsorships,   information  and  promotions,   which  are  site,  terminal  and
time-of-day  specific;  personalization  of  enhanced  information  and  e-mail;
customization fees for formatting  advertising,  sponsorships and promotions for
the Grapevine terminal network; and management fees from collecting,  analyzing,
and reporting on performance data for embedded bases of traditional payphones.

      Through the combined sales forces of our  customers/partners,  information
aggregators,  and our  content  creation  group,  we plan to offer a variety  of
national  and  local  advertising,   sponsorships  and  promotions  that  enable
advertisers  to access both broad and  targeted  audiences.  We believe that our
planned interactive  information  delivery and personalization  capabilities and
e-mail delivery  methods will have an important  impact on the level of revenues
derived by our  customers/partners.  We  believe  that  these  capabilities  and
relationships  will provide us with a distinct  advantage over competitors while
minimizing our own sales  infrastructure  investment.  We believe that our reach
and  message  to  advertisers  in  terms of  targeting,  sensory  intensity  and
interactivity will be unmatched in a public communications environment. However,
there can be no assurance that we will be able to implement our domestic  market
strategy in whole or in part.

The International Public Communications Industry

      Public communications services in foreign countries are generally provided
by  large  government-controlled   postal,  telephone  and  telegraph  companies
("PTTs"),  former PTTs that have been privatized for the purpose of investing in
and expanding  telecommunication  networks and services,  and  cellular/wireless
carriers.   The  Company  believes  that  a  trend  toward   privatization   and
liberalization of the international  telecommunications  industry is opening the
international   markets,   previously   dominated  by  monopoly  and  government
infrastructure, to increased competition.

      We believe that there are several million payphones internationally in the
installed base. However,  the density of payphone  installations in many foreign
countries on a per capita basis is far less than that in the United States.  The
Company  believes that many of these countries are seeking to expand and upgrade
their   telecommunications   systems  and  are   funding   programs  to  provide
communication   services  to  the  public.   The  Company   believes   that  the
international  public  communications  industry,  particularly in underdeveloped
nations,  will continue to evolve and be a significant  growth industry over


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the next several decades to the extent that  privatization and the investment in
both wireline and wireless networks progresses.

Our International Business Strategy

      We focus on foreign  markets  undergoing  deregulation  including  Canada,
South  America,  Central  America,  Africa and the Far East and on  providers of
public  communications  services that are affiliated  with or owned by the RBOCs
and those  licensed  to compete  against  the PTTs.  Our  strategy is to provide
competitive  wireless and coin operated  payphone  terminals to foreign  markets
with  underdeveloped  telecommunications  networks,  and to provide high profile
card/coin  operated payphone  terminals to developed markets such as Canada. Our
strategy  provides  for the  integration  of cellular and other  wireless  radio
technologies into our domestic  payphone products for niche  applications and to
reduce the cost of payphone deployment in major metropolitan areas.

      We are implementing our Grapevine  Internet  terminal  strategy on a North
American  basis and  targeted  the  Canadian  market  for the  first  commercial
deployments  of our  Grapevine  terminals.  We intend to  capitalize  on what we
perceive to be significant  opportunities in other  international  markets,  but
only after we have penetrated the North American market. We expect to reduce the
costs and risks of international  expansion by entering into strategic alliances
with partners able to provide local directory, content, information,  e-mail and
electronic  commerce,  as  well  as  major  local  sales  forces  and  contacts.
Furthermore,  we  plan  to  use  the  Internet  and  our  regional  servers  for
downloading  content and  uploading  management  data from/to our data center to
in-country  locations  outside North America.  We have entered into  discussions
with several large PSPs in Europe and South America to explore the prospects for
suitable  business  relationships.  However,  we do not  anticipate  operational
capability of our services  outside of North America before  calendar year 2001.
Notwithstanding,   we  are  continuing  to  evaluate  additional   international
opportunities.  The expansion into  international  markets  involves a number of
risks as further described herein.  Also, there can be no assurance that we will
be able to implement our international market strategy in whole or in part.

Products and Services of Our Payphone Business

      We design, develop,  manufacture and market a comprehensive line of public
communications products,  including payphone electronics and management software
systems,  payphone  terminals,  and  payphone  components  and  assemblies.  Our
microprocessor-based  payphone  electronics,  with embedded operating  software,
serve as the engine of payphone  terminals  known in the  industry as "smart" or
"intelligent"  payphones.  Networks  of  payphone  terminals  equipped  with our
microprocessor-based  electronics are  programmed,  monitored and controlled via
telemetry by our back office management software systems. Our electronic modules
provide the  capability to  communicate  with a caller by digitized  human voice
messages and prompts activated by the microprocessor, and have the capability to
internally  process the functions  associated with call processing,  call rating
and collecting data for accounting,  coin and route management  functions.  Call
timing and rating functions are performed via proprietary "answer detection" and
"answer  supervision"  designs.  Our  microprocessor-based   electronic  modules
include the Series 5(TM) module,  the 5501(TM)  module,  the 5502(TM) module and
the Gemini System III(TM) module.  The low electric  current  available from the
telephone line, which eliminates the cost of electrical installation,  generally
powers these electronic modules and our payphone terminals.


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<PAGE>

      Our electronic  modules together with our back office software  management
systems  offer  standard  features and options that provide,  among others,  the
ability to:

      o     Monitor and report coin box status;
      o     Monitor  and  report  the  service  condition  of the  payphone  via
            maintenance and diagnostic alarms;
      o     Report,  in real time,  any critical  conditions  to the  management
            system;
      o     Record and store call records,  including called numbers,  types and
            length of calls and call revenue;
      o     Retrieve programming information, call records, cash box status, and
            maintenance and diagnostic data remotely;
      o     Program and monitor various  options,  rates,  alarms and free phone
            numbers on-site or remotely;
      o     Download voice prompts;
      o     Calculate  time-of-day  discounts and control other timed  functions
            via clock and calendar features; and
      o     Download revisions to the software operating system.

      In addition,  we provide software options  including custom voice prompts,
multilingual  voice  prompts,  customized  maintenance  alarms and call  routing
features,  programmable  initial  rates and timed local  calls.  We also support
multiple  payment  options,  including coin,  credit cards and smart cards.  The
Series 5 module operates  exclusively on a B-1 line and is marketed primarily to
independent  payphone  providers.  The 5501 and 5502 modules operate on either a
B-1 line or a specialized  coin line for access to central  office  services and
are  marketed  to private  operators  and  telephone  companies.  The  extensive
features  of the  5502  module  include  a  high-speed  modem  for  faster  data
transmission and retrieval,  user selectable language,  customized tariff tables
and speed dial  programmability  for ease of use and  generation  of  additional
revenues.  The 5502 module also supports a data port interface for access to the
Internet via laptop computers and liquid crystal and vacuum florescent  displays
to augment audible voice instructions and to provide advertising capability. The
Gemini System III module is programmable to operate on either a B-1 line or on a
specialized  coin line for access to central  office  services  and is  marketed
primarily to telephone companies. Its modular connector design allows the PSP to
choose the desired  feature set,  which reduces  installation  time.  The Gemini
System III module also supports a data port interface for access to the Internet
via laptop computers and multiple payment options.

      Our network management software systems are designed to manage and control
both  small  and  large  networks  of  payphone   terminals  equipped  with  our
microprocessor-based   electronic  modules.  Our  payphone  management  software
systems  operate on  personal  computers  in a  multi-tasking  environment,  and
provide  PSPs with the  ability  to manage  and  control  all  aspects  of their
installed payphone network  interactively from a single location.  The Company's
management  software systems provide PSPs with the ability to remotely configure
product features,  control the download of software changes, program rate files,
monitor operating status, and to download coin box, call record, maintenance and
diagnostic  data  for  accounting,  coin and  route  management  functions.  The
Company's  network  management  systems  include the PNM  Plus(TM)  System,  the
PollQuest(TM)  System  and the  CoinNet(TM)  System.  The PNM Plus  system  is a
user-friendly  Windows-based management system that is used to remotely program,
manage,  and monitor payphone terminals equipped with our Series 5, 5501 or 5502
electronic  modules.  This  software  system has a built-in  24-hour  monitoring
function  that  reports all  pertinent  phone  activity,  including  call detail
records,  maintenance  reports and alarm  reports.  The monitoring and reporting
function can be configured to be  completely  hands-free  and to perform late at
night,  optimizing  the  busy-hour  performance.   The  PollQuest  system  is  a
Windows-based management system designed to remotely program, manage and monitor
our international payphone terminals generally equipped with our 5502 electronic
module.  PollQuest  has the  ability to  generate  call  detail and  maintenance
reports, manage the communications


                                       8
<PAGE>

with the payphones and generate performance-based reports. The CoinNet system is
a Unix or DOS-based management system that is used to remotely program,  manage,
and monitor  payphone  terminals  equipped with our Gemini System III electronic
modules. The CoinNet system provides call detail reports,  maintenance and alarm
reports, and the customized operating  characteristics of each Gemini System III
module.

      Our  product  line  also  includes  payphone  terminals,  non-programmable
electronic  payphone  modules which serve as the network  interface in payphones
known in the industry as "dumb" payphones that require a coin line for access to
central office services for rating and routing of calls,  replacement components
and  assemblies,  and a full  offering of industry  services  including  repair,
upgrade and refurbishment of equipment, operator services, customer training and
technical support.

      Our  payphone  terminals  consist  of a wide  range  of  models  including
coin-operated payphones, payphones that accept smart cards and credit cards, and
multi-payment  (coin and card)  payphones  for both  domestic and  international
applications,  including  cellular  and other  wireless  applications.  We offer
traditional GTE style and Western Electric or AT&T style payphones equipped with
our  electronic  modules,  electronic  coin  mechanisms to support  domestic and
foreign coins,  displays to support multilingual  messages in languages selected
by the  customer,  speed dial  buttons  and card  readers.  Our custom  payphone
terminals include the following:

      Eclipse(TM)  and  Komet(TM)  Payphone  Terminals.  The  Eclipse  and Komet
      payphone terminals are  sophisticated,  feature-rich GTE style and Western
      style terminals,  respectively,  equipped with the 5502 electronic module.
      The Eclipse and Komet payphone terminals include a data port interface for
      access to the Internet via laptop  computers and speed dial  buttons,  and
      are configured for multiple payment options,  including coin, credit cards
      and smart  cards.  Their  liquid  crystal or  optional  vacuum  florescent
      displays  augment  audible  voice  instructions  and  provide  advertising
      capability.  These  products  are  marketed  to  both  domestic  telephone
      companies and independent  payphone service  providers for installation in
      high profile  locations such as airports,  hotels and convention  centers.
      The  Eclipse  payphone  terminal  is  also  offered  in  an  international
      configuration that accepts and stores larger coins.

      IPT(TM) Payphone  Terminal.  The IPT payphone terminal is an international
      GTE style terminal equipped with the 5502 electronic  module. The terminal
      is  provided  in  either  a  coin   configuration   or  a  coin  and  card
      configuration,  includes a liquid crystal display to augment audible voice
      instructions and to display  remaining card value when applicable,  and is
      configured to accept and store larger  international  coins. This terminal
      can also be  configured  with a backlit  liquid  crystal  display  with an
      auxiliary power source.

      Solarus(TM)  Payphone Terminal.  The Solarus payphone terminal is a custom
      designed  stainless steel  international  card-only terminal equipped with
      the 5502  electronic  module,  and  includes a liquid  crystal  display to
      augment audible voice  instructions  and to display  remaining card value.
      This terminal can also be configured with programmable  speed dial buttons
      and a backlit liquid crystal display with an auxiliary  power source.  Our
      cellular  model  of the  Solarus  payphone  terminal  operates  in an AMPS
      wireless environment.

      Solarus II(TM) Payphone  Terminal.  The Solarus II payphone  terminal is a
      Western  style  network  access  terminal  that  integrates  TDMA and CDMA
      wireless  technology serving as a fixed portal for prepaid,  emergency and
      free voice services.


                                       9
<PAGE>

      SolarusCity(TM)  Payphone Terminal. The SolarusCity payphone terminal is a
      Western  style  terminal  equipped  with a  5502  electronic  module  that
      operates  in a 900 MHz  wireless  environment.  The 900 MHz base unit used
      with  the  SolarusCity  terminals  is  installed  within  500  feet of the
      terminal and provides  connection to the existing wireline  network.  This
      terminal powered by solar panels eliminates the need of wires to avoid the
      high  construction  cost to install curbside phones in major  metropolitan
      areas.

      We  supply  our  microprocessor-based   electronic  modules  and  payphone
terminals  to  RBOCs  and  other  telephone  companies  that are  upgrading  the
technology  of their  installed  base of payphones and to  independent  payphone
service providers, distributors and resellers. In addition, the Company supplies
replacement    components   and   assemblies   that   include,   among   others,
non-programmable payphone electronics, electronic coin mechanisms, card readers,
cash  box  switches,   dial  assemblies,   handsets,  coin  relays,  and  volume
amplification assemblies.

      We also offer comprehensive services to assist customers manage,  maintain
and expand  their  installed  payphone  network.  The  Company  provides  repair
services,  refurbishes and upgrades customer-owned  terminals and components and
provides operator  services,  training,  technical support and field engineering
services.  Our  refurbishing  activities  involve  the  rebuilding  of  payphone
terminals,  components  and  assemblies  to "like new"  condition.  Our  upgrade
services  include the  modification  of payphone  terminals and assemblies to an
updated or enhanced technology.

Products and Services of Our Grapevine Internet Appliance Business

      We have developed what we believe to be the first non-PC Internet terminal
appliances,  the  Grapevine(TM)  terminals,  for use in a public  communications
environment,  which were designed to enable the on-the-go user to gain access to
Internet-based  content  through  our  client-server  network  supported  by the
e-Prism(TM) back office software system. Our Grapevine  terminals,  supported by
the e-Prism system,  were designed to provide the features of traditional  smart
payphone  terminals,  to provide  connectivity  to  Internet-based  content,  to
support e-mail and e-commerce  services,  and to generate  revenues from display
advertising,  sponsored  content and other  services in addition to  traditional
revenues from public payphone terminals.  The e-Prism service bureau network was
designed  to manage and  deliver  display  advertising  content,  Internet-based
information  and  specialized  and   personalized   services  to  the  Grapevine
terminals. Our Internet appliance business is presently in the development stage
and to date has not generated any significant revenues.

      Our  Grapevine  Internet  Terminal  Appliances.   Our  Grapevine  Internet
terminal  appliances are wired personal  digital  assistants  (PDAs),  which are
designed to carry out-of-home,  electronic interactive content in public spaces.
Our Grapevine terminals use WinCE thin client technology, are managed by what we
believe to be unique  back-office  software  systems,  and are  equipped  with a
high-resolution,  wide-angle active ("TFT") matrix color display for delivery of
display advertising, sponsored advertising and Internet-based content. Also, the
Grapevine  terminals have an IrDA port to communicate e-mail and content to/from
hand-held  PDAs, soft keys which are used to obtain  information and content,  a
card reader for both  magnetic  stripe and smart chip cards to offer loyalty and
personalized  services,  a data port to access  the  Internet  with a PC,  and a
handset  with voice  advertising  to support  free phone  calls.  The  Grapevine
terminals are not Internet surfing devices,  but rather were designed to provide
consumer-specific,  branded content from our integrated  back-office  network of
servers.


                                       10
<PAGE>

[GRAPHIC OMITTED]

Grapevine Internet Appliance Terminal (wall-mount version)

      The  Grapevine  terminals  are provided in a wall-mount  version using the
same  footprint  of a  traditional  payphone  and  in  a  desktop  version.  The
wall-mount version is intended to look like an evolution of the payphone so that
young and old consumers recognize the terminal as easy-to-use and is targeted to
replace  traditional  payphones  in high  profile,  high  traffic  sites such as
airports,  malls and  convention  centers.  The  desktop  version is targeted to
replace telephones  located in airport airline lounges,  hotel executive centers
and lounges and high-end hotel accommodations.

      Each  Grapevine  terminal has three major modules - the Windows CE Content
Delivery Module, the Telephone Module and the Card Reader Module. The wall-mount
version also has a coin path, including a coin scanner,  escrow,  chutes, and an
anti-stuffing device, a coin return bucket, a cashbox and a security package.

                               [GRAPHIC OMITTED]

             Grapevine Internet Terminal Appliance (desktop version)


                                       11
<PAGE>

      The  Windows  CE  Content  Delivery  Module  manages  the  display  of the
advertising and Internet- based content received from our remote e-Prism Content
Server. The primary components in the Windows CE Content Delivery Module are the
Communications Interface, the Content Delivery Processor and the User Interface.
Advertisements and  Internet-based  content are received from the remote e-Prism
Content Server through the Communications  Interface.  Advertisements and static
content  are  stored  as  cached  content  in  memory  in the  Content  Delivery
Processor.  Dynamic content will be provided through a persistent  connection to
our  e-Prism   portal.   The  Content   Delivery   Processor   determines   what
advertisements  and content is  displayed  on the User  Interface,  delivers the
advertisements  and  content to the User  Interface  and  responds  to  consumer
actions through the User Interface. The User Interface consists of the TFT color
display and five push-button  soft keys mounted at the base of the display.  The
consumer will  interact  with content  through the soft keys or through the IrDA
port in the Card Reader Module. The Communications Interface is designed so that
advertisements  and  internet-based  content can be  delivered to the Windows CE
Content  Delivery System by high-speed  modem,  on a standard  telephone line, a
Digital Subscriber Line ("DSL") interface,  an ethernet  connection over a local
area network, or an Integrated Services Digital Network ("ISDN").  The Microsoft
Windows  CE  operating  system is used for all  real-time  software  operations,
including support for the Microsoft Internet Explorer browser to manage content.
The Content  Delivery  Processor also has a high-speed  serial data interface to
the  Telephone  Module so that  commands and data can be  exchanged  between the
Telephone Module and Windows CE Content Delivery Module.

      We have  designed  the soft keys for  navigation  through  directories  to
Internet-based content. These context-sensitive soft keys provide the ability to
offer  flexible  applications  and  information  delivery.  They have  different
instructions  on each key for each screen  that is  displayed  on the  Grapevine
terminal.  One of these  soft keys will  typically  offer Help  details  for the
particular  screen displayed to the consumer.  Others will support  scrolling of
directories, navigation through different levels of an information tree, and the
delivery of specific  functions  associated  with other modules in the Grapevine
terminal  including use of the IrDA port for uploading and  downloading  e-mail,
activation of the handset for voice prompts,  and use of the speakerphone in the
desktop  version.  As our applications and services are expanded these soft keys
will continue to offer more  flexibility for ease and convenience of information
delivery to consumers.

      The Telephone  Module supports the payphone  application in each Grapevine
terminal. It has two primary elements,  the Digital Signal Processor ("DSP") and
Applications Processor. The DSP provides all telephone line and voice interfaces
in the phone including voice  decompression  from stored compressed voice files;
high-speed  modem;  call progress tone detection and generation;  DTMF detection
and generation;  management of audio functions;  and provides interfaces for the
handset and phone line. In addition,  the Telephone Module contains the features
and  functions  that  are  provided  with  our   microprocessor-based   payphone
electronics. The Application Processor provides extensive I/O interfaces for the
coin  scanner,  coin escrow,  keypad,  speed-dial  buttons,  hook switch,  alarm
switches,  card  reader and the Content  Delivery  Processor  components  of the
Grapevine terminal.

      The Card Reader Module provides the card reader  functions,  the IrDA port
functions and the PC data port functions. The card reader is designed to support
magnetic stripe cards,  memory IC cards and microprocessor  smart cards, two (2)
Security Access Modules (SAMs) in the standard  configuration  and an additional
four (4) SAMs for advanced  electronic  commerce  and loyalty  programs in which
multiple purses are required. The IrDA Port is mounted on the Card Reader Module
and is connected to the Content  Delivery  Processor.  The IrDA port  provides a
high-speed data interface for hand-held devices supporting an IrDA port, such as
PDAs, wireless phones and laptop computers. It can be used to transfer data such
as e-mail between these devices and the Grapevine terminal.  The PC data port is
an  industry


                                       12
<PAGE>

standard  connector  mounted on the Card Reader  Module and is  connected to the
Telephone  Module.  The PC  data  port  is  used to  provide  a  standard  phone
connection for  higher-powered  portable devices,  such as laptop PCs, to enable
the consumer to access a high-speed  persistent  connection to Internet services
and other networks.

      The e-Prism  Management  Server Network and Software  System.  The e-Prism
Server Network is a  comprehensive  system of servers for "back office"  support
and content  management to drive the Grapevine  terminals and services delivered
to consumers.  The e-Prism proprietary software system manages the terminals and
is designed to tailor advertising messages, sponsor-paid content and information
delivered to the Grapevine  terminals,  to manage sending and receiving  e-mail,
and to manage,  bill and clear smart card and electronic  commerce  transactions
made at the  terminals.  Additionally,  the e-Prism  system is designed to offer
full  service  capabilities,  including  reports on usage and  provisioning  and
reports on performance measurements for all services.

      The e-Prism system is currently comprised of the e-Prism Phone Server, the
e-Prism  Content Server and the Report  Generator  Server located at our Service
Bureau Data Center.  The e-Prism  Phone Server  manages  phone data such as coin
collections,  maintenance and diagnostic alarms and performance of the telephone
functions of the terminals. The e-Prism Content Server manages content data, the
delivery of advertising and sponsored  information  content to the terminals and
reports  content display  performance.  The Report  Generator  Server is used to
report  information  to PSPs and  advertisers.  As our  Grapevine  terminals are
deployed, our e-Prism service bureau network servers will be expanded as needed.
Also, the network will be expanded to include  regional  servers  throughout the
United  States  and  Canada,  which will be used as  polling  engines  and local
download  managers,  which will provide our  customers/partners  with the direct
ability to provision Grapevine terminals and to obtain data and reports.

      The e-Prism  system  manages  terminal  data,  site data,  customer  data,
advertising agency data,  advertisements and advertising categories and provides
the ability to filter advertisements based on sites and advertising  categories.
In addition,  the e-Prism system  provides the ability to retrieve  remotely all
telemetry data, including call records,  alarm data, cash box data,  programming
information, maintenance and diagnostic data, and advertising data including the
number of times  each  advertisement  is  displayed,  the  number of times  each
advertisement is displayed while the terminal is in use, the number of times the
advertisement  auto-dial feature is used and the related  date/time ranges.  The
system also provides the  capability to download  advertising  and content data,
including images,  messages,  advertising  format type and display duration.  In
addition,  the system  provides  the  ability to  remotely  download  changes to
operating software to both the Telephone Module and Content Delivery Module. The
e-Prism  system is able to store a month of  telemetry  data in its  operational
database and provide reports on the data. The system also replicates the data in
a separate reporting database for analytical reporting.

      The  regional  servers,  which  will be located in regions of up to 35,000
deployed  Grapevine  terminals,  will  be  used  by  our  customers/partners  to
provision  the Grapevine  terminals  and to obtain call detail  records and coin
collection,  cash box and maintenance and alarm reports.  They will have polling
engines  and  local  download  management  functions  associated  with the Phone
Server.  Regional servers will also have the content caching associated with the
Content  Server to store  and  download  advertising  content  to the  Grapevine
terminals.  The regional servers will act as repositories for content from which
a Grapevine terminal draws information.

      Advertising  Services.  We are in the initial  stage of  implementing  our
advertising  services.  The  advertising  sales  team is  planned  include  each
customer/partner,  information aggregators and our advertising support team. The
advertising  sales team will  establish the sources of  advertising on Grapevine
terminals.  Formatted  content is  e-mailed  to our  content  creation  group by
advertisers, other team members, or their representatives.  Our services include
the  reformatting  of content for delivery to


                                       13
<PAGE>

the Grapevine  terminals from our network service bureau, the loading of content
into the Content Server and the  downloading  of content to Grapevine  terminals
designated by the other  advertising team members.  Our content creation team in
conjunction  with the other  advertising  sales  team  members  establishes  the
appropriate  delivery  schedules  and  delivery  format,  by vertical  market or
customer.  To  monitor  quality of service  and report to the  advertisers,  our
customers/partners  have access to reports for  retrieval  of details  regarding
content delivery and reporting.  Presently,  we are capable of providing static,
passive JPEG/GIF advertising and content images.  Capability to provide animated
advertising images and MPEG images is presently under development.

      Advertisements  downloaded to Grapevine terminals rotate continuously,  24
hours  per  day.  Presently,  we  provide  the  ability  to  display  up  to  40
advertisements,  each 5 to 10  seconds  in  duration.  However,  the  number  of
advertisements,  their duration and the number of frames per  advertisement on a
per terminal basis can be modified to meet the requirements of advertisers,  our
customers/partners, or information aggregators. Selective downloads of additions
or  changes  to   advertisements   as  well  as  bulk  content  downloads  on  a
terminal-by-terminal basis are also available. Advertising content is downloaded
periodically  via modem and displayed on a timed schedule.  Grapevine  terminals
display advertising that is stored in the terminals  themselves.  The ability to
use speed dial numbers for  connection  to the call centers of  advertisers  via
voice is also available.

      e-Prism Terminal  Management  Services.  Our e-Prism  terminal  management
services, consisting of a variety of necessary support functions to successfully
manage and maintain Grapevine terminals,  are also in the initial implementation
stage. These services consist of: Content Management Services,  Phone Management
Services,  Network Server Management Services,  Application Development Services
and Content Creation Services, including all of the necessary support functions.

      e-Prism Content  Management  Services focus on the management and delivery
of the content  (advertising and  information) to the entire Grapevine  terminal
network. These services include media contract  administration,  including media
scheduling,   development  of  display  templates  and  specifications  and  the
associated  reporting;  media management,  including downloads,  updates,  trial
tests and termination;  interactive reporting on advertising, including standard
reports on active  impressions,  speed dial  contacts,  and direct  dials to the
sponsors;   and  help  desk  functions  for  media  specifications  and  content
questions.

      e-Prism Phone  Management  Services focus on the management of basic phone
functions  and  reporting on the  Grapevine  terminal  network.  These  services
include  interactive  reporting on phone functions including call detail records
and cash collection data, maintenance data and alarm data; downloads of terminal
software and changes to regional servers;  terminal polling through the regional
servers; and help desk functions for phone operation and maintenance questions.

      e-Prism  Network  Server  Management  Services  focus on the  development,
management, and maintenance of the server network system. These services include
designing,  configuring,  installing  and  managing the e-Prism  Management  and
Content Data Center network; establishing, maintaining and managing network user
security  parameters;  monitoring and improving  network  performance;  managing
network and database  backups and  disaster  recovery;  managing  the  database;
regional  server help desk  functions;  designing,  configuring  and  installing
regional servers; establishing high-speed links between regional servers and the
data center; and configuring  software for data center  applications,  terminals
and regional servers.

      e-Prism Application  Development Services focus on developing  interactive
consumer  applications  and  information  services that  maximizes  value to the
paying sponsor and increases  terminal traffic.  These new applications would be
available as they are released.  These services include


                                       14
<PAGE>

development of enhanced functions,  such as animated  advertising and MPEG video
files and  development  of  information  services that attract  end-users.  This
includes adding new functions and  interactive  features that bring value to the
end-user.  We would  attempt to develop  and release  new  applications  such as
e-commerce,  wireless phone docking  station and advanced e-mail services as new
technologies present additional service and revenue opportunities.

      Content Creation Services focus on creating,  adding,  moving and changing
interactive  local consumer  advertising  and  information  display  screens for
Grapevine terminals in different geographical  deployments.  The advertising and
information  screens  would be made  available  to the  paying  sponsor  and our
customers/partners  as they are released.  These services  include  reformatting
Internet-based   content  and  coordination  with  advertisers  and  advertising
agencies on finished products before they are released.  Most of this content is
generally considered static, since it does not change its format more than daily
and can, therefore,  be handled by our Content Creation team.  Content,  such as
financial  results,  which must be updated  more  frequently,  will come from an
information aggregator and be reformatted for delivery on our network.

      We also  intend to provide  smart  card  marketing  and  support to create
consumer  promotions  and loyalty  programs for  advertising  customers  such as
fast-food  chains.  Smart cards will provide the ability to personalize  content
and e-mail delivery to the consumer at nominal or no cost,  which is established
by  the  customer/partner   based  on  advertising  and  sponsorship   revenues.
Customers/partners,  hotels,  executive clubs and other site owners will be able
to brand their  specific or general  programs to create  awareness.  Smart cards
will also  provide  secure  customer  profiles  that will  enable us to  deliver
personal speed-dial directories,  personal e-mail addresses,  personalized stock
portfolios and secure electronic commerce transactions for the consumer. We plan
to establish a membership group for personalization,  with a specific card-based
and 4-digit personal  identification  number ("PIN") for each member.  To access
personalized  information at any Grapevine  terminal,  the Grapevine Club member
would insert a designated card and lift the handset to enter a PIN. The member's
directory or menu would then appear on the Grapevine terminal's visual display.

Sales, Revenues and Distribution

      General. We market our products and services to the public  communications
or  "payphone"  industry  and we focus our  selling  and  marketing  efforts  on
regulated   telephone  companies  including  GTE  and  the  RBOCs,  AT&T,  large
independent PSPs and our distributors who serve the smaller PSPs. We also market
our products and services internationally focusing on foreign markets undergoing
deregulation,  including Canada, South America,  Central America, Africa and the
Far  East,  and on PSPs  that are  affiliated  or owned by the  RBOCs  and those
licensed to compete  against the PTTs. We are focusing our selling and marketing
efforts on the PSPs that  control the  majority  of the  payphone  terminals  in
service in the United States, including SBC Communications, Inc., Bell Atlantic,
Inc., GTE, BellSouth Corporation,  US West, AT&T and Davel Communications,  Inc.
and to Canada Payphone  Corporation ("CPC") in Canada. Our marketing  activities
principally include advertising in trade publications, participation at industry
trade shows and hosting seminars and training programs for our customers.

      We have historically  earned the majority of our revenues from the sale of
our microprocessor-based payphone electronics, payphone terminals and components
and from repair and refurbishment  services.  In the future, we believe that the
majority of our  revenues may be earned from sales of  Grapevine  terminals  and
recurring  revenues from  services  related  thereto,  including a percentage of
out-of-home advertising revenues generated by the terminals.  However, there can
be no assurance in that regard.  We believe that a majority of out-of-home media
expenditures are concentrated among only a few types of advertiser segments that
lend themselves to the Grapevine  media.  We also believe that


                                       15
<PAGE>

companies  within these segments will find the unique  features of the Grapevine
media attractive with high value demographics,  changeable  advertisements,  and
the ability for the consumer to place an order.

      Our Grapevine Terminal Revenue Strategy. We intend to enter into strategic
alliances with the PSPs, as customers/partners, that control the majority of the
installed payphone base in the United States. We have already formed a strategic
alliance  with  CPC,   believed  to  be  the  second   largest   growing  public
communications  service  provider  in  Canada.  We also  intend  to  enter  into
strategic  allowances with information  aggregators and providers such as Lycos,
MyWay/CMGI and Amazon.com to deliver content and information to our e-Prism data
center and service bureau for delivery to the Grapevine terminal network.  These
customer/partners   and   information   aggregators   would  have  the   primary
responsibility for the selling and marketing  activities directed at advertisers
and sponsors. We are building a team of sales and marketing  professionals whose
efforts are focused on establishing  the Grapevine  brand,  educating  consumers
about the  features  and  benefits  of our  Grapevine  services  and  developing
awareness of the Grapevine advertising medium. The advertisers and sponsors will
include  national,  regional and local accounts and their  agencies.  We believe
that regional and local  advertising  represents an attractive  and  underserved
market opportunity. In the Internet world today, spending by local businesses is
a very small percentage of their overall  advertising  expenditures.  We believe
that our directory-based  integrated content,  information and commerce services
provide a platform for targeted and differentiated  local advertising  solutions
that may be of substantial  appeal and generate  tangible  economic  benefits to
local  businesses.  We  also  intend  to  establish  relationships  with  direct
marketing  companies to sell local advertising and information  through mail and
telephone solicitation.

      The Grapevine terminal  advertising medium competes within the out-of-home
and interactive media markets.  With the Grapevine medium, we are targeting both
the branding and  response-oriented  advertising media market segments and those
advertisers  that sponsor content and information  services.  These  advertisers
place  a high  value  on  reaching  target  demographics  at  less  cost or more
effectively than competing media. Sponsors seek to reach the consumer while they
are in a decision or purchase mode and we believe that the  Grapevine  terminals
provide this capability.

      Based  on  the  advertising  industry  standard  that  values  each  1,000
impressions  made  (referred to as CPM, or  cost-per-thousand),  we believe that
advertising  and  sponsorship on Grapevine  terminals can be compared with other
out-of-home media that generate advertising revenue, per advertisement,  ranging
from $10 to $70 per CPM. We believe that our Grapevine  terminals  offer content
sponsors  several unique  advantages  over other  out-of-home  media targeted at
"on-the-go"  consumers.  First, Grapevine terminals offer interactive capability
and  measurement in a market that  traditionally  relies on passive  advertising
impressions.  We  believe  that  advertisers  may  pay a  premium  for  captured
attention and  reporting.  Second,  Grapevine  terminals  offer public access to
interactive  services and advertising  that today is only available  through the
Internet in homes or offices or publicly  through  cumbersome  Internet  kiosks.
Third, service providers and advertisers will be able to target content delivery
to specific  markets and  demographics,  some of which  cannot be  addressed  by
traditional out-of-home medium, such as colleges.  Fourth,  Grapevine terminals,
through  the  e-Prism  system,  are  designed to offer the ability to change the
actual message,  schedule advertisements around special promotions or sales, and
coordinate  message  delivery  around  specific  times of the day without  large
set-up and installation costs.

      The Grapevine  terminals are also designed to accommodate loyalty programs
and promotions for individual customers, such as a national fast-food chain or a
consumer  products  firm,  using smart chip card purses  issued to consumers and
used for an array of applications that can be managed by our e-Prism back-office
systems.  Our sales strategy is to focus on national accounts that could benefit
from   such   loyalty   or   promotional   programs.   We   believe   that   our
customers/partners   will  lead  the  efforts  to  secure  banner  and  rotating
advertisements  and  sponsorships.  We  also  believe  that  we  will be able to
establish strategic  relationships with major information  aggregators that will
also  assist in the efforts to secure


                                       16
<PAGE>

banner and rotating advertisements and sponsorships. Each major U.S. information
aggregator has hundreds of advertising salespeople, and the PSPs are expected to
use similar  sales  tactics as those used when they sold  Talking  Yellow  Pages
advertising  in the 1990s.  Pricing  policies are expected to remain  consistent
with existing advertising industry rates.

      As the PSPs seek a reinvention of their businesses, we believe that we are
positioned to retain our  long-standing  relationships  with these  customers as
partners in our new specialized service delivery business based on our Grapevine
Internet terminal appliances with  state-of-the-art  back-office phone, content,
card and  e-commerce  management  capabilities.  We intend to be involved in the
advertising  and  information   delivery  business  in  this  public  market  by
leveraging our business arrangements with these  customers/partners.  We believe
that we have a nine to twelve  month  product and business  development  lead in
non-PC, PDA-like Internet terminal appliances for this market.

      Target  markets for Grapevine  terminal  installations  are  high-traffic,
indoor   payphone    locations    determined   by   revenue   levels   and   our
customers/partners strategic accounts. These markets include airport concourses;
transportation  centers,  such as truck  stops  and train  stations;  convention
centers;  hotel and airline  lounges;  shopping  malls;  and other high  traffic
locations such as fast-food chains, factories and gas stations.

      Our market  strategy  is to move into a  different  public  communications
market space, which associates us with Internet media,  advertising and services
as an Application  Service Provider ("ASP") with specialized  service  offerings
oriented to the public consumer and  personalization  for the business  traveler
on-the-go, and to become the dominant niche player within this market sector. We
believe that the addressable public  communications  market in the United States
for wall  mounted  Grapevine  terminals  ranges from  400,000 to 600,000  units,
representing the indoor market sector of the estimated total 2-million  payphone
sites in  operation  today.  In  addition,  we believe  that there are two other
addressable  market  sectors,  the U.S.  desktop  market  sector of an estimated
750,000 units and the international indoor market of an estimated 250,000 units,
primarily in Western Europe and Latin America.

      Our mission is to be a universal provider of technology-enhanced  content,
e-mail  and  commerce  services  for  public  communications   networks,   while
cultivating diverse advertising revenue sources. The Grapevine business model is
based on our ability to team with our  customer/partners  and operate as an ASP.
We  intend  to  sell  our  Grapevine   Internet   terminal   appliances  to  our
customer/partners  at a price that enables  deployment in quantities four to six
times greater than Internet  kiosks.  This strategy  provides a modest margin on
each  terminal.  In  addition,  we intend to license  our  software  and provide
service support for the phone, content and enhanced services from a central data
center on a monthly  fee basis.  We also  intend to  introduce  and  operate the
delivery of specific advertisements,  information,  e-mail,  electronic commerce
and other new  services for a  percentage  share of the  revenues  earned by our
customers/partners.  We believe that our planned  service  business can generate
significant   recurring  revenues  as  the  deployment  of  Grapevine  terminals
increases, although there can be no assurance in that regard.

      We intend to provide  content and services  with broad appeal to consumers
that will increase the value and functionality of our services.  We believe that
consumers  place a premium on content that is relevant to their  everyday  lives
and that they will,  therefore,  increase  the  frequency  and duration of their
usage of our  Grapevine  terminal  appliances  to access  such  content.  We are
focusing  our  efforts on  location-specific  coverage  with local  content  for
targeting  local  demographics.  We are also  focusing  our efforts at providing
personalized  information and services,  such as e-mail, that have the potential
for targeted  advertising  or commerce  opportunities.  By regularly  adding and
integrating new and useful content, we believe we can drive increased traffic to
our public  communication  customer/partners  and  generate  additional  revenue
opportunities for them and us. The link to the site owners is almost


                                       17
<PAGE>

exclusively  through  the PSPs.  However,  we also plan to direct  our sales and
marketing efforts towards these site owners and create a pull sales process from
the site owners to the PSPs.

      We  believe  that  the  key  to the  advertising  value  of the  Grapevine
terminals  is  built  on  the  media's  targetability,   sensory  intensity  and
interactivity,  and we believe that the Grapevine terminal is positioned high on
all three quadrants creating a high value medium for advertisers. Our electronic
interactive  advertising and information  delivery  capability  targets specific
demographics (gender, age, ethnicity), psychographics (interest or mind set) and
geography  (location  specific).  The  benefits  sought by  advertisers  include
sensory intensity (sight, sound and motion);  targeting (reaching consumers with
efficiency  and at a  justifiable  cost);  interactivity  (personalized  two-way
communications  with the target  consumers);  measurement (to validate  consumer
response  by  management  from  the  e-Prism  back-office);  and  critical  mass
(sufficiently  large  consumer base to support  brand  marketing  efforts).  The
degree of sensory intensity, targeting and interactivity influences the medium's
selling price.  Media  platforms,  such as Grapevine  terminal  appliances,  are
analyzed  based on their  ability to link  advertising  impressions  to consumer
behavior,  such as soft  key  strokes  and  electronic  commerce  purchases.  In
addition,  we believe that the  development of personalized  relationships  with
member  consumers will command  premium  advertising  impression  prices for our
Grapevine terminals.

      By providing a general package of information  available free of charge to
all  consumers,  we believe that  consumers  will begin to value the benefits of
detailed and instant information from our Grapevine terminals,  and that we will
be able to  promote  personalization  services.  After we begin  these  personal
services,  we  intend  to  continue  to  promote  more  expansive  and  valuable
capabilities.  For example, a recent Jupiter Communications study indicates that
e-mail is a high-use,  highly-sought service for "on-the-go" consumers, followed
by local events,  on-line  directories  and news, all of which are achievable on
our Grapevine terminals.  Also, we believe that the availability of an IrDA port
enables our  Grapevine  terminals  to become a universal  "docking  station" for
portable  PDAs,  for  which an  ever-increasing  amount of new  services  can be
offered.

      We believe that electronic commerce will continue to grow as an increasing
number of consumers embrace Internet-based  platforms for evaluating,  selecting
and purchasing goods and services. In cooperation with information  aggregators,
financial  service  providers and  e-ticketing  providers  (such as airlines and
theaters) we intend to start offering some electronic  commerce  capabilities in
2001. We believe that Grapevine  terminal  shopping would be a valuable  service
for all consumers  on-the-go,  and that these  services,  including  features to
select  from  on-line  stores and  catalogs,  could be made  available  from any
Grapevine terminal.

      Our Payphone  Business.  We sell our products  directly  through our sales
personnel and through distributors that are supported by our sales,  engineering
and technical support  personnel.  Our direct sales force consists of a staff of
six sales managers and four sales engineers. We presently have four distributors
in  the  United  States  and  representatives/distributors  in  certain  foreign
markets, including Venezuela,  Argentina, Nigeria and Chile. All of our sales to
foreign  markets  are  export  sales.  We do  not  presently  have  any  foreign
operations.

      We generally enter into non-exclusive sales agreements with our customers,
that include,  when  applicable,  non-exclusive  licenses to use our proprietary
operating systems and payphone management software systems.  Our agreements with
the RBOCs generally have terms ranging from one to five years,  are renewable at
the option of the  customers,  and  contain  fixed  sales  prices  with  limited
provisions  for price  increases,  but do not  generally  specify  or commit the
customers to purchase a specific  volume of  products.  Also,  these  agreements
generally  contain  clauses that require us to provide prices and other terms at
least as favorable as those extended to other customers and indemnify  customers
against expenses,  liabilities,  claims and demands resulting from our products,
including those related to patent


                                       18
<PAGE>

infringement.  These agreements may generally be terminated at the option of the
customer  upon  notice,  or if we default  under any  material  provision  of an
agreement.  Our agreements  with other PSPs generally set forth product  pricing
and terms for specified purchase volumes,  and include provisions that enable us
to change  prices upon thirty (30) to ninety (90) days notice.  Agreements  with
our  international  customers  generally  set  forth the  pricing  and terms for
specified purchase volumes, and sales prices are generally fixed with respect to
volume stipulated in the agreements. Our customers are not prohibited from using
or reselling  competing  products and are  generally  not required to purchase a
minimum  quantity of  products,  although our price lists and  agreements  offer
discounts  based on volume.  All purchase  orders from  customers are subject to
acceptance  by us.  Our  policy  is to grant  credit to  customers  that we deem
creditworthy.  In  addition,  we  have  historically  provided  limited  secured
financing with terms  generally not exceeding 24 months and interest  charged at
competitive rates.

      Sales of our  payphone  business  reflect  the  acquisition  of the public
terminal assets of Lucent  Technologies  Inc. (the "Lucent Assets") on September
30, 1997 and the purchase of Technology  Service Group, Inc. ("TSG") on December
17,  1997.  Information  with  respect  to sales of our  payphone  products  and
services,  which include sales related to the  acquisition  of the Lucent Assets
and the purchase of TSG from the dates of the transactions,  for the years ended
March 31, 2000, 1999 and 1998 is set forth below:

<TABLE>
<CAPTION>
                                                                2000            1999             1998
                                                              --------        --------         --------
                                                                          (In Thousands)
<S>                                                           <C>             <C>              <C>
 Payphone terminals                                           $ 12,896        $ 23,758         $ 22,920
 Electronic modules and kits                                    15,056          18,790           10,436
 Components, assemblies and other products                       5,804          12,200           10,070
 Repair, refurbishment and upgrade services                     12,363           9,895            2,285
 Other services                                                  1,098             620              539
                                                              --------        --------         --------
                                                              $ 47,217        $ 65,263         $ 46,250
                                                              ========        ========         ========
</TABLE>

      Sales of our payphone  business by  geographic  region for the years ended
March 31, 2000, 1999 and 1998 were as follows:

<TABLE>
<CAPTION>
                                                                2000            1999             1998
                                                              --------        --------         --------
                                                                          (In Thousands)
<S>                                                           <C>             <C>              <C>
United States                                                 $ 40,935        $ 57,583         $ 37,051
Canada                                                           2,773           3,197            2,012
Latin America                                                    3,023           3,943            6,168
Europe, Middle East and Africa                                     410              41              195
Asia Pacific                                                        76             499              824
                                                              --------        --------         --------
                                                              $ 47,217        $ 65,263         $ 46,250
                                                              ========        ========         ========
</TABLE>

      Our Grapevine Internet Appliance Business. We intend to sell our Grapevine
terminals and enter into strategic  customer/partner  relationships  through our
sales,  marketing  and  business  development  executives  with support from the
direct sales force of our payphone business.  We intend to develop the awareness
of the Grapevine advertising medium and assist our customers/partners,  who will
have  the  primary  responsibility  for the  selling  and  marketing  activities
directed at  advertisers  and sponsors,  to sell display and banner  advertising
through a direct specialized advertising sales force which presently consists of
one sales manager.  We started the  development of the Grapevine  technology and
our service  business in October 1998 and deployed the first Grapevine  terminal
in a controlled test location in December 1999.


                                       19
<PAGE>

      We have entered into an agreement  with CPC that  provides for the sale of
45,000 Grapevine terminals over a five-year period at stipulated prices that are
subject to change annually based on inflation.  The agreement  provides CPC with
the  exclusive  right to deploy  and market our  Grapevine  terminals  in Canada
provided  CPC  complies  with the terms and  conditions  of the  agreement.  The
agreement  stipulates the per-terminal  license and management services fees and
the percentages of  advertising,  e-commerce and other new revenue sources to be
paid to us. The initial  deployment of our  Grapevine  terminals by CPC began in
April 2000.

      Our  Grapevine  terminals  and  specialized  phone and content  management
services are currently in trials with one of the RBOCs and with one of the IXCs.
We  hope  that  we  will be able  to  enter  into  strategic  alliances  for the
commercial deployment of Grapevine terminals by each of these customers/partners
when they complete the initial application and market test phase. We also intend
to pursue other strategic alliances with the other PSPs that control the rest of
the majority of the installed  base of payphone  terminals in the United States.
We  expect  to  begin  full  deployment  of our  Grapevine  terminals  with  the
customers/partners presently in trials, as well as with other PSPs, in the third
and fourth quarters of calendar year 2000. However, there can be no assurance in
that regard.

      We expect to  install  300,000  to  500,000  of our  wall-mount  Grapevine
terminals over the next five years, in cooperation with our  customers/partners.
A similar opportunity exists with our desktop terminal appliance,  which will be
targeted for  installation  in airline and hotel  lounges,  and up-market  hotel
rooms.  However,  there is no assurance  that our  Grapevine  terminals  will be
accepted  in the  market or that  they will be  deployed  in the  quantities  we
expect.

      The critical factors  necessary for the success of our Grapevine  Internet
terminal appliance business are to:

      o     Establish  strategic alliances and enter into supply agreements with
            the targeted customers/partners in the U.S.;

      o     Establish  the  Grapevine  network  as a new,  valuable  advertising
            media;

      o     Establish strategic alliances with information aggregators,  content
            providers  and others  who have a  commitment  to the  non-PC  based
            appliance industry;

      o     Emphasize   service,   support  and   technological   innovation  to
            differentiate  us from wireless phone and Internet kiosk vendors;

      o     Focus on delivering  value to consumers  through services they want,
            and expanding and improving offerings to remain ahead of competitive
            alternatives;

      o     Expand   our  sales   and   marketing   efforts   and   assist   our
            customers/partners  in their sales and marketing efforts,  including
            the development of  relationships  with others to sell  advertising;
            and

      o     Leverage our infrastructure to create a shared services operation to
            control expenses and development costs.

      Our  Grapevine  terminal  appliance  business is still in the  development
stage. Accordingly, revenues from our Grapevine terminal appliance business were
not significant during the year ended March 31, 2000. All shipments of Grapevine
terminals to US-based customers/partners were made under trial agreements. Sales
of Grapevine terminals to CPC shipped in March 2000 approximated $78,000. We did
not receive any  revenues  from  license and  management  services  fees or from
advertising   contracts  during  the  year  ended  March  31,  2000.  Our  first
advertising order was received in April 2000.


                                       20
<PAGE>

      Dependence on  Customers.  During the years ended March 31, 2000 and 1999,
one customer (Bell Atlantic,  Inc.) accounted for 39% and 20%, respectively,  of
our  consolidated  sales and revenues.  During the year ended March 31, 1998, no
single  customer  accounted  for  10% or  more  of our  consolidated  sales  and
revenues. Our domestic distributors accounted for approximately 7%, 7% and 5% of
our consolidated  sales and revenues during the years ended March 31, 2000, 1999
and 1998, respectively.

      Telephone  companies  (primarily RBOCs) accounted for approximately  $27.2
million,  $32.5 million and $16.0 million of our consolidated sales and revenues
during the years ended March 31,  2000,  1999 and 1998,  respectively.  Sales to
other  PSPs  including  foreign  customers  accounted  for  approximately  $20.1
million,  $32.8 million and $30.3 million of our consolidated sales and revenues
during the years ended March 31, 2000, 1999 and 1998, respectively.

      We believe  that the large PSPs will account for the majority of our sales
and revenues in the years ahead.  Accordingly,  the loss of one or more of these
customers or a significant decline in volume from one or more of these customers
could have a material adverse effect on our sales, revenues and business.

      Other  Strategic  Alliances.  We  have  entered  into  an  agreement  with
Caribbean Hotel Services,  Incorporated ("CHS"). Under the agreement,  we agreed
to manufacture  CHS's desktop video payphone terminal on an exclusive basis. The
Company  believes that this alliance could generate  meaningful  revenues in the
future, although there can be no assurance in that regard.

      We began marketing  operator services  cooperatively with a large domestic
operator  service  provider  during the latter  part of fiscal  1998.  Under our
program,  we have  marketed  operator  services to domestic  PSPs at agreed upon
unbundled  rates.  Call  revenues,  net of agreed upon  charges for the operator
services,  and our  administrative  fees,  are payable to the PSPs utilizing the
program.   We  believe   that  the   program   offers   revenues  to  PSPs  from
operator-assisted   calls  competitive  with  other  domestic  operator  service
providers. Our sales revenues from these operator services programs approximated
$930,000,  $244,000 and $101,000 during the years ended March 31, 2000, 1999 and
1998, respectively.

Research and Development

      Our research  and  development  activities  during the last two years were
focused  on  the  development  of our  Grapevine  terminal  appliances,  related
embedded  operating  software  and  e-Prism  management  software  systems.  Our
research and development  efforts in the payphone  business have been focused on
wireless applications and expansion of software product features.  During fiscal
2000,  we  expended  approximately  $10.1  million in research  and  development
activities,   including  approximately  $3.6  million  in  capitalized  software
development  costs, and we estimate that approximately 80% of these expenditures
related to our Internet  appliance  business.  During  fiscal 1999,  we expended
approximately  $6.8 million in research and  development  activities,  including
approximately  $639,000  in  capitalized  software  development  costs,  and  we
estimate that  approximately 25% of these  expenditures  related to our Internet
appliance business. Our research and development expenditures  approximated $4.6
million  including  capitalized  software  development  costs  of  approximately
$100,000 in fiscal  1998 and  consisted  primarily  of  development  of payphone
terminal equipment and related software,  management  software systems and other
products.


                                       21
<PAGE>

      We believe that research and development is important to the  continuation
and  enhancement  of our  competitive  position  and to  expand  the size of our
addressable   market.   We  also  believe  that  our  research  and  development
expenditures  will continue to represent a  significant  percentage of our sales
and revenues in the future.  Our ability to adequately  fund future research and
development  is  dependent  upon our ability to generate  sufficient  funds from
operations or external sources.

      We intend to continue to make  significant  investments in the development
of our Internet appliance business. Research and development expenditures in our
payphone  business will consist  primarily of sustaining our payphone  products,
software and services.  We also plan to develop our e-Prism  software systems to
communicate  with and manage all of our payphone  terminals as well as terminals
manufactured by our competitors and offer payphone  management  services as part
of our service offering.

      Our  research  and  development   activities  are  presently   focused  on
development  of the content  features of our  Grapevine  terminals,  application
services,  specialized  service  offerings  oriented to the public  consumer and
content  personalization for the business traveler  on-the-go.  These activities
surround  the  development  and  implementation  of  persistent   communications
connections, expanded content delivery capabilities, regional network servers, a
card validation  platform,  loyalty  programs,  voice  advertising,  interactive
personalized  information,  personalized e-mail, e-mail voice attachments,  IrDA
access, PDA e-mail upload/download  capability, text to speech e-mail capability
on the telephone  handset,  MPEG film clips display  capability and WAP links to
wireless phones through the IrDA port.

      We also intend to purchase and develop  card  management,  billing,  voice
advertising  and  e-mail  servers  that  will  be  the  enabling  platforms  and
associated  software for magnetic stripe and smart card management and other key
attributes to our  Grapevine  business  strategy.  These servers are intended to
have a broad range of applications pertinent to the continued development of our
public  communications  network  services with  capabilities,  including,  among
others, the following:

      o     Real   time   credit   card    authentication    and   fixed   limit
            transaction/call charging;

      o     Personalization services with differentiation of content by consumer
            and managing ranges of consumer profiles accessible by personal card
            and PIN;

      o     e-mail  voice  attachment  sending to one or more of a  personalized
            list of e-mail addresses,  and e-mail  downloading to the display on
            any Grapevine terminal;

      o     Profiling of members'  preferences  and contact data for any and all
            personalized services offered on the Grapevine terminals;

      o     Loyalty  points  management,  in  conjunction  with  smart chip card
            usage,  allowing basic  multi-application  crediting and debiting of
            awarded points and/or cash by adding a software  loyalty  package to
            the card  database as defined in specific  applications  required by
            customer/partners;

      o     Prepaid transaction/calling card services to resellers and consumers
            further increasing the use of Grapevine terminals;  and

      o     Whispering  advertising  slots  into  calls-in-session,  or  at  the
            initiation  of a call  from  the  handset,  subsidizing  phone  call
            charges through sponsorship.

Licenses, Patents and Trademarks

         We own ten United States patents relating to payphone components, smart
payphone  electronics and other technology,  which expire between April 2010 and
May 2014.  We have  filed  twenty-four  patent  applications  related to various
aspects  of  our  Grapevine  technology,   designs  and  implementations  in  an
operational  environment.  Additional patent  applications are in preparation on
other  features  of  our


                                       22
<PAGE>

Grapevine  technology.  Patents with respect to our Grapevine technology may not
be granted,  and, if granted,  they may be challenged or invalidated.  If we are
not successful in obtaining the patent  protection we seek, our  competitors may
be able to replicate our  technology  and more  effectively  compete with us. In
addition,  issued patents may not provide us with any competitive advantages and
may be challenged by third parties.

      We also own several  service marks and trademarks used in the operation of
our  business  and have  applied for  registration  of other  service  marks and
trademarks,  including "Elcotel" and "elcotel.com" and our Grapevine logo in the
United States and in other  countries.  However,  there is no assurance  that we
will be successful in obtaining the service marks and  trademarks  that we apply
for or that they will be valuable.

      Although we believe that our patents,  service  marks and  trademarks  are
important to our  business,  we do not believe that patent  protection,  service
marks or  trademarks  are critical to the  operation or success of our business.
While we do not believe that we are  infringing on the patents of others,  there
can be no assurance that infringement  claims will not be asserted in the future
or that the results of any  patent-related  litigation would not have a material
adverse effect on our business.

      To protect our proprietary  rights,  we rely on a combination of copyright
and  trademark   laws,   patents  and  patent   applications,   trade   secrets,
confidentiality  agreements  with  employees and third  parties,  and protective
contractual provisions.  Our employees have executed confidentiality and non-use
agreements  that  transfer  any rights they may have in  copyrightable  works or
patentable  technologies to us. In addition,  prior to entering into discussions
with  potential  content  providers  and  affiliates  regarding our business and
technologies, we generally require that such parties enter into a non-disclosure
agreement.   If  these  discussions  result  in  a  license  or  other  business
relationship,  we also  generally  require that the agreement  setting forth the
respective  rights and  obligations  of the parties  include  provisions for the
protection of our intellectual  property rights. In addition, we license the use
of our  proprietary  software  and  designs  through  licensing  agreements  and
provisions  in our sales  agreements,  and the  agreements  and  provisions  are
designed to prevent duplication and unauthorized use of our software.

      Despite  our  efforts  to  protect  our   intellectual   property  rights,
unauthorized  parties may copy aspects of our products or services or obtain and
use  information  that we  regard  as  proprietary.  The  laws  of some  foreign
countries do not protect proprietary rights to as great an extent as do the laws
of the  United  States.  We  have  filed  two  patent  applications  in  foreign
countries,  but we do not currently have any patents in any foreign country.  In
addition,  others could possibly independently develop substantially  equivalent
intellectual property.

      Companies in the computer and service provider  businesses have frequently
resorted to litigation  regarding  intellectual  property rights. We may have to
litigate  to enforce  our  intellectual  property  rights,  to protect our trade
secrets or to determine  the validity and scope of  proprietary  rights of other
parties.  From time to time,  we have  received,  and may receive in the future,
notice of claims of  infringement  of proprietary  rights of other parties.  Any
such  claims  could be  time-consuming,  result  in  costly  litigation,  divert
management's  attention,  cause product or service release delays, require us to
redesign  our  products  or  services  or require  us to enter  into  royalty or
licensing agreements.  These royalty or licensing agreements,  if required,  may
not be  available  on  acceptable  terms  or at all.  If a  successful  claim of
infringement  were  made  against  us and we could  not  develop  non-infringing
technology  or  license  the  infringed  or similar  technology  on a timely and
cost-effective basis, our business could be materially and adversely affected.


                                       23
<PAGE>

      We license certain  technologies,  patents and other intellectual property
rights  from  third  parties  under  agreements  providing  for the  payment  of
royalties.  Royalty expense during the years ended March 31, 2000, 1999 and 1998
approximated $319,000, $220,000 and $86,000, respectively.

Assembly and Sources of Supply

      Subcontractors  and  established  contract   manufacturers   assemble  our
payphone  electronic circuit board assemblies,  our Grapevine terminals and many
other  products  in  accordance  with  our  designs  and   specifications.   The
subcontractors  and  contract   manufacturers  are  generally   responsible  for
purchasing  the electronic  and  mechanical  components for our circuit  boards,
electronic assemblies and products from external suppliers. These suppliers must
be  selected  and/or  approved  by  our  design  engineering  and  manufacturing
operations,   which  are  also  responsible  for  designing  and  procuring  any
specialized  tooling required by suppliers to manufacture any custom components,
such as the  mechanical  components  of our Grapevine  terminals.  Our selection
and/or  approval of suppliers are based on quality,  delivery,  performance  and
cost. Design engineering  attempts to utilize components  available from several
manufacturers,  as well as avoiding single source component restraints. However,
occasionally  it is necessary to use a single source  component and we currently
have  several  items in this  category.  While  we  believe  that we could  find
alternative  suppliers  for our  components,  or in the  case of  single  source
components,  substitute  other  components  for the  ones  currently  used,  our
operations could be adversely  affected until alternative  sources or substitute
components  could be obtained or designed  into our  products.  In addition,  we
believe that we could use alternate  subcontractors,  if necessary, with minimal
interruption  to production,  since there are many suitable  subcontractors  and
manufacturers  capable of  manufacturing  and assembling our products.  Also, we
generally  own  any  specialized   tooling  and  equipment  required  for  these
manufacturing  and  assembly  operations.   However,  our  operations  could  be
adversely affected until alternative sources could be developed.

      A foreign supplier manufactures and/or assembles products that we acquired
in  connection  with the  acquisition  of the public  terminal  assets of Lucent
Technologies  Inc. We have  entered  into an  agreement  for the assembly of our
Grapevine  terminals  with a local  contract  manufacturer.  These  arrangements
generally include  provisions  regarding prices,  changes in prices based on the
cost of materials,  orders and delivery, quality and payment, but do not include
any minimum purchase commitment.

      Our repair and  refurbishment  operations  are located in a 53,400  square
foot  manufacturing  facility in Orange,  Virginia.  We also  assemble  and test
payphone terminals and components at this facility.  Our operations are designed
so that production volumes within certain limits could be readily increased.

      Our payphone  terminals are offered in various  configurations  based upon
the GTE style  housing,  the Western  Electric  style housing and various custom
designed housings,  including the Grapevine terminal Valox(TM) plastic and steel
reinforced housing. One principal supplier supplies GTE style housings; however,
alternative suppliers providing  essentially  equivalent housings are available.
We acquired tooling to manufacture the Western Electric style housing as part of
the acquisition of the public terminal assets of Lucent Technologies Inc. during
the year ended March 31, 1998 and our foreign  subcontractor  manufactures these
housings.  We have also established  alternative suppliers providing essentially
equivalent housings.  Custom designed housings are generally available from sole
sources.  While we believe  that we could find  alternative  suppliers  for such
housings,  our operations could be adversely affected until alternative  sources
could be obtained.

      Our terminals are supplied  with coin  mechanisms  that may be unique to a
particular  configuration or that may be supplied by a sole source.  We acquired
tooling to manufacture the AT&T electronic coin


                                       24
<PAGE>

scanning  mechanism as part of the  acquisition of the public terminal assets of
Lucent  Technologies  Inc.  during the year ended March 31, 1998 and our foreign
subcontractor  manufactures  these assemblies.  The other coin mechanisms we use
are available  from various sole sources.  We believe that we could redesign our
products to use other available coin mechanisms,  develop alternative  suppliers
for  such  assemblies,  or use or  develop  essentially  equivalent  assemblies.
However,  if a  shortage  or  termination  of the  supply  of one or more of the
electronic coin mechanisms were to occur, our operations could be materially and
adversely affected.

      Our circuit board assemblies are subjected to various  automated tests and
defect-inducing  processes  to improve  their  quality  and  reliability.  After
testing,  the  circuit  board  assemblies  may be  installed  in and tested as a
terminal  and shipped to the  customer or  packaged  separately  and shipped for
customer installation.  Our service organizations in Sarasota,  Florida were ISO
9002  certified  in  December  1995  and  we are  currently  pursuing  ISO  9002
certification for our Orange,  Virginia  manufacturing and service organizations
and ISO 9001 certification for our Sarasota, Florida operations.

Warranty and Service

      We provide product  warranties ranging from one to three years on products
we  manufacture  and a warranty  ranging  from  ninety  (90) days to one year on
terminal  equipment  that we repair,  refurbish  or upgrade.  Under our warranty
program, we repair or replace defective parts and components at no charge to our
customers. After warranties expire, we provide non-warranty repairs and services
for a fee. Our distributors are also authorized to repair our products.

Backlog

      Our backlog is subject to  fluctuation  based on the timing of the receipt
and completion of orders.  The Company  calculates its backlog by including only
items for which there are purchase orders with firm delivery  schedules.  At May
31, 2000,  the backlog of all  products and services on order was  approximately
$5,328,000 compared with a backlog of approximately  $5,877,000 at May 31, 1999.
Our backlog at any given date is not necessarily indicative of future revenues.

Competition

      Our Internet Appliance  Business.  Our Grapevine terminal  appliances face
competition  from  other  fixed  location  terminals  such as  Internet  kiosks,
conventional  payphones  and wireless  products.  We believe that our  Grapevine
terminal appliances are products that have superior features as compared to both
Internet kiosks and traditional payphones.  Internet kiosks permit users to surf
the Internet in a public access setting at their  leisure.  We believe that many
users  are  intimidated  by the  kiosks,  and  find  them to be  cumbersome  and
difficult to use. As a result,  we do not believe that these kiosks  effectively
respond to the  emerging  needs of  consumers  for easy,  simple and  widespread
public access content connectivity.  Once a kiosk is in use by a customer,  they
tend to stay on the  terminal  for a very  long  time,  which  makes  them  less
valuable as an advertising  vehicle than a higher user turnover product which we
believe the Grapevine terminal will be. In addition,  Internet kiosks are larger
than  conventional  payphones,  cost three to six times more than our  Grapevine
terminals and are not a cost  effective  replacement  for  installed  payphones.
Further,  Internet kiosks have limited  ability to offer local services  without
extensive  Internet  surfing.  The Internet  kiosk sector has over 50 suppliers,
most of which have not penetrated  long-term  markets such as telephone  company
public  communications  groups.  However,  most of these  firms have  financial,
management and technical resources substantially greater than ours. In addition,
there are many other  firms that have the  resources  and ability to develop and
market products and services that could compete with our Grapevine terminals and
related  services.  Also, there are many other firms that have


                                       25
<PAGE>

the  resources  and ability to develop and market  Internet  terminal  appliance
products and services  that could compete with our Internet  terminal  appliance
products and services.

      Traditional  payphones  are losing  market  share and  profits  due to the
growth of  cellular  phone  usage and the  growth in  dial-around  programs.  We
believe  that our  Grapevine  terminals  will offer PSPs the ability to generate
revenues  that  are  two to four  times  greater  than  those  available  from a
traditional  payphone.  Although  traditional  payphones are expected to compete
effectively  in low  traffic  and outdoor  locations,  we believe our  Grapevine
terminals will outperform traditional payphones in high use indoor locations.

      We believe our Grapevine  terminals are positioned to effectively  compete
against cellular competitors. We believe that we have a twelve to eighteen month
lead over cellular  competitors on the delivery of location-based  services.  We
believe that location-based services will require cellular operators to make new
infrastructure  investments.  Today, cellular operators have adopted a flat-rate
pricing methodology to sell excess capacity available on their network. Once the
minutes are gone they are gone forever. So the cellular operators are willing to
sell minutes at a flat rate to induce  higher usage to increase  total  revenues
and increase customer loyalty.  However with increased  infrastructure purchases
to offer location-based  services at higher transmission speeds, we believe that
the  cellular  community  will charge  premium  prices for these  location-based
value-added  services.  In  addition,  we believe  the  quality of the audio and
visual  content will be superior  with a fixed based line feed than what will be
available from the cellular  community.  Our Grapevine  terminals  offer a value
proposition  for  cellular  users  because we  believe  many if not all of these
location-based  services  will be provided  throughout  the  Grapevine  terminal
network at "No Charge" to the consumer.

      The primary  competition for traditional  out-of-home media is billboards,
transit and  in-store  visual  displays.  In addition,  our Internet  appliances
compete  for  potential   advertising  and  e-commerce  revenues,   directly  or
indirectly, with online service providers, such as AOL, Earthlink and Microsoft,
Internet portals,  such as Lycos and Yahoo!, and manufacturers of other Internet
appliances and PDAs. The primary competition for public access interactive media
includes  TelWeb/Schlumberger,  I-Magic and others.  Further,  existing  content
providers,  such as Double  Click,  Flycast,  24/7 and AdSmart may target public
access  as  a  natural  evolution  of  their  Internet-based  business.  In  the
application  service  provider  market,  the  Company  expects to face  numerous
competitors.   The  Company  expects  competition  from  other  public  Internet
appliances,  whether PC or non-PC,  and  back-office  management  software  from
potential  future  vendors  and service  providers,  including  European  public
terminal vendors such as Landis & Gyr and Schlumberger,  Protel,  Internet kiosk
vendors  such as  Ascom/King,  NetNearU  and  Lexitech,  interactive  television
terminals with Internet access, and limited-feature devices.

      We believe that the primary  competitive  factors in the market for public
interactive Internet appliance content and services are:

      o     the ability to deliver content having broad appeal,  which is likely
            to result in increased consumer traffic and brand name value for the
            information content aggregator and advertisers;

      o     the ability to meet the specific content demands of local,  targeted
            demographic  groups of public  consumers and to deliver detailed and
            attractive information to personalized accounts;

      o     the  cost-effectiveness  and reliability of the content,  e-mail and
            electronic  commerce services;

      o     the ability to provide content and information delivery formats that
            are attractive to advertisers;

      o     the ability to achieve location-specific  downloading of content and
            information  on  a  terminal-by-terminal  and,  as  appropriate,   a
            person-by-person basis; and


                                       26
<PAGE>

      o     the ability to integrate  related content to increase the utility of
            the content and electronic commerce services.

      Our Payphone  Business.  The payphone business is highly  competitive.  We
compete with  numerous  domestic and foreign firms that  manufacture  and market
payphone  terminal  equipment and numerous domestic firms that market repair and
refurbishment  services that have financial,  management and technical resources
substantially  greater than ours.  In addition,  there are many other firms that
have the resources and ability to develop and market  products and services that
could  compete with our products  and  services.  We believe that our ability to
compete depends upon many factors within and outside our control,  including the
timing  and  market  acceptance  of  new  products   developed  by  us  and  our
competitors, performance, price, reliability and customer service and support.

      We believe that the primary  competitive  factors  affecting  our payphone
business are quality,  service, price and delivery performance.  We believe that
we compete aggressively with respect to the pricing of our products and services
and we attempt to reduce manufacturing costs rather than to increase our prices.
We also attempt to maintain inventory at levels that enable us to provide timely
service and to fulfill the delivery requirements of our customers.

      We believe that our principal  competitors  domestically  include  Protel,
Inc. (a subsidiary of  Inductotherm  Industries,  Inc.),  Intellicall,  Inc. and
QuorTech, which recently acquired the payphone business of Nortel Networks, Inc.
It is  also  possible  that  new  competitors  with  financial,  management  and
technical  resources  substantially  greater  than ours may emerge  and  acquire
significant  market  share.  Possible  new  competitors  include  large  foreign
corporations,  the RBOCs and other  entities with  substantial  resources.  Some
telecommunications companies, already established in the telephone industry with
substantial engineering,  manufacturing and capital resources, are positioned to
enter the payphone market. The  Telecommunications Act lifted the restriction on
the manufacturing of  telecommunications  equipment by the RBOCs.  After the FCC
finds that an RBOC has  opened its local  exchange  market to  competition,  the
RBOC,   through   a   separate   affiliate,    may   manufacture   and   provide
telecommunications  equipment and may manufacture  customer premises  equipment,
such  as  payphone  terminals.  As a  result  of the  Act,  we  could  face  new
competitors in the manufacture of payphones and payphone  components from one or
more of the RBOCs or their affiliates.

      Internationally,  we compete with  numerous  foreign  competitors,  all of
which have financial,  management and technical resources  substantially greater
than  ours  and  have   greater   experience   in   marketing   their   products
internationally.    These   foreign   competitors   market   payphone   products
predominately  to the PTTs  and  thereby  dominate  the  international  payphone
market.  In addition,  our  international  marketing  efforts are subject to the
risks of doing business abroad. We believe that the primary  competitive factors
affecting our  international  business are the ability to provide  products that
meet the specific application requirements of the customers, quality and price.

      A number of personal communications technologies are becoming increasingly
competitive  with  payphone  services  provided by the PSPs.  Such  technologies
include  radio-based  paging services,  cellular mobile  telephone  services and
personal communication  services.  These competing services continue to grow and
are adversely  affecting  the payphone  industry.  However,  we believe that the
payphone  industry  will continue to be a major  provider of  telecommunications
access in the future.

      Although we expect to continue to be subject to intense competition in the
future, we believe that our products and services are currently competitive with
those of other  manufacturers  in such areas as equipment  capability,  quality,
cost and service.  Since the payphone industry is highly competitive,  we may be
required  to  develop   enhancements,   new  products  and  services  to  remain
competitive in the future.


                                       27
<PAGE>

Governmental Regulation

      General.   Our  products  and   services   and  the   operations   of  our
customers/partners  are  subject to varying  degrees of  regulation  at both the
federal and state  levels.  There can be no  assurance  that any changes in such
regulation  would not have an adverse impact on our operations or the operations
of our customers.

      Parts 15 and 68 of the FCC rules govern the  technical  requirements  that
payphone and other telephone products,  including our Grapevine terminals,  must
meet in  order  to  qualify  for FCC  registration  and  interconnection  to the
telephone network.  We have performed those tests necessary to assure compliance
with  these  technical  requirements  and  obtained  FCC  registration  for  our
products.

      Our products must be tested and approved by various  regulatory  bodies in
international  markets to which we  export,  and  customers  must  obtain  these
approvals  before the importation of our products.  The  appropriate  regulatory
body has approved products exported by us.

      The  regulation  of  telecommunications  providers  by the FCC  and  state
regulatory authorities has a direct effect on our product designs. We design our
products  to  comply  with   regulations   applicable  to  provision  of  public
communications  services.  Our products may require  modification to comply with
new technical or regulatory  requirements  or other factors upon adoption of new
regulations by federal and state authorities.

      State  regulatory  authorities  have adopted a variety of regulations that
vary from state to state,  governing  technical and operational  requirements of
privately owned payphones, which are also applicable to our Grapevine terminals.
These  requirements  include dial  tone-first  capability to allow free calls to
operator,  emergency,  information and toll free numbers without a coin deposit;
multi-coin  capability;   calculation  of  time-of-day  and  weekend  discounts;
prohibition of post-call  charges;  advisement to callers of additional  charges
for  additional  time before  disconnecting;  provisions of certain  information
statements  posted  on  cabinets;  provision  of  local  telephone  directories;
mandatory  acceptance of incoming  calls;  reduced  charges for local calls from
certain  locations such as hospitals or rest homes;  and  restrictions as to the
location  and  hours of  operation  of such  payphones.  The  states  have  also
established tariffs for local and intrastate coin "sent-paid" calls, and in many
instances for zero-plus calls.

      With respect to the use restrictions and requirements,  such as restricted
locations for payphones,  informational statements on cabinets, or the provision
of access to the carrier of choice, the owner/operators of our products have the
sole   responsibility   to  determine  and  comply  with  all   applicable   use
requirements,  including  the  responsibility  to ensure that the rates  charged
remain current and do not exceed the maximum rates permitted by state or federal
regulations for the particular location of the product.

      Most states require that owner/operators of private payphones be certified
by the  state's  public  utility  commission  and file  periodic  reports.  As a
manufacturer and seller of payphone terminals, we do not believe that any states
currently require us to be certified.

      The  Telecommunications  Act. On September 20, 1996,  the FCC released its
order  (the  "Order")  adopting  regulations  to  implement  the  section of the
Telecommunications  Act that mandated fair compensation for all payphone service
providers and otherwise  changed the regulatory regime for the payphone industry
pursuant to the Telecommunications Act. The Telecommunications Act requires that
the FCC  establish  a per call  compensation  plan to ensure  that all  payphone
service providers are fairly compensated for each and every completed intrastate
and  interstate  call using  their  payphone.  Among  other  matters,  the Order
addressed  compensation for non-coin calls and local coin calling rates, ordered


                                       28
<PAGE>

the  discontinuation  of payphone  subsidies  from basic  exchange  and exchange
access revenues which favored  payphones  operated by telephone  companies,  and
authorized RBOCs and other providers to select service providers.

      The Order required payphones operated by regulated  telephone companies to
be removed from regulation, separating payphone costs from regulated accounts by
April 15, 1997.  This  requirement  was intended to eliminate all subsidies that
favored payphones operated by the telephone companies.  Telephone companies were
also  required to reduce  interstate  access  charges to reflect  separation  of
payphones from regulated  accounts.  In order to eliminate  discrimination,  the
telephone   companies  were  also  required  to  offer  coin  line  services  to
independent  payphone  service  providers  if they  continue  to  connect  their
payphones to central  office-driven coin line services.  The FCC did not mandate
unbundling of specific coin line related  services,  but did make  provisions to
allow  states  to  impose  further  payphone  services   requirements  that  are
consistent with the Order.

      The Order authorized RBOCs to select the operator service provider serving
their payphones and for  independent  payphone  service  providers to select the
operator  service  provider  serving  theirs.  This  provision  preempted  state
regulations  that  require  independent  payphone  service  providers  to  route
intralata calls to the telephone companies.  The FCC, however, did not establish
conditions that require operator service  providers to pay independent  payphone
providers the same commission levels as the RBOCs demand.

      In the Order, the FCC decided that the dial-around  compensation  rate for
access code calls and toll free calls should be equal to the  deregulated  local
coin call rate. The FCC also  established an interim  compensation  plan whereby
compensation  for  access  code and toll free  calls  would be paid to  payphone
service providers. Under the first phase of the FCC's interim compensation plan,
payphone  service  providers  would be  compensated at a flat rate of $45.85 per
payphone per month, as compared to the previous compensation of $6.00 per month.
This  interim  rate was to expire on  September  1, 1997,  and replace all other
dial-around  compensation  prescribed  at  the  state  or  federal  level.  This
compensation was to be paid by the major inter-exchange  carriers based on their
share of toll revenues in the long distance  market.  By October 1, 1997,  under
the second phase of the interim compensation plan, all payphones would switch to
a per-call  compensation rate set at $.35 per toll free or access code call. The
carrier  that was the  primary  beneficiary  of the call would pay the  per-call
compensation.  After one year of  deregulation  of coin rates (October 1, 1998),
the permanent compensation rate would have been adjusted to equal the local coin
rate charge for a particular payphone.

      On July 1, 1997,  the United  States  Court of Appeals for the District of
Columbia  Circuit  issued its  decision  on appeals of certain  portions  of the
Order.  The Court ruled that the FCC was  unjustified  in setting  the  per-call
compensation  rate at an amount equal to the  deregulated  local coin rate.  The
Court also held that interim  compensation  for zero-plus calls must be included
in the new  interim  compensation  plan.  Finally,  the Court  upheld  the FCC's
authority  to  regulate  the  rates  charged  for  local  coin  calls   (thereby
eliminating  state  limitations on such rates) and the FCC's decision to require
the carrier  rather than the calling party to pay the  compensation  to payphone
service  providers  for toll free and access code calls.  The Court  vacated and
remanded to the FCC for further  consideration  the issues of  compensation  for
toll free and access code calls both on a permanent and an interim basis.

      On October 9, 1997, the FCC adopted a revised  compensation plan on remand
from the Court of Appeals.  The revised plan set compensation at a rate of $.284
per completed  call during the period  October 7, 1997 through  October 6, 1999.
After October 6, 1999, the per-call  compensation rate was set at the local coin
rate minus $.066.  The FCC's  decision was appealed to the U.S. Court of Appeals
for the District of Columbia Circuit,  which reversed and remanded the matter to
the FCC.


                                       29
<PAGE>

      On  January  28,  1999,  the FCC  adopted a Third  Report and Order in its
proceeding   implementing   the   payphone   compensation   provisions   of  the
Telecommunications  Act.  This Order  established a  compensation  rate for dial
around and toll free calls of $.24 per  completed  call.  In  addition,  the FCC
applied the new rate  retroactively  to all  compensation  owed since October 7,
1997. Multiple petitions for reconsideration of the Order are pending before the
FCC, which seek both to increase and decrease the  compensation  amount,  and to
change the  compensation  amount  from a flat rate per call to a  variable  rate
depending on call  duration.  There can be no assurance as to the impact on dial
around  compensation  of such petitions to the FCC and the courts.  The ultimate
outcome with respect to dial around  compensation will have a significant impact
on the business and operations of payphone service providers and thus the demand
for payphones.

      We cannot  predict  the  outcome of future  FCC  actions  with  respect to
compensation  to payphone  service  providers or other  matters,  the outcome of
additional  rulings,  if any, by the courts, nor the impact that such additional
actions might have on the Company,  its  customers or the public  communications
industry in general.

      Our  Internet  Terminal  Appliance  Business.  Government  regulation  may
present a risk to our Internet  Appliance  business.  The  increasing use of the
Internet may result in the Government adopting laws and regulations that address
issues  such  as  user  privacy,   pricing,   content,   taxation,   copyrights,
distribution,  and product and service quality.  We may be subject to provisions
of the  Federal  Trade  Commission  that  regulate  advertising  in  the  media,
including the Internet,  and require  advertisers  to  substantiate  advertising
claims before  disseminating  advertising.  The FTC has recently brought several
actions  charging  deceptive  advertising  through the  Internet and is actively
seeking  new cases.  We may also be subject to the  provisions  of the  recently
enacted  Communications Decency Act. This Act imposes substantial monetary fines
and/or  criminal  penalties  on any firm that  distributes  or displays  certain
prohibited material over a public network.  Although recent court decisions have
cast  doubt  on the  constitutionality  of this  Act,  it  could  subject  us to
substantial  liability.  These  or any  other  laws or  regulations  that may be
enacted in the future could have several adverse effects on our business.  These
effects include substantial  liability,  including fines and criminal penalties;
the  prevention  of our ability to offer certain  products or services;  and the
limitation of growth in public information electronic commerce usage.

Environmental Matters

      We are a potentially responsible party for undertaking response actions at
certain  facilities  for the  treatment,  storage,  and  disposal  of  hazardous
substances  operated  by  others.  In  addition,  we have  received a formal "no
further action status" notification from the Florida Department of Environmental
Protection  (the "FDEP")  after  several  years of  evaluation,  assessment  and
monitoring of soil and groundwater contamination at a former facility. We were a
small generator "De Minimis" party with respect to the sites operated by others,
and have been able to execute  and should be  permitted  to  continue to execute
buy-out  agreements  with  respect to the  remediation  activities  at the sites
operated by others.  We have not incurred any  significant  costs to date and we
believe,  based on presently available  information,  that we have no further or
only  insignificant  obligations  with respect to the sites  operated by others.
However,  if additional  waste is attributed to us, it is possible that we could
be liable for additional  costs.  We cannot  estimate a range of costs,  if any,
that we could incur in the future since such costs would be  dependent  upon the
amount of additional  waste, if any, that could be attributed to us. Also, it is
always possible that the FDEP could reopen its  investigation  in the future and
require us to take further  actions at our former  facility.  We cannot estimate
the range of costs,  if any,  that we could incur in the future since such costs
would be dependent  upon the scope of  additional  actions,  if any, that may be
required by the State of Florida.


                                       30
<PAGE>

Employees

      As of June 5, 2000,  the Company  employed 186  full-time  employees.  The
Company is not a party to any collective  bargaining agreement and believes that
its relations with its employees are good.

      Competition   for   qualified   personnel  in  our  industry  is  intense,
particularly  among software  development and other technical  staff. We believe
that our future success will depend in part on our continued ability to attract,
hire and retain qualified personnel.

Seasonality

      Our equipment  sales are generally  stronger  during  periods when weather
does not interfere with the maintenance and  installation of payphone  equipment
by our  customers.  Accordingly,  our  sales  and  revenues  could be  adversely
affected during certain periods of the year.

Risk Factors

      Our business is subject to a number of risks, some of which are beyond our
control. If any of these risks actually occur, our business, financial condition
and operating results could be materially and adversely affected.  Some of these
risks,  in addition to those described  throughout this document,  are set forth
below:

      We Have  Incurred  Recent  Operating  Losses.  We have incurred net losses
since December 1998.  During the quarter ended March 31, 1999, we incurred a net
loss of  $1,520,000  and during the year ended March 31, 2000, we incurred a net
loss of  $11,188,000.  We  expect  to incur  significant  operating  losses on a
quarterly basis in the foreseeable future until our Grapevine Internet appliance
business   begins  to  generate   sufficient   sales  and  revenues  to  achieve
profitability.  However,  it is  possible  that  this  business  may not  become
profitable.  The operating losses were attributable to non-recurring  charges of
$1,772,000  during the quarter ended March 31, 1999 and $733,000 during the year
ended March 31, 2000,  income tax expense of $3,286,000 as a result of recording
a valuation  allowance  against the entire  balance of our  deferred  tax asset,
declining  sales and revenues from our payphone  business and investments in the
development of our Grapevine  terminal  appliances and e-Prism software systems.
Our  prospects  must  be  considered  in  light  of  the  risks,   expenses  and
difficulties  frequently encountered by companies in the early development stage
of a business,  particularly  companies in new and rapidly evolving markets such
as non PC Internet appliances and Internet services.  To address these risks and
to achieve and sustain profitability, we must, among others things:

      o     Establish the strategic  alliances and enter into supply  agreements
            with the  targeted  customers/partners  in the U.S; o Establish  the
            Grapevine network as a new, valuable advertising media;

      o     Establish strategic alliances with information aggregators,  content
            providers  and others  who have a  commitment  to the  non-PC  based
            appliance industry;

      o     Emphasize   service,   support  and   technological   innovation  to
            differentiate us from wireless phone and Internet kiosk vendors;

      o     Focus on delivering  value to consumers  through services they want,
            and continually expanding and improving offerings to remain ahead of
            competitive alternatives;

      o     Expand   our  sales   and   marketing   efforts   and   assist   our
            customers/partners  in their sales and marketing efforts,  including
            the development of  relationships  with others to sell  advertising;
            and


                                       31
<PAGE>

      o     Leverage our infrastructure to create a shared services operation to
            control expenses and development costs.

      If we do not  effectively  address the risks we face, we may never achieve
or sustain  profitability  from our Internet  appliance  business.  In addition,
there is no  assurance  that our  business  will not  continue  to be  adversely
affected by further declines in payphone usage and revenues.

      Our Grapevine  Internet Appliance Business Is in the Development Stage. We
have  limited  or no  experience  in  marketing  Internet  terminal  appliances,
developing   advertising   and  content   relationships   and  operating  as  an
applications  service  provider.  We  have  recently  begun  deployment  of  our
Grapevine  terminals  and  our  initial  display  advertising  application.  Our
information  content creation and delivery,  e-mail and e-commerce  applications
are  still in  development  and  there is no  assurance  that we will be able to
successfully   develop,   or  develop  on  an  timely  basis,  these  and  other
applications  for  our  Internet   appliance  business  that  are  necessary  to
successfully  position the Grapevine terminals as a valuable advertising medium.
We have not  generated  any  significant  revenues  from our  Internet  terminal
appliance  business.  If we are unable to develop, or develop on a timely basis,
planned software applications and advertising and content relationships,  market
our  Grapevine  terminals  and  position our  Grapevine  terminals as a valuable
advertising medium, we may not be able to generate any significant revenues from
this business,  which would adversely affect our future prospects.  Moreover, if
we are able to develop our Internet terminal  appliance  business,  there can be
assurance that the public communications market will accept the business or that
it will generate significant revenues or be profitable. Also, our future success
in the Internet appliance business will depend on our ability to attract, train,
retain and motivate highly skilled  technical,  managerial,  sales and marketing
and business development personnel.

      Our Quarterly Results Are Likely to Fluctuate.  Our operating results have
in the past been, and may continue to be, subject to quarterly fluctuations as a
result of a number of  factors,  many of which are beyond our  control and which
could have an adverse  impact on our  operations  and financial  results.  These
factors  include the  introduction  and market  acceptance of new products,  the
timing of orders, variations in product costs or mix of products sold, increased
competition in the public communications  industry,  changes in general economic
conditions   and  changes  in  specific   economic   conditions  in  the  public
communications  industry. In the future, we believe that these factors will also
include  variable  demand for content  and  information  services  by  Grapevine
terminal users, the cost of acquiring content,  the availability of content, our
ability  and  the  ability  of our  customers/partners  to  attract  and  retain
advertisers,  our  ability to attract and retain  content and e-mail  providers,
seasonal  trends in Grapevine  terminal usage and  advertising  placements,  the
amount and timing of fees paid to our content and information  aggregators,  the
productivity   of  our  direct   sales  force  and  the  sales   forces  of  our
customers/partners in generating  advertising  revenues,  our ability to enhance
and support our technology,  the amount and timing of increased expenditures for
expansion of our e-Prism network and  operations,  the result of litigation that
is currently  ongoing  against us and litigation that may be filed against us in
the future, our ability to attract and retain key personnel, the introduction of
competing Internet appliance products, technical difficulties and network system
downtime.


                                       32
<PAGE>

      Our  Business  Is Subject to Rapid  Technological  Change.  Our  operating
results will depend to a  significant  extent on our ability to reduce the costs
to produce existing  products and introduce new products to remain  competitive.
The  success  of  new  products,  including  without  limitation  our  Grapevine
terminals,  is  dependent  on several  factors,  including  proper  new  product
definition,  product cost,  timely  completion and introduction of new products,
differentiation  of new  products  from  those  of our  competitors  and  market
acceptance  of  those  products.   There  can  be  no  assurance  that  we  will
successfully identify new product opportunities,  develop and bring new products
to market in a timely manner,  or achieve  market  acceptance of our products or
that products and technologies  developed by others will not render our products
or technologies obsolete or noncompetitive.

      In addition, evolving public network capabilities and standards,  evolving
customer  demands and  frequent  service  introductions  may impact the Internet
appliance  market.  Our  future  success in this  market  depends in part on our
ability  to  improve  the  performance,   content  personalization  and  service
reliability in response to user and competitive pressures.  Our efforts in these
areas may not be  successful.  If the  telephone  companies  adopt  new  network
technologies  or  standards,  we may  need  to  incur  substantial  expenditures
modifying or adapting the delivery vehicles for our planned content services. We
will also be dependent upon others to maintain the integrity and  reliability of
the  Internet  infrastructure.   Any  degradation  of  Internet  performance  or
reliability could adversely affect the ability to market the Grapevine medium to
advertisers.  In addition,  if Internet technology does not continue to progress
it may not serve as a viable commercial platform for advertising, promotions and
electronic commerce, which would adversely affect our prospects and business.

      Changes in Telecommunications Law and Regulations May Affect Our Business.
Changes in domestic  and  international  telecommunications  requirements  could
affect sales of our products,  including Grapevine terminals, and the operations
of our customers.  In the United  States,  our products must comply with various
Federal   Communication   Commission  and  state  regulatory   requirements  and
regulations.  In countries outside of the United States,  our products must meet
various  requirements of local  telecommunications  authorities.  Our failure to
obtain  timely  approval  of  products  or to  promptly  modify the  products as
necessary  to meet new  regulatory  requirements  could have a material  adverse
effect on our business, operating results and financial condition.

      Our  International  Business  Is Subject  to  Numerous  Risks.  We conduct
business internationally through exports.  Accordingly, our future results could
be  adversely  affected  by a variety of  uncontrollable  and  changing  factors
including  foreign currency  exchange rates,  regulatory,  political or economic
conditions in a specific country or region,  trade protection measures and other
regulatory  requirements and changes thereto,  government  spending patterns and
natural disasters, among other factors. Any or all of these factors could have a
material adverse impact on our international business.

      We  intend  to  market  our  Grapevine   terminal  and  related   services
internationally after we have implemented our North American strategy.  There is
no assurance  that we will be successful  marketing our Grapevine  terminals and
services  internationally.  We have no  experience  in  developing  advertising,
content and information  delivery  applications or using local Internet  service
capabilities  in  foreign  markets.  We  also  have  limited  experience  as  an
applications service provider in international markets, which include risks such
as  regulation,  tax  consequences,  export  control,  trade  barriers and legal
liabilities,  among  others.  If any  of  these  risks  occur,  our  prospective
international business could suffer.


                                       33
<PAGE>

      Our Common  Stock  Price Has Been and May  Continue  to be  Volatile.  Our
common stock has experienced  substantial  price  volatility,  particularly as a
result of variations between our actual or anticipated financial results and the
published  expectations of analysts and announcements by our competitors and us.
In  addition,  the  stock  market  has  experienced  extreme  price  and  volume
fluctuations that have affected the market price of many technology companies in
particular  and that have often been  unrelated to the operating  performance of
these  companies.  These  factors,  as well as general  economic  and  political
conditions,  may  adversely  affect the market  price of our common stock in the
future.

      Our  Internet  Terminal  Appliance  Business  Model  Is  Evolving  and  Is
Unproven.  Our  Grapevine  terminal  appliance  business  model is evolving  and
unproven.  We plan to develop  content  internally  and  aggregate  content from
third-party  content  providers,  distribute  this content to users of Grapevine
terminals nationally and internationally and share in the revenues from national
and local  advertisements,  sponsorships and promotions generated from Grapevine
terminals with our  customers/partners.  Our business model is new to the public
communications  market both nationally and  internationally,  is unproven and is
likely to  continue  to  evolve.  Moreover,  we may not be aware of all of risks
entailed by this new business  model.  Accordingly our business model may not be
successful,  and we may need to change it. Our  ability  and the  ability of our
customer/partners to generate advertising,  sponsorship and promotional revenues
by distributing  content services to the general public depends, in part, on our
success in persuading advertisers of the effectiveness of Grapevine terminals as
a new advertising medium. We intend to continue to develop our business model as
we explore our opportunities in this new electronic interactive  advertising and
information  delivery  channel to the public.  Our business and future prospects
would be  adversely  affected  if our  plans  and  business  model do not  prove
successful  or if  our  customers/partners  or  we  are  unable  to  execute  as
anticipated.

      Our Payphone Revenues May Decline Faster Than Expected. Payphone usage and
our  revenues  from our  existing  payphone  business  may  decline  faster than
expected,  which  could have a material  adverse  impact on our  operations  and
financial  results and the  liquidity  available to fund our Internet  appliance
business.

      Our Future Prospects Are Dependent on the Success of Our Internet Terminal
Appliance  Business.  In the future,  we plan to rely  significantly on sales of
Grapevine  terminals,  revenues from management services and a share of revenues
from advertising and sponsorships generated from Grapevine terminals. We plan to
derive   significant   revenues   from   sharing   revenues   generated  by  our
customers/partners  and us from the sale of national  and local  advertisements,
sponsorships and promotions that support the profitable  delivery of content and
information.  Our ability and the ability of our  customers/partners to generate
and increase  these  revenues  will depend on such factors as the  acceptance of
Grapevine  terminals as an advertising medium by national and local advertisers,
the  acceptance  and  regular  use  of  our  planned  content,  information  and
electronic commerce capabilities by a large number of users who have demographic
characteristics that are attractive to advertisers,  the success of our strategy
to sell local  advertising,  sponsorships and promotions across the nation,  the
expansion  and  productivity  of our  advertising  sales  force and those of our
customers/partners,  and  the  development  of  the  Grapevine  terminal  as  an
attractive platform for electronic  commerce.  Our business and future prospects
would be adversely  affected if the Grapevine  terminals  were not accepted as a
valuable advertising medium and as a platform for electronic commerce.


                                       34
<PAGE>

      Our Internet Appliance  Business Will Rely on Information  Aggregators and
e-Mail  Providers.  We  anticipate  that we  will  rely  on  relationships  with
information  aggregators  and e-mail service  providers,  which are in the early
stage of  development.  Our  customers/partners  and we will be able to generate
revenues from advertising, sponsorships and promotions only if we can secure and
maintain distribution of content,  information and e-mail services on acceptable
commercial  terms through  mutually  beneficial  arrangements  with  information
aggregators. We cannot assure that any arrangements with information aggregators
can be developed, or if developed,  can be maintained in the foreseeable future.
It is uncertain whether these  relationships will become or remain profitable or
result in  benefits  to us that  outweigh  the costs of the  relationships.  Our
inability  to  develop  these  relationships,   the  loss  of  any  relationship
established  with  information  aggregators  and the  inability  to replace  any
relationships  that  are  lost in a  timely  and  effective  manner  with  other
relationships  that provide comparable  content,  information and e-mail service
could have an adverse effect on our business and future prospects.

      We Rely on a Small Number of Customers.  A few customers have historically
accounted  for a  significant  portion of our sales and revenues of our payphone
business.  In addition, we plan to derive a substantial portion of our sales and
revenues  from our  Internet  appliance  business  from a small  number of these
customers. If these customers do not accept our Grapevine terminal appliances or
our  business  model or determine  that  advertising  and other  revenues do not
justify the  investment,  our business and future  prospects  could be adversely
affected.  Also, the loss of any significant customer or a significant reduction
in sales and revenues from any of these  customers  would  materially  adversely
affect our operations and business.

      We will rely on our customers/partners to develop relationships with media
companies  and direct  marketing  companies to market and sell  advertising  and
generate  revenues  from  national and local  advertisements,  sponsorships  and
promotions.  These  customers/partners  have limited or no experience developing
these  relationships or selling electronic media  advertising.  They may have to
expend  significant time and effort in establishing the media  relationships and
training their sales forces. Our customers/partners and us will also rely on the
media  production  infrastructure  of the media  companies  for the  billing and
collection of national and local advertisements, sponsorships and promotions and
the  production  of  display  and  banner  advertisements.  The  failure  of our
customers/partners  to establish media  relationships  that generate  meaningful
revenues  or the  failure of the media  companies  to  maintain  and  support an
advertisement production infrastructure could adversely affect our business.

      Our Business Is Highly  Competitive.  The payphone business,  the Internet
appliance business and interactive media market are extremely  competitive,  and
the Internet  appliance and  interactive  media markets are evolving and rapidly
changing.  Our current and prospective  competitors include many large companies
that have substantially greater resources than we have.

      Advertising Arrangements May Involve Risks. The development of advertising
and sponsorship  arrangements by our customers/partners and us involve risks. We
anticipate  that  national  and local  advertising,  sponsorship  and  promotion
arrangements  will be sold under short-term  agreements of less than six months.
In addition, we anticipate that advertisers and sponsors would be able to cancel
these agreements, change their expenditures or buy from potential competitors on
relatively short notice and without penalty. Because we expect to derive a large
portion of our future  revenues  from  advertising,  sponsorship  and  promotion
arrangements,  short-term agreements could expose our  customers/partners and us
to  competitive  pressures  and  potentially  severe  fluctuations  in financial
results.  We anticipate that  advertisers  and sponsors will require  guarantees
regarding  the minimum  number of  impressions  or  click-throughs  by Grapevine
terminal  users.  These  arrangements  expose our  customers/partners  and us to
substantial  risks,  including the risk of providing free advertising  until the
minimum levels are met, which could  adversely  affect the financial  results of
our customers/partners and us.


                                       35
<PAGE>

      Advertisers  May  Not  Accept  the  Grapevine  Terminal  Appliances  as an
Advertising Medium. Our Grapevine  terminals are not an established  advertising
medium, and media companies, advertising agencies and potential advertisers have
no  experience  with the Grapevine  terminal  network.  As the Grapevine  medium
evolves,  advertisers may find that traditional  methods of advertising are more
effective methods of advertising than using the Grapevine medium.

      Intense  competition  in the sale of advertising on the Internet and other
interactive  media  has led to a wide  range of rates  and  offer a  variety  of
pricing  models  for  various  advertising  services.  As a  result,  we  cannot
precisely  predict the future  advertising  revenues that the  Grapevine  medium
could achieve or which pricing models  advertisers will adopt.  For example,  if
many  advertisers base their  advertising  rates on the number of clicks through
the content rather than the number of  impressions,  then  advertising  revenues
would  be less.  There  are no  widely  accepted  standards  for  measuring  the
effectiveness of interactive  media  advertising,  and standards may not develop
sufficiently  to  support  the  Grapevine  medium as a  significant  advertising
medium.  We  believe  that the  Grapevine  advertising  rates will be based on a
combination of impressions  and clicks to content,  but there is no assurance in
that  regard.  Also,   advertisers  may  not  accept  our  measurements  or  our
measurements could contain errors.

      Industry  analysts and others have made many  predictions  concerning  the
growth of the interactive  media advertising  market.  Many of these predictions
have not been  accurate and cannot be relied upon.  This growth may not occur or
may occur more slowly than estimated.  If the Grapevine  medium does not develop
as an effective advertising medium, our business and prospects will be adversely
affected.

      Our  Internet  Appliance  Business  Will  Rely on the  Performance  of Our
Systems. Our Internet appliance business will be dependent upon the performance,
reliability and availability of our systems and content delivery mechanisms. Our
revenues will depend,  in large measure,  on the number of users that access our
content  and  electronic  commerce  services.  Our  servers  and  communications
hardware  are located at our service  bureau  facility and  additional  disaster
recovery  hardware  is located at our  headquarters  facility.  Our  systems and
service  operations could be damaged or interrupted by fire, flood,  power loss,
telecommunications  or  Internet  failure,   break-in  and  similar  events.  In
addition, these systems host sophisticated software, which may contain bugs that
could  interrupt  service.   Any  systems   interruptions  that  result  in  the
unavailability of phone, content and electronic commerce services and data would
reduce the volume of users and the value of our services to  customers/partners,
advertisers,   information  aggregators  and  promotion  sponsors,  which  could
adversely affect our business and prospects.

      We Will Rely on the Internet  Infrastructure.  The success of our Internet
appliance business may depend in a large part on other companies maintaining the
Internet infrastructure.  We will rely on other companies to maintain a reliable
network that provides speed,  data capacity and security and to develop products
that enable reliable Internet access and services.  If the Internet continues to
experience  growth in the number of users,  frequency  of use and amount of data
transmitted,  the Internet  infrastructure  may be unable to support the demands
placed on it, and the  Internet's  performance or  reliability  may suffer.  Any
degradation of Internet  performance or reliability could cause a degradation of
our content delivery  services,  which could adversely affect the ability of our
customers/partners and us to generate significant  advertising revenues or cause
advertisers to reduce or eliminate the use of the Grapevine medium.


                                       36
<PAGE>

      We Are Subject to Pending and Potential Legal Proceedings.  We are subject
to legal  proceedings and claims from time to time, and expect to continue to be
in the ordinary course of our business, including claims of alleged infringement
of patents,  trademarks and other intellectual  property rights owned by others.
Such claims, even if without merit, could require the expenditure of significant
financial and managerial resources,  which could harm our business. In addition,
any judgments against us, particularly for infringement of intellectual property
rights,  could  have a  material  adverse  effect on our  business,  results  of
operations and financial position.

      We Will  Receive  Information  That May Subject Us to  Liability.  We will
receive  information  and content  from third  parties and may be liable for the
data that is contained in the content because of the distribution of the content
and  information  to the  Grapevine  terminals.  We  could be  subject  to legal
liability  for such  things as  defamation,  negligence,  intellectual  property
infringement  and product and service  liability.  Agreements that we may obtain
for content delivery may not contain indemnity  provisions in favor of us. We do
not, to date,  knowingly have such  liabilities.  While we have not received any
claims from third  parties or users,  we may receive  claims in the future.  Any
liability  that we incur as a result of content we  receive  from third  parties
could harm our financial results and financial position.

      Potential Software Defects May Adversely Affect Our Business.  Our product
software,  our management  systems software and our server software is developed
internally  and  integrated  with  licensed  technology.  We also  use  external
suppliers  for the  development  of software.  All of this  software may contain
undetected errors,  defects and bugs. Although we have not suffered  significant
harm from any errors or defects to date, we may discover  significant  errors or
defects in the future that we may or may not be able to fix. The  correction  of
significant  software  defects  could  require the  expenditure  of  significant
financial and engineering  resources,  which could have an adverse effect on our
business,  operating  results and financial  position.  In addition,  if we were
unable to correct significant  software defects our business and prospects would
be materially adversely affected.

      Our e-Prism Network Is Subject to Capacity Constraints and Security Risks.
We will have to expand  and  upgrade  our  transaction  processing  systems  and
network infrastructure if the volume of traffic on our Grapevine/e-Prism network
increases.  We may be  unable  to  accurately  project  the  rate or  timing  of
increases,  if any, in the use of our  Grapevine  terminal  content  services or
expand and  upgrade  our systems and  network  equipment  to  accommodate  these
increases  in  a  timely  manner.  We  could  experience   significant  capacity
constraints, unanticipated system disruptions and poor service conditions, which
could have an adverse effect on our Internet Appliance business.

      Even though we have  implemented  security  measures,  our e-Prism network
faces  security  risks  common  to  other  IP-based  networks.  As with  similar
networks, our network may be vulnerable to hackers and others,  computer viruses
and  other  disruptive  problems.  Someone  who is able to  circumvent  security
measures could  misappropriate  our proprietary  information,  content and phone
usage  data,  or  measurements  of  performance   and   reliability,   or  cause
interruptions  to our  service  delivery  and  operations.  Internet  and online
service  providers  have  in  the  past  experienced,  and  may  in  the  future
experience,  interruptions  in service as a result of accidental or  intentional
actions of Internet users, and current and former employees. We will continue to
attempt to protect  our  network  against  the threat of  security  breaches  or
alleviate problems caused by breaches.  Eliminating human circumvention of these
measures, computer viruses and other security problems may require interruptions
or delays of service  delivery  and data  recovery,  any of which could harm our
business.


                                       37
<PAGE>

      We May be Unable to Protect or Enforce Our  Intellectual  Property Rights.
We may be unable to  adequately  protect or enforce  our  intellectual  property
rights. Our success in the Internet appliance business may depend  significantly
upon our proprietary technology. To protect our proprietary rights, we rely on a
combination   of  copyright  and  trademark   laws,   patents,   trade  secrets,
confidentiality  agreements  with  employees  and third  parties and  protective
contractual  provisions.  Despite our efforts to protect our proprietary rights,
unauthorized parties may copy aspects of our services and products or obtain and
use information that we regard as proprietary.  In addition, others may possibly
independently develop substantially  equivalent  intellectual property. If we do
not effectively protect our intellectual property, our business could suffer. We
may have to litigate to enforce our intellectual  property, to protect our trade
secrets or to determine  the validity  and scope of other  parties'  proprietary
rights.  Whether or not a  successful  claim of  infringement  is brought in our
favor or in favor of a third party,  such defense and litigation  could harm our
financial  results  and  impact  our  delivery  of  services  in  a  timely  and
cost-effective manner.

      We Need  Additional  Financing.  As of  March  31,  2000,  we were  not in
compliance with one of the financial  covenants contained in the loan agreements
between our bank and us. As a result, the bank stopped advancing funds under the
revolving  credit lines  provided to us under the loan  agreements,  and had the
right to  accelerate  the maturity of  outstanding  indebtedness  under the loan
agreements.  On April 12, 2000, we entered into a Forbearance  and  Modification
Agreement  (the  "Forbearance  Agreement")  with  the  bank  that  modified  the
provisions of the loan agreements. Under the terms of the Forbearance Agreement,
the maturity date of  indebtedness  outstanding  under the loan  agreements  was
accelerated to July 31, 2000 and the  availability  of additional  funds under a
$2,000,000  export  revolving credit line (none of which was borrowed as of such
date) and a $1,500,000  equipment credit line ($281,000 of which was borrowed as
of such date) was cancelled.  During the term of the Forbearance Agreement,  the
outstanding  indebtedness  under a $10,000,000  working capital revolving credit
line and a $4,000,000  installment  note cannot  exceed the value of  collateral
consisting of eligible accounts receivable and inventories,  except with respect
to permitted  overadvances.  The Forbearance Agreement permits an overadvance of
$2,800,000  through June 30, 2000 and $1,500,000  thereafter until July 31, 2000
when all outstanding indebtedness matures.

      The Company will not be able to pay its outstanding  bank  indebtedness on
July 31, 2000 unless it is able to raise additional  capital and/or  restructure
the bank  indebtedness,  and may not be able to  remain in  compliance  with the
terms of the Forbearance Agreement until July 31, 2000. As a result, the Company
is  attempting  to  secure  an  asset-based   financing  arrangement  and  raise
additional  equity  capital  and/or other  sources of funding  through a private
placement of securities.

      The Company believes that its efforts to raise  additional  capital and/or
other funding will be successful,  and that it will be able to refinance  and/or
restructure its outstanding bank  indebtedness.  If the Company is successful in
raising  additional  equity capital,  the percentage  ownership of the Company's
then current stockholders will be reduced and such reduction may be substantial.
However, there is no assurance that the Company's efforts will be successful, or
if  successful,  that such  financing  would  not be on  onerous  terms.  If the
Company's  efforts to raise  additional  equity capital and/or other funding and
refinance and/or restructure its bank debt are not successful, the Company could
experience difficulties meeting its obligations and it may be unable to continue
normal operations, except to the extent permitted by its bank.

      Cash flows from  operations  will not be  adequate  to fund the  Company's
obligations and operations for the next twelve months without raising additional
capital. The Company may require additional funds during or after such period in
addition to that  currently  sought.  Additional  financing may not be available
except on onerous terms,  or at all. If the Company cannot raise adequate funds,
if and when necessary, to satisfy its capital requirements, it may have to limit
its operations  significantly,  which


                                       38
<PAGE>

would adversely affect its prospects.  The Company's future capital requirements
depend upon many factors,  including, but not limited to, the level of sales and
revenues of its payphone business,  success of its Internet appliance  business,
the extent to which it develops and upgrades its network, the extent to which it
expands its content solutions and delivery capabilities and the rate at which it
expands its sales and marketing operations.

      The Company's consolidated financial statements included in Item 8 of this
report have been  prepared  assuming  that the Company will  continue as a going
concern.  The  Company's  difficulties  in  meeting  the  covenants  of its loan
agreements  and its losses from  operations  raise  substantial  doubt about its
ability to continue as a going  concern.  Management's  plans in regard to these
matters  are  described  in Note  16 to the  consolidated  financial  statements
included in Item 8 of this report. The consolidated  financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

Item 2. PROPERTIES

      The Company owns and occupies two 24,000 square foot buildings  located at
6428 Parkland Drive, Sarasota,  Florida. These buildings, which were constructed
in 1987 and 1989, house our principal administrative, engineering, marketing and
sales personnel and activities.  The two buildings are owned subject to mortgage
indebtedness pursuant to a promissory note with our bank.

      The Company leases the following properties:

      o     11,200  square  feet of office  space in a building  located at 1060
            Windward Ridge Parkway, Alpharetta,  Georgia under a five-year lease
            agreement  dated  November 17, 1997  containing a five-year  renewal
            provision, which was assigned to the Company in October 1999;

      o     A 53,400  square foot  manufacturing  facility  located at 315 Waugh
            Boulevard,  Orange,  Virginia under a one-year lease  agreement that
            ends on July 31, 2000 and that is  renewable  by the Company for two
            additional terms of one year each; and

      o     A 24,000  square  foot  warehouse  facility  located at 13180  James
            Madison Highway,  Orange, Virginia under a six-month lease agreement
            that ends on November  30, 2000 and that is renewable by the Company
            for one additional six-month term.

      Our  service  bureau  data  center  and some of our  selling,  design  and
development personnel are housed in the Alpharetta, Georgia leased facility. Our
assembly,  refurbishment  and  warehouse  facilities  are housed in the  Orange,
Virginia leased facilities. The Company believes that its owned and leased space
is adequate for its current business.

Item 3. LEGAL PROCEEDINGS

      Nogah  Bethlahmy,   et  al.  plaintiffs  v.  Randy  S.  Kuhlmann,  et  al.
defendants. San Diego Superior Court Case No. 691635. This punitive class action
was  filed in 1995 in the  Superior  Court of the  State of  California  for the
County of San Diego alleging that Amtel Communications, Inc. ("Amtel"), a former
customer  that  filed  for  bankruptcy,  conspired  with  its own  officers  and
professionals,  and with various telephone suppliers  (including the Company) to
defraud  investors  in Amtel by  operating  a Ponzi  scheme.  See Item 3,  Legal
Proceedings  of Part I of the  Company's  Form  10-KSB for the fiscal year ended
March 31, 1996 and Item 1, Legal  Proceedings  of Part II of the Company's  Form
10-Q for the quarter ended September 30, 1996.


                                       39
<PAGE>

      On September 28, 1998,  the Court granted our Motion for Summary  Judgment
and the Court  dismissed us from the class  action.  On December  11, 1998,  the
plaintiffs  appealed  the  Court's  decision  to grant our  Motion  for  Summary
Judgment.  On June 8, 2000,  the Court of  Appeal,  Fourth  Appellate  District,
Division One of the State of California affirmed the Summary Judgment entered by
the Superior Court of San Diego County in favor of the Company.

      While we are subject to various other legal proceedings  incidental to the
conduct of our business, we do not believe that there are any such pending legal
proceedings that are material to our business.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      No  matter  was  submitted  to a vote  of  security  holders  through  the
solicitation  of proxies or  otherwise  during the fourth  quarter of the fiscal
year ended March 31, 2000.

                                     PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      Our common  stock is listed on the Nasdaq  National  Market  System of The
Nasdaq Market under the symbol  "ECTL." The following  table sets forth the high
and low sales  prices of our  common  stock  for each of the  quarterly  periods
during  the  years  ended  March 31,  2000 and 1999 as  reported  by the  Nasdaq
National Market System:

                                                            High          Low
                                                           ------        -------
     Year Ended March 31, 2000:

          Quarter Ended June 30, 1999                      3 7/8         1 7/16
          Quarter Ended September 30, 1999                 2 3/32        1 7/32
          Quarter Ended December 31, 1999                  4             1 1/4
          Quarter Ended March 31, 2000                     8             1 13/16

     Year Ended March 31, 1999:

          Quarter Ended June 30, 1998                      6 23/32       4 3/16
          Quarter Ended September 30, 1998                 6 1/2         4 1/4
          Quarter Ended December 31, 1998                  6 1/4         4 3/4
          Quarter Ended March 31, 1999                     5 7/8         3 1/4

      At June 22, 2000, we had 367 holders of record of our common stock.

      We have never  declared or paid any cash dividends on our common stock and
do not intend to pay cash dividends in the foreseeable  future.  Under the terms
our bank loan  agreements we are prohibited  from paying  dividends,  other than
dividends  payable in common  stock,  without the prior  written  consent of the
bank.

                                   ----------


                                       40
<PAGE>

Item 6. SELECTED FINANCIAL DATA

      The following  selected  financial  data (in  thousands,  except per share
data)  is  qualified  in  its  entirety  by  reference  to  the  more   detailed
consolidated  financial  statements and notes thereto included elsewhere in this
report.  See  Item  7 -  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                                                    Year Ended March 31,
                                                         ---------------------------------------------------------------------------
                                                            2000             1999            1998            1997            1996
                                                         --------         --------        --------        --------         ---------
<S>                                                      <C>              <C>             <C>             <C>              <C>
Results of Operations (1)
Net sales                                                $ 47,295         $ 65,263        $ 46,250        $ 26,832         $ 21,462
Gross profit                                               12,115           21,628          17,605          10,949            8,224
Selling, general and administrative
  expenses                                                  9,984           10,560           9,930           6,326            6,465
Engineering, research and
  development expenses                                      6,479            6,121           4,514           2,623            2,257
Amortization expense                                        2,263            2,084             654              32               25
Other charges (credits) (2)                                   733            1,772              --            (331)           1,844
Net income (loss) (3)                                    $(11,188)        $    361        $  1,757        $  1,628         $ (1,291)
Earnings (loss) per common and
  common equivalent share (4):
    Basic                                                $  (0.83)        $   0.03        $   0.18        $   0.20         $  (0.16)
    Diluted                                              $  (0.83)        $   0.03        $   0.18        $   0.20         $  (0.16)
Financial Position
Current assets                                           $ 19,073         $ 31,327        $ 28,124        $ 10,982         $ 10,227
Current liabilities                                        19,602           10,634           7,887           3,085            3,939
Total assets                                               59,709           71,295          67,438          15,944           14,929
Long-term obligations                                         208           10,355           9,891             232              432
Retained earnings (deficit)                                (7,508)           3,680           3,319           1,562              (66)
Stockholders' equity                                     $ 39,899         $ 50,306        $ 49,660        $ 12,627         $ 10,558
</TABLE>

      (1)   On December 18, 1997, we acquired  Technology  Service  Group,  Inc.
            ("TSG")  pursuant to a merger and on September  30, 1997 we acquired
            from Lucent  Technologies Inc.  ("Lucent") certain assets related to
            Lucent's  payphone  manufacturing  and component parts business (the
            "Lucent  Assets").  Our  consolidated  statements of operations  and
            other comprehensive income (loss) for the years ended March 31, 2000
            and 1999  include  the  operating  results of TSG and the  operating
            results  from the  Lucent  Assets.  Our  consolidated  statement  of
            operations and other comprehensive  income (loss) for the year ended
            March  31,  1998  includes  the  operating  results  of TSG  and the
            operating  results from the Lucent Assets from the respective  dates
            of acquisition.  See Item 8 - "Consolidated Financial Statements and
            Supplementary Data."

      (2)   Other   charges  for  the  year  ended  March  31,  2000   represent
            restructuring   charges.  See  Item  8  -  "Consolidated   Financial
            Statements and Supplementary Data." Other charges for the year ended
            March 31, 1999  include  expenses of $1,240  incurred in  connection
            with a possible business combination that was terminated and $490 of
            charges  related to the  reorganization  of our sales and  marketing
            organization.  Other charges (credits) for the years ended March 31,
            1996 and 1997 represent an impairment  reserve with respect to notes
            receivable  due to the  bankruptcy  of one of our  customers,  legal
            expenses  related  to  the  bankruptcy  proceeding  and  adjustments
            thereto  related to the settlement of the  proceeding.  See Item 8 -
            "Consolidated Financial Statements and Supplementary Data."

      (3)   At March 31,  2000,  the  Company  recorded  a  valuation  allowance
            amounting to the entire  balance of its  deferred  tax asset,  which
            increased the Company's net loss for the year then ended by $6,163.

      (4)   Earnings per share have been  restated for the years ended March 31,
            1997 and 1996 to  comply  with  Statement  of  Financial  Accounting
            Standards No. 128, Earnings Per Share.


                                       41
<PAGE>

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS

      The following  discussion of financial condition and results of operations
should be read in conjunction  with the  consolidated  financial  statements and
notes  thereto  included  in Item 8 -  "Consolidated  Financial  Statements  and
Supplementary Data". All dollar amounts set forth herein, except per share data,
are stated in thousands.

Results of Operations

      On December 18, 1997, we acquired  Technology  Service Group, Inc. ("TSG")
pursuant to a merger for a total purchase price of $35,605, and on September 30,
1997,  we acquired  from Lucent  Technologies  Inc.  ("Lucent")  certain  assets
related to Lucent's  payphone  manufacturing  and component  parts business (the
"Lucent  Assets")  for a total  purchase  price  of  $5,957  (the  "fiscal  1998
acquisitions").   Our   consolidated   statements   of   operations   and  other
comprehensive  income (loss) for the years ended March 31, 2000 and 1999 include
the operating  results of TSG and the operating  results from the Lucent Assets.
Our consolidated  statement of operations and other comprehensive  income (loss)
for the year ended March 31, 1998 includes the operating  results of TSG and the
operating  results  from  the  Lucent  Assets  from  their  respective  dates of
acquisition.

      We incurred a net loss of $11,188,  or ($.83) per diluted  share,  for the
year ended March 31, 2000  (fiscal  2000) as compared to net income of $361,  or
$.03 per diluted share, for the year ended March 31, 1999 ("fiscal 1999") versus
net income of $1,757,  or $.18 per diluted  share,  for the year ended March 31,
1998  ("fiscal  1998").  Our net loss for the year ended March 31, 2000 reflects
substantial   expenditures  to  develop  our  public  access  Internet  terminal
appliances and related service operations,  charges related to the restructuring
of our core  payphone  business  of $733,  tax  expense of $3,286 as a result of
recording a  valuation  allowance  amounting  to the entire  deferred  tax asset
balance  because of an  uncertainty  as to  whether  the  deferred  tax asset is
realizable  and  declines in revenues  and sales and gross  profit  margins as a
result of industry  conditions beyond our control,  including the contraction of
the installed base of public access  terminals,  the  consolidation  of domestic
public communications  providers, and declining industry revenues resulting from
increasing usage of wireless  services and increased volume of dial-around (toll
free and access code) calls.  As a result of the prolonged  continuance of these
industry conditions, we do not believe that revenues and net sales from our core
payphone products and services will improve in the foreseeable  future. In fact,
revenues and net sales of our core payphone business are expected to continue to
decline in the  foreseeable  future.  However,  we believe that our revenues and
sales may begin to grow as we launch our non-PC Internet  appliances and related
services,  but that a certain  period  of growth  will be  required  before  new
sources of  revenues  from these  products  and  services  support  the  related
operations.  However,  there can be no assurance in that regard.  Therefore,  we
expect to continue to report  operating  losses for at least the next year as we
invest in the  development  and launch of our  Internet  appliance  products and
services.

      Our public access  Internet  terminal  appliances are designed to provide,
among others,  advertising,  sponsored  information  and content and  e-commerce
capabilities in addition to traditional payphone  capabilities.  We believe, but
cannot assure,  that the revenues that may be generated from these  capabilities
will be  substantially  greater than the  revenues  generated  from  traditional
payphone   services.   We  are  developing  the  services  to  implement   these
capabilities  through a server  network  environment  with a strategy  for us to
share in the new revenue  streams  generated by our customers.  We believe,  but
cannot assure,  that our target  customers will begin to deploy our new products
and services  during the third and fourth  quarters of calendar  year 2000 after
they  complete the initial lab and market  trials,  which began in January 2000.
However,  there  is no  assurance  that  our  public  access  Internet  terminal
appliances


                                       42
<PAGE>

will be successfully introduced or accepted by the marketplace,  or if they are,
that revenues from such products and related  services and revenues derived from
advertising, sponsored content and other sources would have a material favorable
impact on the  revenues  of our  customers  or on our sales and  revenues in the
foreseeable future or at all. Our ability to implement this strategy and develop
revenues and profits from the  relatively  new and evolving  market for Internet
appliances,  content and  services  is subject to  substantial  risks.  See "The
Company's Business - Risk Factors." These risks include,  but are not limited to
the following:

      o     uncertain   acceptance  of  our  public  access  Internet  appliance
            products by our customers and the public;

      o     uncertain   acceptance  of  our  public  access  Internet  appliance
            products as a new advertising media;

      o     our ability and the ability of our  customers  to attract and retain
            advertisers;

      o     our ability to develop,  deliver,  enhance, maintain and support the
            technology;

      o     our ability to attract and retain content providers and the cost and
            availability of content;

      o     an evolving and unpredictable business model;

      o     the overall level of demand for content and e-commerce services in a
            public access setting;

      o     seasonal trends in advertising placements;

      o     the amount and timing of  increased  expenditures  for  expansion of
            operations,  including the hiring of personnel, capital expenditures
            and related costs;

      o     the result of litigation that may be filed against us in the future;

      o     our  ability  to  attract  and  retain  qualified  personnel;

      o     the  introduction  of new  or  enhanced  products  and  services  by
            competitors;

      o     technical difficulties, system downtime and system failures;

      o     political  or economic  events and  governmental  actions  affecting
            Internet operations or content; and

      o     general economic  conditions and economic conditions specific to the
            Internet and advertising industries.

      The  decline in net income for fiscal  1999 as  compared to fiscal 1998 is
attributable to a number of factors, including, among others: (i) a reduction in
gross  profit  margin as a  percentage  of sales;  (ii) an increase in costs and
expenses due to the fiscal 1998  acquisitions  and integration of the operations
and assets  acquired;  (iii)  expenses  of $1,240  incurred in  connection  with
negotiations  concerning a possible  business  combination that were terminated;
and (iv) a  charge  of $490  related  to the  reorganization  of our  sales  and
marketing organization, all of which are more fully explained herein.


                                       43
<PAGE>

Fiscal 2000 compared to Fiscal 1999

      The  following  table  shows  certain  line  items  in  our   consolidated
statements  of  operations  and other  comprehensive  income (loss) for the year
ended March 31, 2000 and 1999 that are  discussed  below  together  with amounts
expressed as a percentage of sales.

<TABLE>
<CAPTION>
                                                            Percent                   Percent
                                                 2000       of Sales       1999       of Sales
                                               --------     --------     --------     --------
<S>                                            <C>            <C>        <C>             <C>
Revenues and net sales                         $ 47,295       100%       $ 65,263        100%
Cost of revenues and sales                       35,180        74          43,635         67
Gross profit                                     12,115        26          21,628         33
Selling, general and administrative
  expenses                                        9,984        21          10,560         16
Engineering, research and
  development expenses                            6,479        14           6,121          9
Other charges                                       733         2           1,772          3
Income tax expense                                3,286         7             213         --
</TABLE>

      Revenues  and net sales by  business  segment and  customer  group for the
years ended March 31, 2000 and 1999  together  with the increase or decrease and
with the  increase or decrease  expressed  as a  percentage  change is set forth
below:

<TABLE>
<CAPTION>
                                                                    Increase    Percentage
                                               2000      1999      (Decrease)     Change
                                            --------   --------    ---------    ----------
<S>                                         <C>        <C>         <C>               <C>
Payphone Business:
  Telephone companies                       $ 27,209   $ 32,507    $ (5,298)         (16%)
  Private operators                           10,366     20,081      (9,715)         (48)
  Distributors                                 3,360      4,995      (1,635)         (33)
  International operators                      6,282      7,680      (1,398)         (18)
Internet Appliance Business:
  International operators                         78         --          78           --
                                            ========   ========    ========     ========
                                            $ 47,295   $ 65,263    $(17,968)         (28%)
                                            ========   ========    ========     ========
</TABLE>

      The  decrease  in  revenues  and net  sales of our  payphone  business  is
primarily  attributable to a decrease in volume of product sales to all customer
groups  partially  offset by an increase in revenues from operator  services and
from repair, refurbishment and upgrade services provided to telephone companies.
We believe that the  fluctuations  in domestic  product  sales and revenues from
repair,  refurbishment  and upgrade  services are primarily  attributable to the
contraction of the installed base of payphone  terminals in the domestic  market
and to declining  revenues of payphone  service  providers  caused by increasing
usage of  wireless  services  and a  higher  volume  of  dial-around  calls.  In
addition,  continuing  downward pricing pressures  contributed to the decline in
revenues and net sales to domestic  customers.  Revenues from operator  services
increased by  approximately  $707 due to an increase in the number of PSPs using
the Company's  services.  The decrease in revenues and net sales of our payphone
business to international  operators is primarily  attributable to a decrease in
export volume of payphone terminals to customers in Latin America and Asia.


                                       44
<PAGE>

      We made our first commercial  shipment of our Internet terminal appliances
at the end of the  year  under a  contract  with  Canada  Payphone  Corporation.
Shipments of our Internet  terminal  appliances to domestic  customers were made
under trial agreements,  and did not generate any revenues during the year ended
March 31, 2000.

      Revenues  and net sales of products and services for the years ended March
31, 2000 and 1999  together  with the increase or decrease and with the increase
or decrease expressed as a percentage change is set forth below:

<TABLE>
<CAPTION>
                                                                             Increase     Percentage
                                                        2000      1999      (Decrease)      Change
                                                      --------   --------    ---------    ----------
<S>                                                   <C>        <C>         <C>               <C>
Products:
   Payphone terminals                                 $ 12,896   $ 23,758    $(10,862)         (46%)
   Internet terminal appliances                             78         --          78           --
   Electronic modules and kits                          15,056     18,790      (3,734)         (20)
   Components and other products                         5,804     12,200      (6,396)         (52)
Services:
   Repair, refurbishment and upgrade services           12,363      9,895       2,468           25
   Other payphone services                               1,098        620         478           77
                                                      ========   ========    ========     ========
                                                      $ 47,295   $ 65,263    $(17,968)         (28%)
                                                      ========   ========    ========     ========
</TABLE>

      Cost of sales and gross profit as a percentage  of net sales  approximated
74% and 26%, respectively,  for the year ended March 31, 2000 as compared to 67%
and 33%,  respectively,  for the year ended March 31,  1999.  The decline in the
gross profit percentage between such periods is principally  attributable to (i)
the decrease in sales volume of products; (ii) the increase in the percentage of
sales and revenues from telephone companies at margins lower than those achieved
from other customer groups;  (iii) downward pricing pressures;  (iv) an increase
in the provision for obsolescence  and slow moving  inventories of $995; and (v)
the increase in revenues from  lower-margin  repair,  refurbishment  and upgrade
services.

      The decrease in selling,  general and administrative expenses is primarily
attributable  to the decline in revenues and net sales,  cost reductions and the
restructuring  discussed below, offset by an increase in the estimated provision
for credit losses of $428,  retirement  compensation to our former president and
chief  executive  of $160 and  recruiting  expenses of $143.  As a result of the
restructuring,  we began to shift our  marketing  and selling  resources  to the
introduction  of our public  access  Internet  terminal  appliances  rather than
increasing overall spending. We began to realize the cost and expense reductions
from the restructuring during the third quarter of fiscal 2000.

      During fiscal 2000, we made significant  investments in the development of
our public  access  Internet  terminal  appliances  and back  office  management
software which resulted in an increase in engineering,  research and development
expenditures,  including  capitalized  software development costs, of $3,337, or
approximately  49%, to $10,097  versus $6,760 for the year ended March 31, 1999.
Capitalized software development costs approximated $3,618 during the year ended
March 31, 2000 as compared to $639 during the year ended March 31, 1999.  During
the year ended  March 31,  2000,  we  abandoned a software  development  project
related  to  certain  activities  discontinued  as  part  of  the  restructuring
discussed  below, and recognized an impairment loss of $140. The impairment loss
is included in engineering, research and development expenses for the year ended
March 31,  2000.  In May 2000,  we began to reduce and realign our  research and
development   resources  to  reflect  estimated  resources  to  develop  planned
application requirements over the next year.


                                       45
<PAGE>

      During the year ended March 31, 2000, we implemented a restructuring  plan
to  close  our  Sarasota,   Florida   manufacturing   facility  and  consolidate
manufacturing operations, resize our core payphone business operations, reorient
our distribution strategy and begin to build support operations to introduce our
public  access  Internet  terminal  appliances  to the  market and  provide  the
services related thereto. In connection with this  restructuring,  we recognized
other charges of $733 during the year ended March 31, 2000.  These other charges
consisted of estimated employee termination benefits under severance and benefit
arrangements of $608 and future lease payments of $125 related to the closure of
leased  facilities.  The  other  charges  do  not  include  the  recognition  of
impairment  losses of $8 related to closed  facilities.  We believe,  but cannot
assure,  that the  restructuring  will  have the  impact of  reducing  costs and
expenses  in all  functional  areas  of the  business  by  approximately  $2,000
annually,  net of  increases  in  expenses  to support  our  Internet  appliance
business.  We expect to begin to realize the full impact of the anticipated cost
and expense reductions from the restructuring during the quarter ending June 30,
2000.  Other  charges  for the year ended March 31, 1999  related  primarily  to
expenses  incurred with respect to an aborted  business  combination  as further
discussed below.

      During the year ended March 31,  2000,  the  Company  recorded a valuation
allowance  amounting  to the entire  balance  of its  deferred  tax  asset.  The
increase in the valuation  allowance of $6,163  resulted in a net tax expense of
$3,286 on a pre-tax  loss of $7,902  during the year ended March 31, 2000 versus
an effective tax rate of 37% on pre-tax  income of $574 for the year ended March
31, 1999.

Fiscal 1999 compared to Fiscal 1998

      The  following  table  shows  certain  line  items  in  our   consolidated
statements of operations and other  comprehensive  income (loss) for fiscal 1999
and fiscal 1998 that are discussed  below  together with amounts  expressed as a
percentage  of sales and with the change in the line item from  period to period
expressed as a percentage increase or (decrease).

<TABLE>
<CAPTION>
                                                Fiscal        Percent         Fiscal        Percent      Percentage
                                                 1999         of Sales         1998         of Sales        Change
                                               --------       --------      --------        --------     ----------
<S>                                            <C>              <C>         <C>               <C>             <C>
Net sales                                      $ 65,263         100%        $ 46,250          100%            41%
Cost of goods sold                               43,635          67           28,645           62             52
Gross profit                                     21,628          33           17,605           38             23
Selling, general and administrative
  expenses                                       10,560          16            9,930           21              6
Engineering, research and
  development expenses                            6,121           9            4,514           10             36
Amortization                                      2,084           3              654            1            219
Interest (income) expense                           517           1             (103)          --           (602)
Other charges                                     1,772           3               --           --             --
Income tax expense                                  213          --              853            2            (75)
</TABLE>


                                       46
<PAGE>

      We did not  generate any revenues  from our  Internet  appliance  business
during the years ended March 31,  1999 and 1998.  Revenues  and net sales of our
payphone  business by customer group for the years ended March 31, 1999 and 1998
together  with the  increase  or  decrease  and with the  increase  or  decrease
expressed as a percentage change is set forth below:

<TABLE>
<CAPTION>
                                                                  Increase     Percentage
                                          1999         1998      (Decrease)      Change
                                       --------     --------     ---------     ----------
<S>                                    <C>          <C>           <C>              <C>
Telephone companies                    $ 32,507     $ 15,999      $ 16,508         103%
Private operators                        20,081       18,684         1,397            7
Distributors                              4,995        2,368         2,627          111
International operators                   7,680        9,199        (1,519)         (17)
                                       --------     --------     ---------     ----------
                                       $ 65,263     $ 46,250      $ 19,013          41%
                                       ========     ========     =========     ==========
</TABLE>

      As a result of the industry  conditions  discussed above, the revenues and
net sales of our  payphone  business,  particularly  with  respect to  telephone
companies,  began to erode during the latter part of fiscal 1999.  However, as a
result of the fiscal 1998  acquisitions  and strong demand by private  operators
and  distributors,  our revenues  and net sales  increased by 41% as compared to
fiscal 1998.  The  increase in our revenue and net sales is primarily  due to an
increase in domestic volume,  a substantial  portion of which is attributable to
business with telephone  companies  acquired in connection  with the fiscal 1998
acquisitions, offset by a slight decline in average selling prices and a decline
export volume.

      Revenues  and net sales of products and services for the years ended March
31, 1999 and 1998  together  with the increase or decrease and with the increase
or decrease expressed as a percentage change is set forth below:

<TABLE>
<CAPTION>
                                                                                  Increase    Percentage
                                                          1999         1998      (Decrease)     Change
                                                        --------     --------     ---------   ----------
<S>                                                     <C>          <C>         <C>             <C>
Products:
   Payphone terminals                                   $ 23,758     $ 22,920        $ 838         4%
   Electronic modules and kits                            18,790       10,436        8,354         80
   Components and other products                          12,200       10,070        2,130         21
Services:
   Repair, refurbishment and upgrade services              9,895        2,285        7,610        333
   Other services                                            620          539           81         15
                                                        --------     --------     --------     -------
                                                        $ 65,263     $ 46,250     $ 19,013        41%
                                                        ========     ========     ========     =======
</TABLE>

      The growth in  revenues  and net sales of  electronic  modules and kits is
primarily  attributable to the fiscal 1998  acquisitions  and strong demand from
private  operators and  distributors.  The growth in net sales of components and
other products and revenues from repair,  refurbishment  and upgrade services is
primarily  attributable to the fiscal 1998  acquisitions.  The decline in export
volume  substantially  offset an increase in net sales of payphone  terminals to
private operators.

      Cost of sales as a percentage  of revenues and net sales  increased to 67%
during fiscal 1999 from 62% during  fiscal 1998 as a result of several  factors,
including:  (i) the increase in the  percentage  of sales to domestic  telephone
companies  and  revenues  from  repair,  refurbishment  and upgrade  services at
margins  lower than those  achieved  from other  products and  services;  (ii) a
slight reduction in average


                                       47
<PAGE>

selling prices, primarily to large private operators and distributors; and (iii)
the introduction of new products, including our Eclipse(TM) payphone terminal.

      The increase in selling,  general and administrative expenses is primarily
attributable to inclusion of operations  related to the fiscal 1998 acquisitions
for a full year  versus a part of the year in fiscal  1998,  and an  increase in
sales commissions related to the 41% increase in sales, offset  significantly by
reductions in personnel and facilities  costs from the integration of the fiscal
1998  acquisitions  and from the  restructuring of the our selling and marketing
organization. In addition, the provision for credit losses, which in fiscal 1998
included significant reserves related to the impairment of certain international
notes, declined from $1,352 in fiscal 1998 to $117 in fiscal 1999.

      The  increase  in  engineering,   research  and  development  expenses  is
primarily  attributable to the expansion of our engineering resources to develop
advanced   digital   microprocessor   based  technology  and  an  advanced  open
architecture   network   management   software  system  that  would  enable  the
integration of our  technologies  in advanced  video,  information  and internet
terminal  applications  for  various  vertical  markets,  and the  inclusion  of
development  activities  related to the fiscal 1998 acquisitions for a full year
versus a part of the year in fiscal  1998.  In  addition,  capitalized  software
development   costs   approximated  $639  during  fiscal  1999  as  compared  to
approximately $100 in fiscal 1998.

      The increase in amortization is primarily  attributable to amortization of
goodwill and  identifiable  intangible  assets  recorded in connection  with the
fiscal 1998  acquisitions  for an entire year as compared to part of the year in
fiscal 1998.

      We incurred net interest expense during fiscal 1999 of $517 as compared to
net  interest  income of $103  during  fiscal 1998  primarily  as a result of an
increase  in  average  outstanding  indebtedness  related  to  the  fiscal  1998
acquisitions  and  capital  expenditures,  including  capitalized  software,  of
$2,148.

      Other charges  during fiscal 1999 include  $1,240 of expenses,  consisting
primarily of legal,  accounting and consulting  fees incurred in connection with
negotiations  concerning a possible business combination that were terminated by
the Company in April 1999 and $490 of charges related to the  reorganization  of
the Company's sales and marketing organization.

      Our effective tax rate  increased to 37% in fiscal 1999 from 33% in fiscal
1998 primarily due to an increase in nondeductible expenses consisting primarily
of amortization of goodwill.

Impact of Inflation

      Our primary costs, inventory and labor, increase with inflation.  However,
we do not believe that inflation and changing  prices have had a material impact
on our business.

Liquidity and Capital Resources

      Liquidity.  As of March 31, 2000, we were in default of certain  financial
covenants contained in our bank loan agreements (our "Loan Agreements"),  and as
a result,  the bank had the right to  accelerate  the  maturity  of  outstanding
indebtedness.  We entered into a Forbearance  and  Modification  Agreement  (the
"Forbearance Agreement") with our bank on April 12, 2000 that modified the terms
of our Loan  Agreements.  Under  the  terms of the  Forbearance  Agreement,  the
maturity  date  of all  indebtedness  outstanding  under  the  Loan  Agreements,
including  indebtedness   outstanding  under  our  revolving  credit  lines,  an
installment  note and a  mortgage  note was  accelerated  to July 31,  2000.  In
addition,  the annual interest rates of the  installment  note and mortgage note
were  increased to 11.5%,  the annual  interest rate under the revolving  credit
lines was  increased  from one and  one-half  percentage  point  over the bank's


                                       48
<PAGE>

floating  30 day  Libor  rate  (7.63%  at March  31,  2000) to two and  one-half
percentage  points above the bank's floating prime interest rate (11.5% at April
12,  2000),  and the  availability  of  additional  funds under a $2,000  export
revolving  credit  line (none of which is  outstanding)  and a $1,500  equipment
revolving  credit  line  ($281 of which is  outstanding  at March 31,  2000) was
cancelled.  In addition,  the  Forbearance  Agreement  permits an overadvance of
indebtedness  outstanding  under a $10,000 working capital revolving credit line
and a  $4,000  installment  note of  $2,800  through  June 30,  2000 and  $1,500
thereafter  based on the value of  collateral  consisting  of eligible  accounts
receivable and inventories. However, we are only able to borrow additional funds
under the working capital  revolving credit line to the extent of any repayments
made to remain in compliance with the overadvance  provisions of the Forbearance
Agreement.   In  accordance  with  the  terms  of  the  Forbearance   Agreement,
outstanding  bank debt in the  aggregate  amount of $11,460 at March 31, 2000 is
classified as a current liability.

      During  the year  ended  March 31,  2000,  we used  $7,700 of cash to fund
operating losses, net of non-cash charges and credits,  and investing activities
related primarily to our Internet  appliance  business.  These cash requirements
were  financed from cash flows and  reductions  in net  operating  assets of our
payphone  business.  We believe that the operating,  working capital and capital
expenditure  requirements of our Internet appliance business will continue to be
significant  during the next year,  but that our payphone  business  will not be
able to support the anticipated requirements.

      Accordingly,  we are attempting to secure an asset based  financing  line,
additional  equity  capital  and/or other  sources of funding to  refinance  the
outstanding indebtedness under our Loan Agreements and to provide the capital to
fund our operating, working capital and capital expenditure requirements for the
next twelve months. We have received  proposals with respect thereto and believe
that our efforts will be  successful.  However,  there is no assurance  that our
efforts will be successful,  or if successful,  that such financing would not be
available  only on onerous  terms.  In addition,  there is no assurance that any
such  financing  would  provide the funding  required to  refinance  outstanding
indebtedness  and fund  continued  net  operating  losses  and  other  liquidity
requirements.  If our efforts to secure additional  capital and other sources of
financing  are not  successful,  we may be forced to further  reduce our product
development  efforts,  slow  down  the  launch  of our  public  access  Internet
appliances and take other actions that may adversely affect our growth potential
and future prospects.  Further,  if our efforts to raise additional  capital and
other  sources of financing are not  successful,  we will be unable to repay our
bank indebtedness and will experience  further  difficulties  meeting all of our
obligations.  Accordingly, there is no assurance that our cash resources will be
sufficient to meet our anticipated  cash needs for  operations,  working capital
and capital  expenditures  for an extended period of time or for the next twelve
months unless we are able to successfully  raise sufficient  additional  capital
and/or financing on satisfactory terms.

      Financing Activities. We fund our operations, working capital requirements
and capital expenditures from internally generated cash flows and funds, if any,
available  under bank credit lines.  We borrow funds under our bank credit lines
to finance capital expenditures,  increases in accounts and notes receivable and
inventories and decreases in bank overdrafts (as drafts clear), accounts payable
and accrued liability  obligations to the extent that we are permitted when such
requirements  exceed  cash  provided  by  operations,  if any.  We also  use the
financing  available  under bank credit lines to fund operations and payments on
long-term debt when necessary. We measure our liquidity based upon the amount of
funds we are able to borrow under our bank credit lines, which varies based upon
operating  performance  and the value of  collateral.  At March 31, 2000, we are
unable to borrow any  additional  funds under the terms of our credit lines as a
result of the default discussed above, and have accumulated approximately $1,153
of cash.

      At March 31, 2000 and 1999,  outstanding  debt under our  $10,000  working
capital line was $6,095 and $5,185, respectively, and outstanding debt under our
$4,000 installment note was $3,322 and $4,000, respectively.  Our bank will only
permit us to borrow additional funds under our $10,000


                                       49
<PAGE>

revolving credit line to the extent we repay debt outstanding on the date of the
Forbearance  Agreement  and we are  then in  compliance  with  the  terms of the
Forbearance  Agreement.  Outstanding  indebtedness  under our mortgage  note was
$1,762  and  $1,833  at March  31,  2000  and  1999,  respectively.  We also had
outstanding  indebtedness  of $281 under our  capital  equipment  credit line at
March 31,  2000.  During the year ended March 31, 2000,  net proceeds  under our
bank lines  aggregated  $1,191  before our  default and the  curtailment  of our
ability to borrow funds under the Loan Agreements.

      On March 29, 1999,  we entered into an amendment  (the  "Amendment")  that
modified the terms of our Loan  Agreements.  Pursuant to the Amendment:  (i) our
working capital revolving credit line was reduced from $15,000 to $10,000;  (ii)
we borrowed $4,000 under the terms of an installment  note payable in sixty (60)
equal monthly  installments,  including  interest at an annual  interest rate of
7.55%;  (iii) we  established  a $1,500  revolving  credit  line to finance  our
capital expenditures;  and (iv) we established a $2,000 revolving credit line to
finance  our export  activities.  The  proceeds  from the term note were used to
reduce  our then  outstanding  indebtedness  under our  former  $15,000  working
capital  revolving  credit  line,  and net  payments  under our working  capital
revolving credit lines amounted to $2,460 during the year ended March 31, 1999.

      During the year ended March 31,  1998,  proceeds  from bank notes  payable
aggregated  $8,770 and  consisted  of $3,050  under an  installment  note due on
October 2, 2004,  $3,800 under term notes due on March 31, 1998 and $1,920 under
a mortgage note. The proceeds under the  installment and term notes were used to
finance  the  purchase  of the  Lucent  assets and for other  general  corporate
purposes.  The proceeds under the mortgage note were used for general  corporate
purposes  and to retire  our then  outstanding  mortgage  note with a  principal
balance of $315.

      In addition,  during the year ended March 31,  1998,  we secured a $15,000
working  capital  revolving  credit line from our bank.  The  initial  financing
proceeds drawn under this $15,000  working  capital  revolving  credit line were
used to refinance and retire our then  outstanding  debt under a $2,000  working
capital line of credit,  the  installment and term notes incurred to finance the
purchase of the Lucent assets and  outstanding  bank  indebtedness of TSG at the
date of acquisition of $3,970.  Net proceeds under our working capital revolving
credit lines during the year ended March 31, 1998 were $3,675.

      Aggregate  principal  payments  under  notes  payable  and  capital  lease
obligations  during the years ended March 31, 2000, 1999 and 1998 were $829, $66
and $7,302, respectively.

      Indebtedness  outstanding  under our Loan Agreements is  collateralized by
substantially  all of our  assets.  Our  Loan  Agreements,  as  modified  by the
Forbearance  Agreement,  contain  covenants  that  prohibit  or restrict us from
engaging in certain  transactions  without  the  consent of the bank,  including
mergers or consolidations and disposition of assets, among others. Additionally,
our Loan  Agreements,  as modified by the Forbearance  Agreement,  require us to
comply with specific financial  covenants,  including  covenants with respect to
working capital and net worth.  Noncompliance with any of these covenants or the
occurrence of an event of default, if not waived,  could accelerate the maturity
of the indebtedness outstanding under the Loan Agreements.

      Bank overdrafts  related to outstanding  drafts increased by $1,428 during
the year ended March 31, 1999 and declined by a corresponding  amount during the
year ended March 31, 2000.

      During the years ended March 31,  2000,  1999 and 1998,  the net  proceeds
from the  exercise of common  stock  options  amounted  to $642,  $285 and $295,
respectively.


                                       50
<PAGE>

      Operating   Activities.   Cash  flows  provided  by  (used  in)  operating
activities  for the years ended March 31, 2000,  1999 and 1998 are summarized as
follows:

<TABLE>
<CAPTION>
                                                           2000       1999        1998
                                                        --------    --------    --------
<S>                                                     <C>         <C>         <C>
Net income (loss)                                       $(11,188)   $    361    $  1,757
Non-cash charges and credits, net                          8,937       4,876       3,176
                                                        --------    --------    --------
                                                          (2,251)      5,237       4,933
                                                        --------    --------    --------
Changes in operating assets and liabilities:
Accounts and notes receivable                              3,807      (1,471)     (2,695)
Inventories                                                3,809      (5,296)      3,112
Accounts payable, accrued expenses and
  other current liabilities                                 (282)         33      (1,785)
Refundable taxes and other operating assets                1,927      (1,189)       (864)
                                                        --------    --------    --------
                                                           9,261      (7,923)     (2,232)
                                                        --------    --------    --------
                                                        $  7,010    $ (2,686)   $  2,701
                                                        ========    ========    ========
</TABLE>

      Our operating cash flow is primarily  dependent  upon  operating  results,
sales  levels and related  credit  terms  extended to  customers  and  inventory
purchases,  and the changes in operating assets and liabilities related thereto.
During the year ended March 31, 2000,  we used $2,251 in cash to fund  operating
losses net of  non-cash  charges and  credits.  During the years ended March 31,
1999 and 1998,  we  generated  $5,237  and  $4,933 in cash,  respectively,  from
earnings plus non-cash charges and credits. However, during the year ended March
31,  2000,  we generated  $9,261 of cash from  changes in  operating  assets and
liabilities as compared to the years ended March 31, 1999 and 1998, when we used
$7,923 and $2,232 of cash,  respectively,  to fund net  increases  in  operating
assets and liabilities.

      Our operating assets and liabilities are comprised principally of accounts
and notes receivable,  inventories, accounts payable, accrued expenses and other
current  liabilities.  During the year ended March 31, 2000, we generated $3,807
and $3,809 of cash  through  reductions  in accounts  and notes  receivable  and
inventories,  respectively.  We also  generated  $1,645 of cash from  changes in
other operating assets and liabilities  during the year ended March 31, 2000. In
comparison,  during the year ended March 31, 1999,  we used $1,471 and $5,296 of
cash to fund  increases  in  accounts  and  notes  receivable  and  inventories,
respectively,  and $1,156 of cash to fund changes in other operating  assets and
liabilities,  and during the year March 31, 1998,  we  generated  $3,112 in cash
from a reduction  of  inventories  and used $2,695 and $2,649 of cash to fund an
increase in accounts and notes receivable and to fund changes in other operating
assets  and  liabilities,  respectively.  Cash  used  to pay  restructuring  and
reorganization obligations accrued and acquired during the years ended March 31,
2000,  1999  and  1998


                                       51
<PAGE>

was  $782,  $923  and  $152,   respectively.   Outstanding   restructuring   and
reorganization   obligations  that  will  affect  future  operating  cash  flows
aggregated $440 at March 31, 2000.

      Our  current  ratio  declined to .97 to 1 at March 31, 2000 as compared to
2.95 to 1 at March 31, 1999  primarily  due to our loss for the year ended March
31, 2000, the  classification  of all outstanding bank indebtedness as a current
liability,  the increase in the deferred tax  valuation  allowance of $6,196 and
the capital asset and capitalized software expenditures  discussed below. During
the year ended March 31, 2000, our current assets decreased by $12,254 (39%) and
current  liabilities  increased by $8,968 (84%).  Working capital decreased to a
deficit of $529 at March 31, 2000 from $20,693 at March 31,  1999.  Extension of
credit to customers and  inventory  purchases  represent  our principal  working
capital  requirements,  and material  increases in accounts and notes receivable
and/or  inventories could have a significant  effect on our liquidity.  Accounts
and notes receivable and inventories represented in the aggregate 88% and 84% of
our  current  assets at March 31,  2000 and 1999,  respectively.  We  experience
varying accounts  receivable  collection  periods from our four customer groups,
and believe  that credit  losses  will not have a  significant  effect on future
liquidity as a significant  portion of our accounts and notes receivable are due
from  customers  with  substantial   financial  resources.   The  level  of  our
inventories is dependent on a number of factors, including delivery requirements
of  customers,  availability  and  lead-time  of  components  and our ability to
estimate and plan the volume of our business.

      Investing  Activities.  Net cash used for investing  activities during the
years ended March 31, 2000, 1999 and 1998 amounted to $5,449, $2,140 and $7,493,
respectively.   The  Company's   capital   expenditures   consist  primarily  of
manufacturing   tooling  and   equipment,   computer   equipment   and  building
improvements  required for the support of operations and  capitalized  software,
including  new  product  software  development  costs.  Cash  used  for  capital
expenditures aggregated $1,831, $1,468 and $960 during the years ended March 31,
2000, 1999 and 1998,  respectively.  During the years ended March 31, 2000, 1999
and 1998,  cash used to acquire  software and capitalized  software  development
costs aggregated $3,618, $680 and $129, respectively. In addition, cash used for
the  acquisitions  of TSG and the  Lucent  assets  aggregated  $447 and  $5,957,
respectively,  during the year ended March 31, 1998.  As of March 31,  2000,  we
have not entered into any  significant  commitments  for the purchase of capital
assets.

Year 2000 Discussion

      We have  completed our efforts to assess the risks and impact of Year 2000
on our business and address Year 2000 issues  resulting  from computer  programs
designed  to use  two-digit  date codes  rather  than four  digits to define the
applicable  year. We assessed Year 2000  compliance of products and systems that
we presently  sell and support,  performed  appropriate  compliance  testing and
modified and/or upgraded non-compliant product software related to such products
and  systems.  In some cases,  we  identified  that  certain of our products and
systems were Year 2000 compliant with issues, which means that they will operate
properly  if  programmed  and  configured  in  accordance   with  our  published
guidelines. We also assessed Year 2000 compliance of our business and management
information systems and related computer equipment, performed compliance testing
and upgraded non-compliant software and equipment where necessary.  In addition,
we assessed the readiness of third parties,  particularly critical suppliers and
other third  parties that have material  relationships  with us, to identify and
mitigate the risks to our business and operations in the event they  experienced
Year 2000 problems and difficulties.

      Based on Year 2000  inquiries  that we have  received  from our  customers
after December 31, 1999 and our investigations  thereof, we are not aware of any
significant Year 2000  noncompliance  issues related to the products and systems
that we  presently  sell and  support.  In  addition,  based  on our  Year  2000
compliance  testing and remediation  activities,  the only products that we have
historically sold that


                                       52
<PAGE>

are not Year 2000  compliant or compliant  with issues are products that we have
discontinued to manufacture and that are no longer supported by the Company.  We
have  previously  notified  our  customers  that we do not intend to bring these
discontinued,  non-compliant  products  into  compliance  and that  they  should
upgraded  accordingly.  We do not believe  that we have an  obligation  to bring
these  discontinued  products into  compliance or an obligation to replace these
products  under our  warranties  since  they were last sold more than five years
ago.  Accordingly,  we have not recorded any liability related to these products
in our financial statements.

      The risks  associated  with the  failure of our  products  to be Year 2000
compliant  include:  (1) loss of data or an adverse impact on the reliability of
data  generated  by our  products;  (2) loss of  functionality;  (3)  failure to
communicate with other  applications  used by our customers that may not be Year
2000  compliant;  and (4)  potential  litigation  by  customers  with respect to
products and services no longer  supported  by us.  However,  based on Year 2000
inquiries   received  from  our  customers  after  December  31,  1999  and  our
investigations  thereof,  we do not believe that these risks are  significant or
that Year 2000 issues  related to our  products and systems will have a material
adverse impact on our business or operating results.

      We have not experienced any material interruptions or operational problems
as a  result  of  Year  2000  issues  related  to our  business  and  management
information  systems or from the failure of third  parties,  including  critical
suppliers and other third parties that have material  relationships  with us, to
be Year 2000 compliant.

      Principally, our existing engineering and information technology personnel
undertook  our Year  2000  efforts.  We have not  separately  tracked  the costs
incurred for such efforts,  but such costs  consisted  primarily of compensation
costs for the personnel  assessing and  mitigating  the risk of Year 2000 on our
business.  In addition,  the costs  incurred to upgrade or acquire new Year 2000
compliant  software and equipment have not been material,  and we do not believe
that any increases in  administrative  costs related to Year 2000 issues will be
material in the future. Further, we believe, but cannot assure, that we will not
incur any significant costs and expenses related to future Year 2000 remediation
activities  or  claims  that  may be  filed  against  us  related  to Year  2000
noncompliance issues.

Selected Quarterly Data

      The  following  sets forth a summary of selected  unaudited  statements of
operations  and other  comprehensive  income (loss) data for the quarters  ended
June 30, 1999, September 30, 1999, December 31, 1999 and March 31, 2000:

<TABLE>
<CAPTION>
                                                                   Quarter Ended
                                           ----------------------------------------------------------------
                                           June 30,        September 30,     December 31,        March 31,
                                             1999            1999 (1)          1999 (2)          2000 (3)
                                          --------         -------------     ------------        ---------
                                                                     Unaudited
<S>                                       <C>               <C>               <C>                 <C>
Revenues and net sales                    $ 12,758          $ 13,451          $ 12,669            $  8,417
Gross profit                              $  3,986          $  2,649          $  3,495            $  1,985
Net loss                                  $   (350)         $ (1,574)         $ (1,484)           $ (7,780)
Comprehensive loss                        $   (350)         $ (1,623)         $ (1,507)           $ (7,685)
Loss per common and
  common equivalent share:
    Basic                                 $  (0.03)         $  (0.12)         $  (0.11)           $  (0.57)
    Diluted                               $  (0.03)         $  (0.12)         $  (0.11)           $  (0.57)
</TABLE>


                                       53
<PAGE>

      (1)   During the quarter ended  September 30, 1999,  the Company  recorded
            additional impairment reserves related to slow moving inventories of
            approximately  $821 as a  result  of the  continued  contraction  of
            revenues and net sales of its payphone business.

      (2)   During the quarters  ended December 31, 1999 and March 31, 2000, the
            Company   recorded   restructuring   charges   of  $700   and   $33,
            respectively,   in  connection  with  the  planned  closure  of  its
            Sarasota,  Florida  manufacturing  facility and other  restructuring
            plans.

      (3)   During the quarter ended March 31, 2000, the Company recorded income
            tax expense of $5,154 as a result of recording a valuation allowance
            amounting  to the entire  deferred tax asset  balance  because of an
            uncertainty as to whether the deferred tax asset is realizable.


                                       54
<PAGE>

      The  following  sets forth a summary of selected  unaudited  statements of
operations  and other  comprehensive  income (loss) data for the quarters  ended
June 30, 1998, September 30, 1998, December 31, 1998 and March 31, 1999:

<TABLE>
<CAPTION>
                                                                   Quarter Ended
                                          -----------------------------------------------------------------
                                           June 30,        September 30,     December 31,        March 31,
                                             1998              1998              1998            1999 (1)
                                          ---------        -------------     -----------         ---------
                                                                     Unaudited
<S>                                       <C>                <C>              <C>                <C>
Net sales                                 $ 15,636           $ 18,808         $ 16,859           $ 13,960
Gross profit                              $  5,408           $  6,617         $  5,611           $  3,992
Net income (loss)                         $    237           $    865         $    779           $ (1,520)
Comprehensive income (loss)               $    237           $    865         $    779           $ (1,520)
Earnings (loss) per common and
  common equivalent share:
    Basic                                 $   0.02           $   0.06         $   0.06           $  (0.11)
    Diluted                               $   0.02           $   0.06         $   0.06           $  (0.11)
</TABLE>

      (1)   During the quarter ended March 31, 1999, the Company  recorded other
            charges  of  $1,772,   including  expenses  of  $1,240  incurred  in
            connection  with   negotiations   concerning  a  possible   business
            combination  that were terminated by the Company and $490 of charges
            related to the  reorganization  of the Company's sales and marketing
            activities.

Effects of New Accounting Standards

      In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 133 ("SFAS 133"),  Accounting for Derivative
Instruments and Hedging Activities,  which establishes  standards for accounting
of derivative  instruments including certain derivative  instruments embedded in
other  contracts,  and  hedging  activities.  SFAS 133 is  effective  for fiscal
quarters of all fiscal years  beginning  after June 15, 2000.  SFAS 133 requires
entities to  recognize  derivative  instruments  as assets and  liabilities  and
measure them at fair value,  and to match the timing of gain or loss recognition
on hedging  instruments with the recognition of changes in the fair value of the
hedged  asset or  liability  that are  attributable  to the  hedged  risk or the
earnings  effect  of the  hedged  forecasted  transaction.  Management  does not
believe  that the  adoption  of SFAS 133 will have a  significant  impact on the
Company's consolidated financial statements.

      During the year ended March 31,  2000,  the Company  adopted  Statement of
Position 98-1,  "Accounting for Costs of Computer Software Developed or Obtained
for  Internal  Use" ("SOP 98-1")  issued by the American  Institute of Certified
Public  Accountants (the "AICPA").  SOP 98-1 provides guidance on accounting for
the costs of computer  software  developed  or obtained for internal use and new
cost recognition  principles and identifies the  characteristics of internal use
software.  The  adoption  of SOP  98-1  did not have a  material  impact  on the
Company's results of operations, financial position or cash flows.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

      We are  exposed  to market  risk,  including  changes in  interest  rates,
foreign  currency  exchange  rate  risks and  market  risk with  respect  to our
investment in the marketable  securities of Canada Payphone  Corporation.  Other
than our investment in marketable securities of Canada Payphone Corporation with
a market value of $325 at March 31, 2000, we do not hold any material  financial
instruments  for trading  purposes or any  investments in cash  equivalents.  We
believe  that our primary  market  risk  exposure


                                       55
<PAGE>

relates to the effects that changes in interest rates have on  outstanding  debt
obligations  that do not have  fixed  rates  of  interest.  As a  result  of the
Forbearance Agreement effective April 12, 2000, the annual interest rates of our
bank indebtedness were increased by approximately 400 basis points. Based on the
outstanding  balance of our debt  obligations  at March 31, 2000, an increase in
interest  rates of 400 basis  points  (4%) will  result in  additional  interest
expense of approximately $473 annually.  In addition,  changes in interest rates
impact the fair value of our notes receivable and debt  obligations.  Additional
information  relating to the fair value of certain of our  financial  assets and
liabilities  is  included  in Note 1 to our  consolidated  financial  statements
included in Item 8 - "Consolidated Financial Statements and Supplementary Data."

      Our  international  business  consists  of  export  sales,  and  we do not
presently  have any  foreign  operations.  Our  export  sales to date  have been
denominated  in U.S.  dollars  and as a result,  no losses  related  to  foreign
currency exchange rate  fluctuations have been incurred.  There is no assurance,
however,  that we will be able to continue to export our products in U.S. dollar
denominations  or that our  business  will not  become  subject  to  significant
exposure to foreign currency exchange rate risks. Certain foreign  manufacturers
produce  payphones and payphone  assemblies  for us, and related  purchases have
been  denominated in U.S.  dollars.  Fluctuations in foreign  exchange rates may
affect the cost of these products.  However,  changes in purchase prices related
to foreign  exchange rate  fluctuations to date have not been material.  We have
not entered into foreign currency exchange forward contracts or other derivative
arrangements to manage risks associated with foreign exchange rate fluctuations.

                                   ----------


                                       56
<PAGE>

Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                         Page

Independent Auditors' Report                                              58

Consolidated Balance Sheets at March 31, 2000 and 1999                    59


Consolidated Statements of Operations and Other
  Comprehensive Income (Loss) for the years ended

  March 31, 2000, 1999 and 1998                                           60


Consolidated Statements of Cash Flows for the years ended
  March 31, 2000, 1999 and 1998                                           61


Consolidated Statements of Changes in Stockholders' Equity

  for the years ended March 31, 2000, 1999 and 1998                       62


Notes to Consolidated Financial Statements                                63

Financial Statement Schedules:

            All financial statement schedules are omitted because they
            are not  required or are not  applicable,  or the required
            information  is  shown  in  the   consolidated   financial
            statements or notes thereto

                                   ----------


                                       57
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
  Elcotel, Inc.:

We have audited the accompanying  consolidated  balance sheets of Elcotel,  Inc.
and subsidiaries  (the "Company") as of March 31, 2000 and 1999, and the related
consolidated  statements of operations  and other  comprehensive  income (loss),
stockholders'  equity,  and cash flows for each of the three years in the period
ended March 31, 2000. These financial  statements are the  responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial  position of the Company as of March 31, 2000
and 1999,  and the  results of its  operations  and its cash flows for the years
then ended in conformity with accounting  principles  generally  accepted in the
United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 7 to the
consolidated financial statements, at March 31, 2000, the Company was in default
of certain  financial  covenants  contained in the Loan and Security  Agreements
(the  "Loan  Agreements")  between  the  Company  and its  bank.  The  Company's
difficulties in meeting the covenants of its Loan Agreements and its losses from
operations  raise  substantial  doubt  about its  ability to continue as a going
concern. Management's plans in regard to these matters are described in Note 16.
The consolidated  financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

DELOITTE & TOUCHE

Certified Public Accountants

Tampa, Florida
June 20, 2000


                                       58
<PAGE>

                         ELCOTEL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                 (Dollars in thousands except per share amounts)

<TABLE>
<CAPTION>
                                                                              March 31,             March 31,
                                                                                2000                  1999
                                                                              ---------            ----------
<S>                                                                           <C>                  <C>
ASSETS
Current assets:
     Cash                                                                     $  1,153             $     16
     Accounts and notes receivable, less allowances for credit
        losses of $1,593 and $1,970, respectively                                8,073               12,209
     Inventories                                                                 8,768               13,978
     Refundable income taxes                                                        82                1,997
     Deferred tax asset - current portion                                           --                2,215
     Prepaid expenses and other current assets                                     997                  912
                                                                              --------             --------
        Total current assets                                                    19,073               31,327

Property, plant and equipment, net                                               5,867                5,064
Notes receivable, less allowances for credit losses
     of $272 and $312, respectively                                                395                  898
Identified intangible assets, net of accumulated amortization
     of $2,665 and $1,541, respectively                                          6,610                7,734
Capitalized software, net of accumulated amortization of $505
     and $240, respectively                                                      4,786                1,573
Goodwill, net of accumulated amortization of $1,567
     and $878, respectively                                                     22,403               23,218
Deferred tax asset                                                                  --                  948
Other assets                                                                       575                  533
                                                                              --------             --------
                                                                              $ 59,709             $ 71,295
                                                                              ========             ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Bank overdraft                                                           $     --             $  1,428
     Accounts payable                                                            4,868                4,186
     Accrued expenses and other current liabilities                              3,123                4,197
     Notes, debt and capital lease obligations payable - current                11,611                  823
                                                                              --------             --------
        Total current liablilities                                              19,602               10,634
Notes, debt and capital lease obligations payable - noncurrent                     208               10,355
                                                                              --------             --------
     Total liabilities                                                          19,810               20,989
                                                                              --------             --------
Commitments and contingencies
Stockholders' equity:
     Common stock, $0.01 par value,
        40,000,000 and 30,000,000 shares authorized,
        13,794,391 and 13,551,693 shares issued, respectively                      138                  136
     Additional paid-in capital                                                 47,423               46,667
     Retained earnings (deficit)                                                (7,508)               3,680
     Holding gain on marketable securities                                          23                   --
     Less - cost of 52,000 shares of common stock in treasury                     (177)                (177)
                                                                              --------             --------
        Total stockholders' equity                                              39,899               50,306
                                                                              --------             --------
                                                                              $ 59,709             $ 71,295
                                                                              ========             ========
</TABLE>

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


                                       59
<PAGE>

                         ELCOTEL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      AND OTHER COMPREHENSVE INCOME (LOSS)
                      (In thousands, except per share data)
<TABLE>
<CAPTION>
                                                                         Year Ended March 31,
                                                          --------------------------------------------------
                                                             2000                 1999                 1998
                                                          --------             --------             --------
<S>                                                       <C>                  <C>                  <C>
Revenues and net sales:
  Product sales                                           $ 33,834             $ 54,748             $ 43,426
  Services                                                  13,461               10,515                2,824
                                                          --------             --------             --------
                                                            47,295               65,263               46,250
                                                          --------             --------             --------
Cost of revenues and sales:
  Cost of products sold                                     24,930               34,755               26,624
  Cost of services                                          10,250                8,880                2,021
                                                          --------             --------             --------
                                                            35,180               43,635               28,645
                                                          --------             --------             --------
Gross profit                                                12,115               21,628               17,605
                                                          --------             --------             --------
Other costs and expenses:
  Selling, general and administrative                        9,984               10,560                9,930
  Engineering, research and development                      6,479                6,121                4,514
  Amortization                                               2,263                2,084                  654
  Other charges                                                733                1,772                   --
  Interest expense (income)                                    558                  517                 (103)
                                                          --------             --------             --------
                                                            20,017               21,054               14,995
                                                          --------             --------             --------
(Loss) income before income tax expense                     (7,902)                 574                2,610
Income tax expense                                          (3,286)                (213)                (853)
                                                          --------             --------             --------
Net (loss) income                                          (11,188)                 361                1,757

Other comprehensive income, net of tax:

Holding gain on marketable securities                           23                   --                   --
                                                          --------             --------             --------
Comprehensive (loss) income                               $(11,165)            $    361             $  1,757
                                                          ========             ========             ========
(Loss) earnings per common and common
  equivalent share:
  Basic                                                   $  (0.83)            $   0.03             $   0.18
                                                          ========             ========             ========
  Diluted                                                 $  (0.83)            $   0.03             $   0.18
                                                          ========             ========             ========
Weighted average number of common
  and common equivalent shares outstanding:
  Basic                                                     13,532               13,456                9,641
                                                          ========             ========             ========
  Diluted                                                   13,532               13,777                9,842
                                                          ========             ========             ========
</TABLE>

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

                                       60
<PAGE>

                         ELCOTEL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                                     Year Ended March 31,
                                                                         --------------------------------------------
                                                                           2000              1999              1998
                                                                         --------          --------          --------
<S>                                                                      <C>               <C>               <C>
Cash flows from operating activities
  Net (loss) income                                                      $(11,188)         $    361          $  1,757
  Adjustments to reconcile net (loss) income to net cash
    provided by (used in) operating activities:
      Depreciation and amortization                                         3,558             3,247             1,299
      Provisions for obsolescence and warranty expense                      1,454               825               253
      Provision for credit losses                                             545               117             1,352
      Loss on impairment of assets                                            148                --                --
      Loss on disposal of equipment                                             4                12                 2
      Deferred tax expense                                                  3,247               563               270
      Stock option compensation (credits) expense                             (19)              112                --
      Changes in operating assets and liabilities
        (net of acquisition of Technology Service Group, Inc.
        and certain assets from Lucent Technologies Inc.):
         Accounts and notes receivable                                      3,807            (1,471)           (2,695)
         Inventories                                                        3,809            (5,296)            3,112
         Refundable income taxes                                            1,915            (1,188)             (110)
         Prepaid expenses and other current assets                            239               112              (555)
         Other assets                                                        (227)             (113)             (199)
         Accounts payable                                                     682               976            (1,695)
         Accrued liabilities and other current liabilities                   (964)             (943)              (90)
                                                                         --------          --------          --------
  Net cash flow provided by (used in) operating activities                  7,010            (2,686)            2,701
                                                                         --------          --------          --------
Cash flows from inveating activities
  Net cash used for acquisition of Technology
    Service Group, Inc                                                         --                --              (447)
  Acquisition of certain assets of Lucent Technologies Inc.                    --                --            (5,957)
  Capital expenditures                                                     (1,831)           (1,468)             (960)
  Capitalized software                                                     (3,618)             (680)             (129)
  Proceeds from disposal of equipment                                          --                 8                --
                                                                         --------          --------          --------
  Net cash flow used in investing activities                               (5,449)           (2,140)           (7,493)
                                                                         --------          --------          --------
Cash flows from financing activities
  Proceeds from exercise of common stock options                              642               285               295
  Net proceeds (payments) under revolving credit lines                      1,191            (2,460)            3,675
  (Decrease) increase in bank overdraft                                    (1,428)            1,428                --
  Proceeds from notes payable                                                  --             4,000             8,770
  Principal payments on notes payable                                        (829)              (66)           (7,302)
                                                                         --------          --------          --------
  Net cash flow (used in) provided by financing activities                   (424)            3,187             5,438
                                                                         --------          --------          --------
  Net increase (decrease) in cash                                           1,137            (1,639)              646
  Cash at beginning of year                                                    16             1,655             1,009
                                                                         --------          --------          --------
  Cash at end of year                                                    $  1,153          $     16          $  1,655
                                                                         ========          ========          ========
</TABLE>

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


                                       61
<PAGE>

                         ELCOTEL, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                    YEARS ENDED MARCH 31, 2000, 1999 AND 1998
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                     Common Stock                                Accumulated
                                                  ------------------    Additional    Retained      Other
                                                  Shares                  Paid-in     Earnings   Comprehensive  Treasury
                                                  Issued     Amount       Capital     (Deficit)     Income        Stock      Total
                                                  ------    --------    ----------     -------   -------------  ---------  --------
<S>                                                <C>      <C>         <C>          <C>          <C>           <C>        <C>
Balance, March 31, 1997                            8,234    $     82    $ 11,160     $  1,562     $   --        $ (177)    $ 12,627
Exercise of stock options                            158           2         293           --         --            --          295
Tax benefit from exercise of
     stock options                                    --          --          62           --         --            --           62
Acquisition of Technology Service
     Group, Inc.                                   5,025          50      35,208           --         --            --       35,258
Registration expenses of
     acquisition of Technology
     Service Group, Inc.                              --          --        (339)          --         --            --         (339)
Net income                                            --          --          --        1,757         --            --        1,757
                                                  ------    --------    --------     --------     ------        ------     --------
Balance, March 31, 1998                           13,417         134      46,384        3,319         --          (177)      49,660
Exercise of stock options                            135           2         283         --           --            --          285
Net income                                            --          --          --          361         --            --          361
                                                  ------    --------    --------     --------     ------        ------     --------
Balance, March 31, 1999                           13,552         136      46,667        3,680         --          (177)      50,306
Exercise of stock options                            242           2         658           --         --            --          660
Tax benefit from exercise of
     stock options                                    --          --          98           --         --            --           98
Holding gain on marketable
     securities, net of tax                           --          --          --           --         23            --           23
Net loss                                              --          --          --      (11,188)        --            --      (11,188)
                                                  ------    --------    --------     --------     ------        ------     --------
Balance, March 31, 2000                           13,794    $    138    $ 47,423     $ (7,508)    $   23        $ (177)    $ 39,899
                                                  ======    ========    ========     ========     ======        ======     ========
</TABLE>

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


                                       62
<PAGE>

                         ELCOTEL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED MARCH 31, 2000, 1999 AND 1998
                  (Dollars in thousands, except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

      Elcotel,  Inc. and its wholly owned  subsidiaries (the "Company")  design,
develop,  manufacture  and  market a  comprehensive  line of  integrated  public
communications  products and  services.  The  Company's  product  line  includes
microprocessor-based  payphone  terminals  known in the  industry  as "smart" or
"intelligent" payphones,  software systems to manage and control networks of the
Company's smart payphone  terminals,  electromechanical  payphone terminals also
known  in  the  industry  as  "dumb"  payphones,   replacement   components  and
assemblies,  and an offering of industry services including repair,  upgrade and
refurbishment of equipment,  operator services,  customer training and technical
support.  In  addition,  the  Company has  developed  non-PC  Internet  terminal
appliances for use in a public communications environment, which will enable the
on-the-go user to gain access to Internet-based  content and information through
the  Company's  client-server  network  supported  by its back  office  software
system.  The Company's a non-PC  Internet  terminal  appliances were designed to
provide  the  features  of  traditional  smart  payphone  terminals,  to provide
connectivity  to  Internet-based  content,  to  support  e-mail  and  e-commerce
services,  and to generate revenues from display advertising,  sponsored content
and other  services in addition to traditional  revenues from public  payphones.
The Company's  service bureau network was designed to manage and deliver display
advertising  content,  Internet-based  content and specialized and  personalized
services to its non-PC  Internet  terminal  appliances.  The Company's  Internet
appliance  business is  presently in the  development  stage and to date has not
generated any significant revenues.

Going Concern

      The accompanying financial statements have been prepared assuming that the
Company will continue as a going  concern.  As discussed in Note 7, at March 31,
2000, the Company was in default of certain financial covenants contained in the
loan agreements between the Company and its bank. The Company's  difficulties in
meeting the  covenants  of its loan  agreements  and its losses from  operations
raise  substantial  doubt  about its  ability to  continue  as a going  concern.
Management's  plans in regard to these  matters  are  described  in Note 16. The
accompanying  financial  statements  do not include any  adjustments  that might
result from the outcome of this uncertainty.

Principles of Consolidation

      The accompanying consolidated financial statements include the accounts of
Elcotel,  Inc. and its wholly  owned  subsidiaries.  All  material  intercompany
accounts and transactions have been eliminated in consolidation.

Revenue Recognition

      Sales of products  and related  costs are recorded  upon  shipment or when
customers  accept  title to such goods.  The Company  recognizes  revenues  from
software   licenses  upon  delivery  of  the  software.   Revenue  from  repair,
refurbishment and upgrade of customer-owned equipment is recorded upon shipment.
Revenues from other services are recognized as the services are rendered.


                                       63
<PAGE>

Inventories

      Inventories are stated at the lower of cost or market.  Cost is determined
based on the  first-in,  first-out  ("FIFO")  method  or  standard  cost,  which
approximates cost on a FIFO basis.

      Reserves to provide for losses due to obsolescence  and excess  quantities
are established in the period in which such losses become probable.

Marketable Securities

      All marketable securities,  classified as other current assets, are deemed
by  management  to be available for sale and are reported at fair value with net
unrealized gains or losses reported within stockholders' equity.  Realized gains
and losses are recorded based on the specific  identification method. There were
no realized  gains or losses for the years ended March 31, 2000,  1999 and 1998.
The carrying amount of the Company's marketable securities, consisting of equity
securities, approximated $326 and $1 at March 31, 2000 and 1999, respectively.

Property, Plant and Equipment

      Property,  plant and  equipment  are  recorded  at cost  less  accumulated
depreciation.  Depreciation is computed by the  straight-line  method based upon
the  estimated  useful lives of the related  assets,  generally  three years for
computers,  five years for  equipment,  furniture  and fixtures and  thirty-five
years for buildings.

      Additions,  improvements and expenditures  that  significantly  extend the
useful  life  of  an  asset  are  capitalized.   Expenditures  for  repairs  and
maintenance  are charged to operations  as incurred.  When assets are retired or
disposed of, the cost and accumulated  depreciation thereon are removed from the
accounts, and any gains or losses are included in income.

Engineering, Research and Development Costs

      Costs and expenses  incurred for the purpose of product  research,  design
and development are charged to operations as incurred. Engineering, research and
development  costs consist primarily of costs associated with development of new
products  and  manufacturing   processes.   The  Company  capitalizes   software
development  costs once  technological  feasibility has been achieved.  Once the
product is released,  the capitalized costs are amortized to operations based on
the  straight-line  method over the estimated useful life of the product,  which
ranges  from  five to ten  years.  Capitalized  software  development  costs are
reported  at  the  lower  of  cost,  net  of  accumulated  amortization,  or net
realizable  value.  Software  development  costs  incurred  prior  to  achieving
technological  feasibility  are charged to research and  development  expense as
incurred.  Software  development costs capitalized  during the years ended March
31, 2000, 1999 and 1998 approximated $3,618, $639 and $100, respectively

Amortization of Goodwill and Identified Intangible Assets

      The  excess  of the  purchase  price  over the fair  value of  assets  and
liabilities  of  acquired  businesses  is being  amortized  to  operations  on a
straight-line basis over a period of 35 years.  Identified intangible assets are
being  amortized  over the following  estimated  useful  lives:  trade names and
workforce - 35 years;  customer  contracts - 3.45 years;  license agreements - 5
years;  patented  technology  - 4 years;  non-compete  agreement - 2 years;  and
customer relationships - 15 years.


                                       64
<PAGE>

Income Taxes

      The Company uses the liability  method in  accounting  for income taxes in
accordance  with  Statement of  Financial  Accounting  Standards  No. 109 ("SFAS
109"),  Accounting for Income Taxes.  Income tax benefit (expense) is based upon
income  (loss)  recognized  for  financial  statement  purposes and includes the
effects of temporary  differences between such income (loss) and that recognized
for tax purposes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting  purposes  and the  amounts  used for  income  tax  purposes,  and are
measured  using the enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse.  The deferred tax asset is reduced
by a valuation  allowance when, on the basis of available  evidence,  it is more
likely  than not that all or a portion  of the  deferred  tax asset  will not be
realized.

Earnings (Loss) Per Common Share

      Earnings  (loss) per common share is computed in accordance with Statement
of Financial  Accounting  Standards  No. 128 ("SFAS  128"),  Earnings Per Share,
which requires  disclosure of basic earnings per share and diluted  earnings per
share.  Basic  earnings  per share are  computed by  dividing  net income by the
weighted average number of shares of common stock  outstanding  during the year.
Diluted  earnings  per share are computed by dividing net income by the weighted
average  number of shares of common stock  outstanding  and  dilutive  potential
common shares outstanding during the year. The weighted average number of shares
outstanding during the years ended March 31, 2000, 1999 and 1998 for purposes of
computing  basic earnings per share were  13,531,587,  13,456,255 and 9,640,530,
respectively.  During the year ended March 31,  2000,  potential  common  shares
outstanding  were not dilutive.  During the years ended March 31, 1999 and 1998,
dilutive stock options had the effect of increasing the weighted  average number
of shares  outstanding  used in the computation of diluted earnings per share by
321,144 shares and 201,585 shares, respectively.

Fair Value of Financial Instruments

      The carrying  amount of cash,  accounts  receivable  and accounts  payable
approximates  fair value due to the short maturity of the instruments.  The fair
value of notes  receivable  is  estimated by  discounting  the future cash flows
using current  interest rates offered for similar  transactions and approximates
carrying  value.  The fair value of the Company's debt  obligations is estimated
based on the interest  rates  currently  available to the Company for bank loans
with similar terms and average maturities and approximates carrying value.

Credit Policy and Concentration of Credit Risks

      Credit is granted under various terms to customers  that the Company deems
creditworthy.  In addition,  the Company provides limited secured note financing
with terms generally not exceeding two years and interest charged at competitive
rates. Trade accounts and notes receivable are the primary financial instruments
that subject the Company to significant  concentrations of credit risk. In order
to minimize this risk, the Company  performs  ongoing credit  evaluations of its
customers.  With respect to notes  receivable,  the Company  generally  requires
collateral consisting primarily of the payphone terminals and related equipment.
Allowances  for credit  losses on accounts and notes  receivable  are  estimated
based  upon  expected   collectibility.   Allowances  for  impairment  of  notes
receivable are measured based upon the fair value of collateral or the Company's
estimate of the present value of future  expected cash flows in accordance  with
Statement of Financial Accounting Standards No. 114 ("SFAS 114"), "Accounting by
Creditors for Impairment of a Loan."


                                       65
<PAGE>

Warranty Reserves

      The Company  accrues and recognizes  warranty  expense based on historical
experience and statistical  analysis.  The Company provides  warranties  ranging
from one to three years and passes on  warranties  on products  manufactured  by
others.

Stock Based Compensation Plans

      The Company  recognizes  compensation  expense with respect to stock-based
compensation plans based on the difference, if any, between the per-share market
value of the stock and the  option  exercise  price on the  measurement  date in
accordance  with  Accounting  Principles  Board  Opinion No. 25 ("APB  25").  In
addition, in accordance with Statement of Financial Accounting Standards No. 123
("SFAS 123"),  "Accounting for Stock-Based  Compensation," the Company discloses
the pro forma  effects on net income  (loss) per share  assuming the adoption of
the fair value based method of accounting for compensation cost related to stock
options and other forms of stock-based compensation set forth in SFAS 123.

Impairment of Long-Lived Assets

      The Company  evaluates the carrying value of property plant and equipment,
goodwill and other intangible  assets when indicators of impairment are present,
and  recognizes  impairment  losses if the carrying  value of the assets is less
than  expected  future  undiscounted  cash flows of the  underlying  business in
accordance  with  Statement of  Financial  Accounting  Standards  No. 121 ("SFAS
121"),  "Accounting  for the Impairment of Long-Lived  Assets and for Long-Lived
Assets to be Disposed Of."  Impairment  losses are measured by the amount of the
asset  carrying  values in excess of fair  market  value.  During the year ended
March 31, 2000, the Company  recorded  impairment  losses of $148 related to the
closure of one of its manufacturing facilities and the abandonment of a software
development  project.  No impairment losses were recorded during the years ended
March 31, 1999 and 1998.

Comprehensive Income

      The Company  adopted the  provisions of Statement of Financial  Accounting
Standards No. 130 ("SFAS 130"),  "Reporting  Comprehensive  Income,"  during the
year ended March 31, 1999.  SFAS 130  establishes  standards  for  reporting and
display  of   comprehensive   income  and  its  components  in  a  full  set  of
general-purpose  financial  statements,  and  requires  that all items  that are
required  to  be  recognized  under   accounting   standards  as  components  of
comprehensive income be reported in a financial statement that is displayed with
the same  prominence  as  other  financial  statements.  In  addition,  SFAS 130
requires  enterprises to classify items of other  comprehensive  income by their
nature  and  display  the  accumulated  balance  of other  comprehensive  income
separately from retained  earnings and additional  paid-in capital in the equity
section of a statement  of financial  position.  During the year ended March 31,
2000,  the  Company  had one  item of other  comprehensive  income  relating  to
marketable equity  securities.  The Company had no items of other  comprehensive
income during the years ended March 31, 1999 and 1998.

Disclosure about Segments of an Enterprise and Related Information

      During the year ended March 31,  1999,  the Company  adopted  Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related  Information."  SFAS 131 establishes  standards for
the way that public  business  enterprises  report  information  about operating
segments in annual and interim financial statements. See Note 12.


                                       66
<PAGE>

Derivative Financial Instruments and Hedging Activities

      In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"),  "Accounting for Derivative
Instruments and Hedging Activities," which establishes  standards for accounting
of derivative  instruments including certain derivative  instruments embedded in
other  contracts,  and  hedging  activities.  SFAS 133 is  effective  for fiscal
quarters of all fiscal years  beginning  after June 15, 2000.  SFAS 133 requires
entities to  recognize  derivative  instruments  as assets and  liabilities  and
measure them at fair value,  and to match the timing of gain or loss recognition
on hedging  instruments with the recognition of changes in the fair value of the
hedged  asset or  liability  that are  attributable  to the  hedged  risk or the
earnings  effect  of the  hedged  forecasted  transaction.  Management  does not
believe  that the  adoption  of SFAS 133 will have a  significant  impact on the
Company's consolidated financial statements.

Computer Software Developed or Obtained for Internal Use

      During the year ended March 31, 2000,  the Company  adopted the provisions
of  Statement  of Position  98-1,  "Accounting  for Costs of  Computer  Software
Developed  or Obtained for  Internal  Use" ("SOP  98-1")  issued by the American
Institute of Certified Public  Accountants (the "AICPA") in March 1998. SOP 98-1
provides guidance on accounting for the costs of computer software  developed or
obtained for internal use and new cost recognition principles and identifies the
characteristics of internal use software. SOP 98-1 is effective for fiscal years
beginning  after  December  15,  1998.  The  adoption of SOP 98-1 did not have a
material impact on the Company's  results of operations,  financial  position or
cash flows.

Use of Estimates

      The  preparation  of financial  statements  in conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

Reclassification of Prior Years

      The Company's consolidated financial statements at March 31, 1999 and 1998
and  for  the  years  then  ended  have  been  reclassified  to  conform  to the
presentation at and for the year ended March 31, 2000.

NOTE 2 - ACQUISITIONS

      The  Company's  acquisitions  have been  accounted  for under the purchase
method. Accordingly,  the purchase prices have been allocated to assets acquired
and  liabilities  assumed based on fair value at the dates of  acquisition.  The
results of  acquired  businesses  and assets are  included  in the  consolidated
financial statements of the Company from the dates of acquisition.

      On December  18,  1997,  the Company  acquired,  via a merger,  Technology
Service Group,  Inc.  ("TSG"),  and issued  4,944,292  shares of common stock in
exchange for the  outstanding  common stock of TSG based on an exchange ratio of
1.05 shares of the Company's common stock for each share of common stock of TSG,
and TSG became a wholly  owned  subsidiary  of the  Company.  In  addition,  the
Company  issued 80,769 shares of common stock in payment of certain  acquisition
expenses. Further,


                                       67
<PAGE>

holders of options and rights to purchase shares of common stock of TSG pursuant
to option and stock purchase plans received options and rights to purchase, at a
proportionately  reduced per share exercise  price, a number of shares of common
stock of the Company equal to 1.05 times the number of shares of common stock of
TSG they were entitled to purchase  immediately prior to the merger.  Similarly,
holders of warrants to purchase shares of common stock of TSG received  warrants
to purchase, at a proportionately  reduced per share exercise price, a number of
shares of common  stock of the Company  equal to 1.05 times the number of shares
of common stock of TSG they were entitled to purchase  immediately  prior to the
merger.

      A summary of the purchase price is set forth below.

    Issuance of 4,944,292 shares of common stock
             stock at a market price of $6.50 per share           $ 32,138
    Fair value of outstanding common stock
        warrants, options and purchase rights                        2,595
    Costs and expenses of the merger                                   872
                                                                  --------
    Total purchase price                                          $ 35,605
                                                                  ========

      The Company  registered the shares of common stock issued  pursuant to the
Merger and incurred  registration  expenses of $339. These expenses were charged
to paid-in capital during the year ended March 31, 1998.

      A  summary  of the book  value of the  assets  and  liabilities  of TSG at
December  18, 1997 as compared to their  estimated  fair values  recorded at the
acquisition date is set forth below.

<TABLE>
<CAPTION>
                                                                                Estimated
                                                                   Book           Fair
                                                                  Value           Value
                                                                 -------        ---------
<S>                                                              <C>            <C>
      Cash and temporary investments                             $   239        $    239
      Accounts receivable                                          3,703           3,703
      Inventories                                                 11,103           6,490
      Refundable income taxes                                        604             604
      Deferred tax asset, current                                    748           3,719
      Prepaid expenses and other current assets                       12              12
      Property, plant and equipment                                  662             782
      Capitalized software                                           875             846
      Identified intangible assets                                   147           6,684
      Other assets                                                    29              29
      Accounts payable                                            (3,634)         (3,634)
      Accrued expenses                                            (1,519)         (2,719)
      Borrowings under lines of credit                            (3,970)         (3,970)
      Deferred tax liability, non-current                             (4)         (1,276)
                                                                 -------        --------
      Net assets acquired                                        $ 8,995          11,509
                                                                 =======
      Excess of purchase price over net assets acquired                           24,096
                                                                                --------
      Total                                                                     $ 35,605
                                                                                ========
</TABLE>

      The fair value of identified  intangible assets includes TSG's trade names
of $2,869,  assembled  workforce of $1,372,  patented  technology  of $419,  and
customer contracts of $2,024 (see Note 6). The


                                       68
<PAGE>

fair value of  inventories  was reduced by $4,810 to reflect the  estimated  net
realizable value of inventories related to products discontinued by the Company.
The fair value of accrued liabilities  includes estimated  liabilities of $1,200
pursuant to a plan to exit certain  activities of TSG and terminate and relocate
employees of TSG (see Note 8). During the year ended March 31, 2000, the Company
reduced the  estimated  liabilities  related to the exit plan and credited  $126
against  the  excess  of  the  purchase  price  over  the  net  assets  acquired
("goodwill").

      On September 30, 1997, the Company acquired from Lucent  Technologies Inc.
("Lucent")  inventories,  machinery,  and  equipment  and  tooling,  as  well as
licenses of certain patent and other  intellectual  property rights,  related to
the payphone manufacturing and component parts business conducted by Lucent. The
purchase price, including acquisition expenses of $367, was $5,957.

      A  summary  of the  allocation  of the  purchase  price to the net  assets
acquired  from Lucent based on the  Company's  estimates of their fair values is
set forth below.

      Inventories                                  $ 2,991
      Equipment and tooling                            500
      Intangible assets                              2,591
      Accrued warranty expense                        (125)
                                                   -------
      Total purchase price                         $ 5,957
                                                   =======

      Identified  intangible assets are comprised of license agreements of $938,
a non-compete  agreement of $77 and customer  relationships  of $1,576 (see Note
6).

      Assuming the acquisitions had occurred on April 1, 1997, the Company's pro
forma results of operations for the year ended March 31, 1998 would have been as
follows:

                                                     1998
                                                   --------

Net sales                                          $ 66,554
                                                   ========
Net income                                         $     14
                                                   ========
Basic earnings per share                           $     --
                                                   ========
Diluted earnings per share                         $     --
                                                   ========

      The pro forma  results of  operations  for the fiscal year ended March 31,
1998  include the  operating  results of TSG from April 1, 1997 to December  18,
1997 and pro forma  adjustments  consisting  of an increase in  amortization  of
goodwill and other intangible assets of $932 due to the increase in the carrying
value of intangible assets and amortization over their estimated useful lives, a
decrease in  depreciation  of $228 due to an increase in the  carrying  value of
property and equipment and depreciation over different estimated useful lives, a
decrease  in deferred  tax  expense of $104  resulting  from the  allocation  to
deferred tax assets and liabilities and a decrease in income tax expense of $179
to  reflect  the pro forma  effect  on income  tax  expense  resulting  from the
acquisition.  The pro forma  adjustments  related to the acquisition of Lucent's
assets  for the  fiscal  year  ended  March 31,  1998  include  an  increase  in
amortization  of intangible  assets of $130, an increase in depreciation of $50,
an increase in interest  expense of $245 and a decrease in income tax expense of
$149.


                                       69
<PAGE>

NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE

      Current  accounts and notes  receivable at March 31, 2000 and 1999 include
notes  receivable  due  within one year of $487 and $803,  respectively,  net of
credit and  impairment  allowances  of $1,080 and  $1,242,  respectively.  Notes
receivable  consist of trade notes  receivable  from  customers  with  remaining
maturities  of two  years  or  less,  and are  generally  collateralized  by the
payphone equipment sold and giving rise to the asset. The notes bear interest at
rates ranging from 12% to 16%.  Interest  income on impaired notes is recognized
as the interest is collected.  The Company  recognizes  interest income on notes
with no related credit loss allowance as earned.

      Changes in allowances  for credit losses on accounts and notes  receivable
for the years ended March 31, 2000, 1999 and 1998 are summarized as follows:

                                                   2000        1999      1998
                                                 -------     -------   -------

      Balance, beginning of year                 $ 2,282     $ 2,410   $ 1,301
      Provision for credit losses                    545         117     1,352
      Write-offs, net of recoveries                 (962)       (245)     (243)
                                                 -------     -------   -------
      Balance, end of year                         1,865       2,282     2,410
      Long-term allowances                          (272)       (312)     (487)
                                                 -------     -------   -------
      Current allowances                         $ 1,593     $ 1,970   $ 1,923
                                                 =======     =======   =======

NOTE 4 - INVENTORIES

      Inventories at March 31, 2000 and 1999 consisted of the following:

                                                     2000              1999
                                                   --------          --------

      Finished products                            $  1,679          $  1,875
      Work-in-process                                 1,068               924
      Purchased components                            7,835            11,630
                                                   --------          --------
                                                     10,582            14,429
      Reserve for obsolescence                       (1,814)             (451)
                                                   --------          --------
                                                   $  8,768          $ 13,978
                                                   ========          ========

      Substantially all inventories are pledged to secure bank indebtedness (See
Note 7).

      Changes in reserves  for  potential  losses due to  obsolescence  and slow
moving  inventories  for the  years  ended  March  31,  2000,  1999 and 1998 are
summarized as follows:

                                           2000           1999          1998
                                          -------       -------       -------

      Balance, beginning of year          $   451       $   100       $   100
      Provision for losses                  1,401           406            13
      Write-offs                              (38)          (55)          (13)
                                          -------       -------       -------
      Balance, end of year                $ 1,814       $   451       $   100
                                          =======       =======       =======


                                       70
<PAGE>

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

      Property,  plant and  equipment at March 31, 2000 and 1999 is comprised of
the following:

                                                          2000           1999
                                                        --------       --------

Land                                                    $    372       $    372
Buildings                                                  3,067          2,842
Engineering and manufacturing equipment                    5,671          4,291
Furniture, fixtures and office equipment                   2,250          1,841
                                                        --------       --------
                                                          11,360          9,346
Less accumulated depreciation                             (5,493)        (4,282)
                                                        --------       --------
                                                        $  5,867       $  5,064
                                                        ========       ========

      Depreciation  expense for the years ended March 31, 2000,  1999,  and 1998
was $1,295, $1,163, and $645,  respectively.  Substantially all property,  plant
and equipment are pledged to secure bank indebtedness (see Note 7).

      Assets  under  capital  leases  are   capitalized   using  interest  rates
appropriate  at the  date of  purchase  or at the  inception  of the  lease,  as
applicable.   The  cost  and   accumulated   depreciation   of  engineering  and
manufacturing  equipment under capital leases included in property and equipment
was $279 and $28 at March 31, 2000. No assets under capital  leases were held at
March 31, 1999.

NOTE 6 - IDENTIFIED INTANGIBLE ASSETS

      Identified intangible assets recorded in connection with acquisitions, net
of  accumulated  amortization,  at March  31,  2000 and  1999  consisted  of the
following:

                                                              2000         1999
                                                             ------       ------

     Trade names, net of accumulated
         amortization of $187 and $105                       $2,682       $2,764
     Customer contracts, net of accumulated
         amortization of $1,341 and $754                        683        1,270
     Workforce, net of accumulated
         amortization of $90 and $50                          1,282        1,322
     License agreements, net of accumulated
         amortization of $469 and $281                          469          657
     Patented technology, net of accumulated
          amortization of $239 and $135                         180          284
     Non-compete agreement, net of accumulated
          amortization of $77 and $58                            --           19
     Customer relationships, net of accumulated
          amortization of $262 and $158                       1,314        1,418
                                                             ------       ------
                                                             $6,610       $7,734
                                                             ======       ======


                                       71
<PAGE>

NOTE 7 - NOTES, DEBT AND CAPITAL LEASE OBLIGATIONS PAYABLE

      Notes,  debt and capital lease  obligations  payable at March 31, 2000 and
1999 are summarized as follows:

                                                             2000        1999
                                                           --------    --------

Secured Promissory Notes Payable to Bank:
   Revolving credit lines due July 31, 2000                $  6,376    $  5,185
   11.5% installment note, payable in four equal
      monthly installments of $80 including interest,
      with remaining principal balance of $3,215
      due on July 31, 2000                                    3,322       4,000
   11.5% mortgage note, payable in four equal
      monthly installments of $19 including interest,
      with remaining principal balance of $1,755
      due on July 31, 2000                                    1,762       1,833
Capital lease obligations                                       263        --
Unsecured promissory note, payable in thirty
   equal monthly installments of $6 including interest           96         160
                                                           --------    --------
                                                             11,819      11,178
 Amount payable within one year                             (11,611)       (823)
                                                           --------    --------
 Amount payable after one year                             $    208    $ 10,355
                                                           ========    ========

      As of March 31,  2000,  the  Company  was in default of certain  financial
covenants  contained in the Loan and Security Agreements (the "Loan Agreements")
between the Company and its bank. On April 12, 2000, the Company  entered into a
Forbearance and Modification  Agreement (the  "Forbearance  Agreement") with its
bank  that  modified  the terms of the Loan  Agreements.  Under the terms of the
Forbearance Agreement,  the maturity date of all indebtedness  outstanding under
the Loan  Agreements,  including  indebtedness  outstanding  under the revolving
credit lines, the installment note and the mortgage note was accelerated to July
31, 2000. In addition,  the annual  interest rates of the  installment  note and
mortgage  note were  increased to 11.5% from 7.55% and 8.5%,  respectively,  the
annual interest rate under the revolving credit lines was increased from one and
one-half  percentage  point over the bank's floating 30 day Libor rate (7.63% at
March 31,  2000) to two and  one-half  percentage  points above the bank's prime
interest  rate (11.5% at April 12,  2000),  and the  availability  of additional
funds under a $2,000 export  revolving credit line (none of which is outstanding
at March 31, 2000) and a $1,500  equipment  revolving credit line ($281 of which
was  outstanding at March 31, 2000) was  cancelled.  The  Forbearance  Agreement
permits an  overadvance  of  indebtedness  outstanding  under a $10,000  working
capital  revolving  credit line  ($6,095 of which was  outstanding  at March 31,
2000) and a $4,000  installment  note ($3,322 of which was  outstanding at March
31,  2000) of $2,800  through June 30, 2000 and $1,500  thereafter  based on the
value of collateral  consisting of eligible accounts receivable and inventories.
Indebtedness   outstanding  under  the  Loan  Agreements  is  collateralized  by
substantially  all of the assets of the Company.  As a result of the default and
modification of the Loan Agreements, the Company has classified outstanding bank
debt in the  aggregate  amount  of  $11,460  at  March  31,  2000  as a  current
liability.

      On March 29, 1999, the Company and its bank entered into an amendment (the
"Amendment")  that modified the terms of the Loan  Agreements.  Pursuant to that
Amendment,  the Company's working capital revolving credit line was reduced from
$15,000 to $10,000 and the Company  borrowed  $4,000  pursuant to an installment
note and  established  a $1,500  revolving  credit  line to finance  its capital


                                       72
<PAGE>

expenditures   and  a  $2,000  revolving  credit  line  to  finance  its  export
activities.  The proceeds  from the term note were used to reduce the  Company's
outstanding indebtedness under the $15,000 revolving credit line.

      The Loan  Agreements,  as modified by the Forbearance  Agreement,  contain
covenants  that  prohibit  or  restrict  the  Company  from  engaging in certain
transactions   without   the   consent  of  the  bank,   including   mergers  or
consolidations and disposition of assets, among others.  Additionally,  the Loan
Agreements,  as modified by the  Forbearance  Agreement,  require the Company to
maintain a working  capital ratio of 1 to 1 and a ratio of total  liabilities to
net worth of 1.5 to 1.  Noncompliance with any of these conditions and covenants
or the  occurrence  of an  event of  default,  if not  waived  or  cured,  could
accelerate  the  maturity  of  the  indebtedness   outstanding  under  the  Loan
Agreements.

      Scheduled  maturities of notes, debt and capital lease obligations payable
for the next five years are as follows:

             Fiscal 2001                             $11,611
             Fiscal 2002                                 127
             Fiscal 2003                                  81
                                                     -------
                                                     $11,819
                                                     =======

      The Company leases certain equipment under capital lease obligations.  The
present  value of future  minimum  lease  payments for the assets under  capital
leases at March 31, 2000 is as follows:

             Fiscal 2001                                    $ 111
             Fiscal 2002                                      109
             Fiscal 2003                                       85
                                                            -----
             Total minimum capital lease obligation           305
             Less portion representing interest               (42)
                                                            -----
             Present value of minimum lease payments        $ 263
                                                            =====

NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued  expenses and other  current  liabilities  as of March 31, 2000 and 1999
consist of the following:

                                                                2000       1999
                                                               ------     ------

          Payroll and payroll taxes                            $1,237     $1,218
          Warranty expense                                        561      1,101
          Relocation, severance and reorganization charges        440        615
          Professional fees                                        48        248
          Royalities and technology transfer fees                 249        284
          Customer advances                                       329        457
          Other                                                   259        274
                                                               ------     ------
                                                               $3,123     $4,197
                                                               ======     ======

      In  November  1999,  the  Company   announced  a  restructuring   plan  to
consolidate  manufacturing   operations,   resize  its  core  payphone  business
operations,  reorient its  distribution  strategy and begin to build  operations
required to introduce its new public access Internet appliance products and back
office


                                       73
<PAGE>

management  systems to the marketplace.  In connection with this  restructuring,
the  Company  recognized  other  charges of $733 during the year ended March 31,
2000. These other charges consisted of estimated employee  termination  benefits
under  severance and benefit  arrangements  of $608 and future lease payments of
$125  related to the  closure  of leased  facilities.  The other  charges do not
include  the  recognition  of  impairment  losses  of  $148  related  to  closed
facilities and the Company's decision to abandon a software  development project
related to certain discontinued activities. Impairment losses of $140 and $8 are
classified  as  engineering,  research  and  development  expenses  and selling,
general and administrative expenses,  respectively,  during the year ended March
31, 2000.

      Under the November 1999 restructuring plan, the Company will terminate the
employment  of 56  employees  by December  31,  2000,  including 28 employees in
connection with the consolidation of manufacturing operations and the closure of
its manufacturing  facility in Sarasota,  Florida and 28 corporate  employees in
all major  functions.  As of March 31,  2000,  the  Company had  terminated  the
employment of 54 employees under the plan. During the year ended March 31, 2000,
the  Company  charged  $320  of  severance  and  benefit  payments  against  the
restructuring liability, which is included in accrued relocation,  severance and
reorganization liabilities.

      Under the restructuring  plan, the Company closed a leased office facility
in  Alpharetta,  Georgia  and leased a larger  facility to  accommodate  service
operations related to its new public access Internet appliance products and back
office management  systems.  The  restructuring  charges related to future lease
payments  include a  termination  settlement  of $27  under a lease  termination
agreement  with  respect to the  closed  office  facility  and  remaining  lease
payments of $98 under the lease agreement related to the Company's manufacturing
facility.  During the year ended March 31, 2000,  payments of $47 related to the
lease  termination  agreement and the closed  facility were charged  against the
restructuring liability.

      During the year ended March 31, 1999,  the Company  reorganized  its sales
and marketing  organization.  The Company accrued and recognized  reorganization
charges of $490,  which  included the  estimated  costs of severance  and salary
continuation   arrangements  and  related  employee  benefits  with  respect  to
terminated  employees.  During  the years  ended  March 31,  2000 and 1999,  the
Company  charged $373 and $117 of  severance  and benefit  payments  against the
restructuring liability accrued in connection with the reorganization.

      The restructuring and  reorganization  charges of $733 and $490 during the
years ended March 31, 2000 and 1999, respectively, are included in other charges
(credits) in the  accompanying  consolidated  statements of operations and other
comprehensive income (loss).

      In connection with the  acquisition of TSG, the Company assumed  estimated
liabilities of $1,200  pursuant to a plan to exit certain  activities of TSG and
terminate  and  relocate  employees  of  TSG.  These  liabilities  included  the
estimated costs of severance and salary  continuation  arrangements  and related
employee  benefits of $730 and the  estimated  costs to relocate  employees  and
property of TSG of $470.  The plan  provided for the closure of TSG's  corporate
facility and the  integration of TSG's general,  administrative  and engineering
activities  into those of the Company,  and  identified  the employees that were
expected to be relocated or  terminated as a result of the  acquisition.  During
the years ended March 31, 2000, 1999 and 1998, the Company  charged  payments of
$42, $806 and $152,  respectively,  against the liabilities  accrued pursuant to
the plan.  During the year ended March 31, 2000, the Company charged $126 of the
liabilities  accrued  pursuant to plan against  goodwill  recorded in connection
with the acquisition,  such amount  representing a change in estimate related to
remaining liabilities to be paid.


                                       74
<PAGE>

      Changes in accrued  relocation,  severance and reorganization  charges for
the years ended March 31, 2000, and 1999 are summarized as follows:

                                                    2000       1999       1998
                                                  -------    -------    -------

   Balance, beginning of year                     $   615    $ 1,048    $    --
   Acquired obligations                                --         --      1,200
   Restructuring and reorganization charges           733        490         --
   Payments                                          (782)      (923)      (152)
   Adjustment to goodwill                            (126)      --           --
                                                  -------    -------    -------
   Balance, end of year                           $   440    $   615    $ 1,048
                                                  =======    =======    =======

      Changes in accrued  warranty  expense for the years ended March 31,  2000,
1999 and 1998 are summarized as follows:

                                              2000          1999          1998
                                            -------       -------       -------

   Balance, beginning of year               $ 1,101       $ 1,170       $   295
   Acquired obligations                          --            --         1,075
   Expense provision                             53           419           240
   Charges incurred                            (593)         (488)         (440)
                                            -------       -------       -------
   Balance, end of year                     $   561       $ 1,101       $ 1,170
                                            =======       =======       =======


                                       75
<PAGE>

NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION

      A summary of the  Company's  supplemental  cash flow  information  for the
years ended March 31, 2000, 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
                                                            2000        1999     1998
                                                          -------    -------   -------
<S>                                                       <C>        <C>       <C>
 Cash paid (received) during the year for
      Interest                                            $   950    $   861   $   427
      Income taxes                                         (1,876)       845       694

Non-cash investing and financing activities
     Receipt of marketable securities to satisfy
       accounts receivable resulting in an increase
       in other current assets and a reduction in
       accounts receivable                                    287         --        --
     Equipment acquired under capital lease
       obligations                                            279         --        --
     Tax benefit from exercise of options resulting in
       an increase in stockholders' equity and
       an increase in non-current deferred tax assets
       in 2000 and a decrease in income taxes payable
       in 1998                                                 98         --        62
     Issuance of common stock to acquire
       Technology Service Group, Inc. (see Note 2)             --         --    35,258
     Write-off of acquired accrued restructuring
       liabilities resulting in a decrease in accrued
       expenses and goodwill                                  126         --        --
     Compensation related to exercised stock options
       resulting in an increase in stockholders' equity
       and a decrease in accrued expenses                      18         --        --
     Other assets acquired by issuance
       of note payable                                         --        160        --
</TABLE>

NOTE 10 - STOCKHOLDERS' EQUITY

Common Stock

      On November 2, 1999, the stockholders of the Company approved an amendment
to the Company's  Certificate of  Incorporation to increase the number of shares
of common stock, $.01 par value,  authorized for issuance to 40,000,000  shares,
from 30,000,000 shares.  Holders of voting common stock are entitled to one vote
per share on all matters to be voted on by the  stockholders.  No dividends have
been declared or paid on the Company's common stock during the years ended March
31, 2000, 1999 and 1998.

Common Stock Warrants

      At the acquisition  date of TSG, TSG had issued and outstanding  1,150,000
redeemable  warrants to purchase  575,000  shares of common stock at an exercise
price of $11.00 per share (the  "Redeemable  Warrants") and warrants to purchase
100,000  shares of common  stock at an  exercise  price of $10.80 per


                                       76
<PAGE>

share (the  "Underwriter  Warrants").  In connection with the  acquisition,  the
Redeemable  Warrants  were  converted  into  warrants of the Company to purchase
603,750 shares of common stock at a per share exercise price of $10.48,  and the
Underwriter  Warrants  were  converted  into warrants of the Company to purchase
105,000 shares of common stock at a per share exercise price of $10.29 (see Note
2). On May 9, 1999, the Redeemable Warrants, none of which had been exercised or
redeemed,  expired  pursuant to their  terms.  The  Underwriter  Warrants may be
exercised at any time until May 9, 2001, the expiration  date of the Underwriter
Warrants.  The Underwriter Warrants contain  anti-dilution a provision providing
for  adjustments  of the number of warrants  and  exercise  price under  certain
circumstances.  The  Underwriter  Warrants grant to the holders  thereof certain
rights of registration of the securities issuable upon their exercise.

Stock Option Plans

      On October 15, 1999,  the Board of  Directors  of the Company  adopted the
1999 Stock  Option  Plan (the "1999  Plan").  The  Compensation  Committee  (the
"Committee")  appointed by the Board of Directors of the Company administers the
1999  Plan,  and  pursuant  to  the  1999  Plan  have  the  authority  to  grant
non-qualified  stock  options  to  senior  executive  officers  of the  Company.
Non-qualified  stock options to purchase up to an aggregate of 539,988 shares of
common  stock may be  granted  under the 1999  Plan at  option  exercise  prices
determined  by the  Committee.  The Committee has the authority to interpret the
provisions of the 1999 Plan,  to determine  the terms and  provisions of options
granted  under the 1999 Plan and to  determine  the number of shares  subject to
options granted and the vesting periods  thereof.  The Committee's  authority to
grant options under the 1999 Plan expires on October 15, 2004.  Options  granted
under the 1999 Plan  expire  five years from the date of grant  unless  they are
terminated  prior  thereto  upon the  termination  of  employment  of a grantee.
Unvested  options  granted  under  the 1999  Plan  expire  immediately  upon the
termination  of a grantee's  employment  by the grantee for any reason or by the
Company for cause. Upon the termination of a grantee's employment by the Company
without  cause,  options that would have vested  during the twelve  months after
such  termination  of employment or during the remaining  term of any employment
agreement  between the grantee and the Company,  whichever is less,  immediately
vest  and are  thereafter  exercisable  until  their  expiration  date,  and any
remaining  unvested options expire as of the termination  date.  Pursuant to the
terms of an employment agreement between the Company and its President and Chief
Executive  Officer dated October 15, 1999, the Company granted options under the
1999  Plan to  purchase  539,988  shares  of the  Company's  common  stock at an
exercise  price of $1.67 per share.  Such  options  vest and become  exercisable
ratably  at the end of each  month  over the term of the  employment  agreement,
which  expires on October 11, 2002.  As of March 31,  2000,  options to purchase
90,000 shares of common stock are exercisable.

      On July 2, 1991, the Company adopted the 1991 Stock Option Plan (the "1991
Plan").  The 1991 Plan  provides  the Board of Directors of the Company with the
authority  to  grant  to  employees,  officers  and  directors  of  the  Company
non-qualified  stock options and incentive  stock options  within the meaning of
Section 422A of the Internal Revenue Code. On November 2, 1999, the stockholders
approved an amendment to the 1991 Plan that  increased  the number shares of the
Company's  common  stock that may be issued  under the 1991 Plan from  2,100,000
shares to 2,600,000  shares.  The Board's  authority to grant  options under the
1991 Plan expires on July 2, 2001.  The Board has the authority to determine the
number of shares subject to options  granted and such other terms and conditions
under which  options  may be  exercised.  The  per-share  option  price of stock
options  granted  under the 1991 Plan shall not be less than the  greater of the
per-share  fair market  value of the  Company's  common  stock as of the date of
grant or $.75, or 110% of the  per-share  market value with respect to incentive
stock  options  granted to  employees  owning 10% or more of the total  combined
voting power of all classes of the Company's  stock.  Options  granted under the
1991 Plan expire five years from the date of grant or 30 days after  termination
of  employment,  except for  termination  of  employment  for certain  specified
reasons or unless the Board of Directors extends such 30-day period.


                                       77
<PAGE>

      As of March 31, 2000,  options to purchase  541,534 shares of common stock
were  available  for grant under the 1991 Plan.  The weighted  average  exercise
price of options  outstanding  under the 1991 Plan at March 31,  2000,  1999 and
1998 was $4.77, $5.09 and $4.72, respectively. At March 31, 2000, 1999 and 1998,
options   outstanding  under  the  1991  Plan  had  weighted  average  remaining
contractual lives of 3.7 years, 3.0 years and 3.2 years, respectively.

      The  following  table  summarizes  information,  including  the status and
changes in stock options outstanding,  with respect to the 1991 Plan for each of
the years in the three-year period ended March 31, 2000:

                                              Number of         Option Price
                                               Shares          Range Per Share
                                             ------------      ---------------

Outstanding at March 31, 1997                     391,448       $1.31 - $7.50
     Granted                                      285,400       $5.56 - $6.00
     Exercised                                    (69,385)      $1.31 - $6.19
     Cancelled                                    (62,188)      $3.50 - $7.50
                                             ------------
Outstanding at March 31, 1998                     545,275       $1.81 - $7.38
     Granted                                      561,000       $4.56 - $5.88
     Exercised                                    (22,600)      $1.81 - $3.50
     Cancelled                                    (57,675)      $3.50 - $6.94
                                             ------------
Outstanding at March 31, 1999                   1,026,000       $3.50 - $7.38
     Granted                                      806,250       $1.88 - $6.19
     Exercised                                   (140,250)      $4.56 - $6.19
     Cancelled                                   (535,825)      $1.88 - $7.38
                                             ------------
Outstanding at March 31, 2000                   1,156,175       $1.88 - $6.81
                                             ============

Options exercisable at March 31, 2000             258,899       $4.56 - $6.81
                                             ============
Options exercisable at March 31, 1999             291,255       $3.50 - $7.38
                                             ============
Options exercisable at March 31, 1998             137,800       $1.81 - $6.19
                                             ============

      On July 2, 1991, the Company  adopted a Directors'  Stock Option Plan (the
"Directors  Plan").  The Directors Plan provides for the grant of  non-qualified
stock options to directors who are not employees of the Company.  On November 2,
1999,  the  stockholders  of the Company  approved an amendment to the Directors
Plan that increased the number shares of the Company's  common stock that may be
issued  under the  Director  Plan from  225,000  shares to 300,000  shares.  The
Board's  authority to grant options under the Directors  Plan expires on July 2,
2001.   Pursuant  to  the  Directors  Plan,  each  new   non-employee   director
automatically receives a non-qualified option to purchase 4,000 shares of common
stock upon appointment or election to the Board. Thereafter, on March 31 of each
year,  each  non-employee  director  receives a  non-qualified  stock  option to
purchase  1,000 shares of common stock for each  committee of the Board on which
such  non-employee  director is then serving and for each committee of the Board
on which such  non-employee  director is then serving as chairman.  Non-employee
directors  are also  eligible  for  discretionary  grants of  options  under the
Directors  Plan. The per-share  option price of stock options  granted under the
Directors  Plan shall not be less than the greater of the per-share  fair market
value of the  Company's  common stock as of the date of grant or $2.00.  Options
granted under the Directors Plan become  exercisable on the first anniversary of
the date of grant.  Options  granted under the Directors  Plan expire five years
from the date of grant or 30 days after the date a


                                       78
<PAGE>

director  ceases  to  serve as a  director  (one  year in the  event of death or
disability),  except that such 30-day  period does not apply if director  status
ceased  within one year  after a change in control of the  Company or unless the
Board of Directors extends such 30 day period.

      As of March 31, 2000,  options to purchase  124,000 shares of common stock
were available for grant under the Directors Plan. The weighted average exercise
price of options  outstanding  under the Directors Plan at March 31, 2000,  1999
and 1998 was $4.71, $4.75 and $4.78,  respectively.  At March 31, 2000, 1999 and
1998,  options  outstanding  under  the  Directors  Plan  had  weighted  average
remaining contractual lives of 3.3 years, 3.9 years and 2.3 years, respectively.

      The  following  table  summarizes  information,  including  the status and
changes in stock options  outstanding,  with respect to the  Directors  Plan for
each of the years in the three-year period ended March 31, 2000:

                                              Number of         Option Price
                                               Shares          Range Per Share
                                             ------------      ---------------

Outstanding at March 31, 1997                     100,000       $2.00 - $6.31
     Granted                                       28,000       $5.56 - $5.88
     Exercised                                    (31,000)      $2.00 - $3.94
     Cancelled                                     (4,000)          $5.88
                                             ------------
Outstanding at March 31, 1998                      93,000       $3.81 - $6.31
     Granted                                       51,000       $3.59 - $4.56
     Exercised                                    (22,000)      $3.81 - $5.25
     Cancelled                                    (28,000)      $3.81 - $6.31
                                             ------------
Outstanding at March 31, 1999                      94,000       $3.59 - $6.31
     Granted                                       12,000           $3.16
     Exercised                                     (2,000)          $3.94
     Cancelled                                    (13,000)      $3.59 - $3.94
                                             ------------
Outstanding at March 31, 2000                      91,000       $3.16 - $6.31
                                             ============

Options exercisable at March 31, 2000              79,000       $3.59 - $6.31
                                             ============
Options exercisable at March 31, 1999              43,000       $3.94 - $6.31
                                             ============
Options exercisable at March 31, 1998              69,000       $3.81 - $6.31
                                             ============

      In connection  with the  acquisition  of TSG,  options to purchase  41,000
shares of common stock outstanding under TSG's 1995 Non-Employee  Director Stock
Plan (the "1995 Directors  Plan") were converted into options to purchase 43,050
shares of common  stock of the  Company.  No  additional  options may be granted
under the 1995 Directors Plan subsequent to the acquisition. Such options became
exercisable  in full as a result of the  acquisition  of TSG and expire one year
after the date a director ceases to serve as a director of TSG or ten years from
the date of grant,  whichever is earlier. At March 31, 1998, options to purchase
43,050 shares of common stock were  outstanding at exercise  prices ranging from
$4.76 to $10.30 per share, and all such options were  exercisable.  The weighted
average exercise price of options  outstanding  under the 1995 Directors Plan at
March 31, 1998 was $7.83, and the remaining weighted average contractual life of
such  options was .7 years.  During the year ended March 31,  1999,  all options
outstanding under the 1995 Directors Plan expired unexercised.


                                       79
<PAGE>

      In  addition,  in  connection  with the  acquisition  of TSG,  options  to
purchase  531,125  shares of common stock  outstanding  under TSG's 1994 Omnibus
Stock Plan (the "Omnibus Plan") were converted into options to purchase  557,682
shares of common  stock of the  Company.  No  additional  options may be granted
under  the  Omnibus  Plan  subsequent  to  the  acquisition.   The  options  are
exercisable  in four equal annual  installments  beginning on the date of grant,
and expire ten years from the date of grant. The weighted average exercise price
of options  outstanding  under the Omnibus Plan at March 31, 2000, 1999 and 1998
was $4.23,  $3.10 and $3.09,  respectively.  At March 31,  2000,  1999 and 1998,
options  outstanding  under the  Omnibus  Plan had  weighted  average  remaining
contractual lives of 4.4 years, 5.2 years and 6.5 years, respectively.

      The  following  table  summarizes  information,  including  the status and
changes in stock options outstanding,  with respect to the Omnibus Plan for each
of the years in the three-year period ended March 31, 2000:

                                                Number of         Option Price
                                                 Shares             Per Share
                                             --------------       ------------

Options assumed and converted                        557,682      $.95 - $10.26
     Exercised                                      (68,479)      $.95 - $4.76
     Cancelled                                      (40,297)      $.95 - $10.26
                                             --------------
Outstanding at March 31, 1998                       448,906       $.95 - $10.26
     Exercised                                      (90,244)      $.95 - $4.76
     Cancelled                                      (23,887)      $.95 - $10.26
                                             --------------
Outstanding at March 31, 1999                       334,775       $.95 - $9.05
     Exercised                                     (146,300)      $.95 - $4.76
     Cancelled                                       (4,200)          $9.05
                                             --------------
Outstanding at March 31, 2000                       184,275       $.95 - $9.05
                                             ==============

Options exercisable at March 31, 2000               184,275       $.95 - $9.05
                                             ==============
Options exercisable at March 31, 1999               320,662       $.95 - $9.05
                                             ==============
Options exercisable at March 31, 1998               402,614       $.95 - $10.26
                                             ==============

Accounting for Stock-Based Compensation

      During the year ended March 31, 2000, the Company  recognized  stock-based
compensation  expense of $64 with respect to compensatory  options granted under
the 1999 Plan.  During the year ended March 31, 1999,  the Company  modified the
terms of certain outstanding options to include provisions that would accelerate
their vesting upon a change in control of the Company and to extend the exercise
period of vested options upon certain events. As a result of the  modifications,
the Company recognized stock-based  compensation expense of $112 during the year
ended March 31, 1999. During the year ended March 31, 2000, the Company credited
$83  of  previously  recognized  stock-based  compensation  expense  related  to
cancelled  and expired  options to income.  The Company  did not  recognize  any
compensation  expense with respect to stock options  granted under the Company's
plans during the year ended March 31, 1998.


                                       80
<PAGE>

      A comparison of the  Company's  net income (loss) and earnings  (loss) per
share as reported  and on a pro forma basis for the years ended March 31,  2000,
1999 and 1998  assuming  the Company had adopted the fair value based  method of
accounting  for  compensation  cost related to stock  options and other forms of
stock-based compensation set forth in SFAS 123 is as follows:

                                                 2000         1999       1998
                                               ---------     ------    -------

 Net income (loss)            As reported      $ (11,188)    $  361    $ 1,757
                              Pro forma        $ (11,928)    $ (173)   $ 1,522

 Basic earnings (loss)        As reported      $   (0.83)    $ 0.03    $  0.18
   per share                  Pro forma        $   (0.88)    $(0.01)   $  0.16

 Diluted earnings (loss)      As reported      $   (0.83)    $ 0.03    $  0.18
   per share                  Pro forma        $   (0.88)    $(0.01)   $  0.15


      The fair value of each option  granted  under the  Company's  stock option
plans is estimated on the date of grant using the  Black-Scholes  Option pricing
model. The significant  weighted-average assumptions used during the years ended
March 31,  2000,  1999 and 1998 to estimate  the fair values of options  granted
under the Company's stock option plans are summarized below:

                                              2000        1999         1998
                                           ---------   ---------    ----------
1999 Plan
    Expected dividend yield                      --           --           --
    Expected volatility                       77.66%          --           --
    Risk free interest rate                    6.20%          --           --
    Expected life                          4.0 years          --           --

1991 Plan
    Expected dividend yield                      --           --           --
    Expected volatility                       77.66%       47.07%       45.32%
    Risk free interest rate                    6.20%        6.20%        6.20%
    Expected life                          4.13 years   4.7 years    3.8 years

Directors Plan
    Expected dividend yield                      --           --           --
    Expected volatility                       78.52%       45.33%       45.32%
    Risk free interest rate                    6.20%        6.20%        6.20%
    Expected life                          4.0 years    4.0 years    3.8 years

      Based on these assumptions, the weighted average fair value of each option
granted under the  Company's  1999 Plan during the year ended March 31, 2000 was
$1.01.  The weighted  average fair value of each option  granted  under the 1991
Plan during the years ended March 31, 2000,  1999 and 1998 was $2.52,  $2.25 and
$2.46,  respectively.  The weighted  average  fair value of each option  granted
under the  Directors  Plan during the years ended March 31, 2000,  1999 and 1998
was $0, $1.80 and $2.38, respectively.


                                       81
<PAGE>

Common Stock Reserved

      The number of shares of common stock reserved for issuance pursuant to the
Company's stock option plans and outstanding  common stock warrants at March 31,
2000 and 1999 is summarized as follows:

                                                    2000            1999
                                                 ---------       ---------

       Stock  Option Plans                       2,636,972       1,807,734
       Redeemable Warrants                              --         603,750
       Underwriter Warrants                        105,000         105,000


Stockholder Rights Plan

      The Company  adopted a  Stockholder  Rights Plan and granted  common stock
purchase  rights as a dividend at the rate of one right ("Right") for each share
of  outstanding  common  stock of the Company  held of record as of the close of
business  on May 11,  1999.  When the Rights  become  exercisable,  the  holders
thereof will be entitled to purchase,  for an amount equal to $10 per Right (the
"Purchase  Price," which is subject to  adjustment)  common stock of the Company
with a fair  market  value  equal to two times such  amount.  Subject to certain
exceptions,  if certain persons or entities (an  "Acquirer"),  as defined in the
Stockholder Rights Agreement between the Company and its transfer agent,  become
the  beneficial  owners of 10% or more of the  common  stock of the  Company  or
announce a tender or exchange  offer which would result in its  ownership of 10%
or more of the common stock of the Company,  the Rights,  unless redeemed by the
Company,  become  exercisable ten (10) days after a public  announcement that an
Acquirer has become such. If,  following the Rights  becoming  exercisable,  the
Company is acquired in a merger or similar transaction, or if 50% or more of the
Company's assets or earning power are sold in one or more related  transactions,
the holders of the Rights would be entitled to purchase,  upon exercise,  common
stock  of the  acquiring  company  with a fair  market  value of two  times  the
Purchase Price.  The Rights may be redeemed at any time until ten days following
a public announcement that an Acquirer has become such at $.001 per Right upon a
vote therefore by a majority of the outside directors. Presently, the Rights are
not exercisable nor are they separately  traded from the Company's common stock.
The Rights expire on May 11, 2009.


                                       82
<PAGE>

NOTE 11 - INCOME TAXES

      Income tax expense for the years  ended March 31,  2000,  1999 and 1998 is
comprised of the following:

                                               2000          1999          1998
                                             -------       -------       -------

     Current tax expense (benefit):
     Federal                                 $    67       $  (422)      $   624
     State                                       (28)           72            21
                                             -------       -------       -------
                                                  39          (350)          645
                                             -------       -------       -------
     Deferred tax expense (benefit):
     Federal                                   2,894           550           124
     State                                       353            13            84
                                             -------       -------       -------
                                               3,247           563           208
                                             -------       -------       -------
     Net tax expense                         $ 3,286       $   213       $   853
                                             =======       =======       =======

      During the year ended March 31,  2000,  the  Company  recorded a valuation
allowance  equal to the entire  deferred tax asset balance because the Company's
financial  condition gives rise to an uncertainty as to whether the deferred tax
asset is  realizable.  The increase in the valuation  allowance  during the year
ended  March 31,  2000 was  $6,193.  There was no  increase  or  decrease to the
valuation allowance for the years ended March 31, 1999 and 1998.

      Deferred  tax assets and  liabilities  as of March 31,  2000 and March 31,
1999 are comprised of the following:

                                                       2000         1999
                                                      -------     -------

     Deferred tax assets:
     Accounts and notes receivable reserves           $   691     $   845
     Inventory and inventory reserves                     760         723
     Warranty and other accruals                          621         847
     Other assets and liabilities                         (14)         --
     State taxes                                          187          --
     Tax credit carryforwards                           1,442       1,213
     Net operating loss carryforwards                   6,236       3,729
                                                      -------     -------
                                                        9,923       7,357
                                                      -------     -------
     Deferred tax liabilities:
     Property, plant and equipment                          6          75
     Intangible and other assets                        1,395       1,675
     State taxes                                           --          85
                                                      -------     -------
                                                        1,401       1,835
                                                      -------     -------
     Excess of deferred tax assets over
       deferred tax liabilities                         8,522       5,522
     Less valuation allowance                          (8,522)     (2,359)
                                                      -------     -------
     Net deferred tax asset                                --       3,163
     Less current deferred tax asset                       --      (2,215)
                                                      -------     -------
     Non-current deferred tax asset                   $    --     $   948
                                                      =======     =======


                                       83
<PAGE>

      At  March  31,  2000,   the  Company  has  available  net  operating  loss
carryforwards  for federal and state tax purposes of  approximately  $16,789 and
$15,705  respectively,  which expire from 2001 through  2015.  In addition,  the
Company has  available  approximately  $1,442 in  research  and other tax credit
carryforwards, which expire from 2001 through 2015.

      The  utilization of certain net operating loss  carryforwards  for federal
income tax purposes is subject to an annual limitation of approximately  $200 as
a result of a previous change in ownership of TSG. In addition, these pre-change
losses may only be utilized to the extent that  taxable  income is  generated by
TSG. These  limitations  do not reduce the total amount of net operating  losses
that may be taken for  federal  income tax  purposes,  but rather  substantially
limit the amount that may be used during a particular  year. As a result,  it is
more  likely  than not that the  Company  will be  unable  to use a  significant
portion of these net operating loss  carryforwards.  The valuation  allowance of
$2,215 at March 31, 1999 relates to these carryforwards.

      The  reconciliation  of income tax attributable to income before taxes for
the years ended March 31, 2000, 1999 and 1998 computed at the U.S. statutory tax
rate to the Company's effective tax rate is as follows:

                                                     2000       1999       1998
                                                    ------     ------     ------

     U.S. statutory rate                            (34)%       34.0%      34.0%
     Increases (decreases) resulting from:
           State taxes, net of federal benefit         --       10.5        2.7
           Business credits                           2.9      (71.6)      (7.4)
           Amortization of goodwill                  (8.7)      40.8        2.5
           Stock option compensation                   --        6.6         --
           Expired net operating losses                --        7.8         --
           Change in valuation allowance             84.5         --         --
           Other                                     (3.1)       8.9         .9
                                                     ----       ----       ----
      Effective rate                                 41.6%      37.0%      32.7%
                                                     ====       ====       ====

NOTE 12 - DISCLOSURES ABOUT SEGMENTS AND RELATED INFORMATION

      The Company has two business segments,  the public payphone market segment
and the public Internet  appliance  market segment,  which is in the development
stage.  The Company has not generated any  significant  revenues from the public
Internet appliance market segment as of March 31, 2000. The Company's  customers
include private payphone operators and telephone  companies in the United States
and certain foreign countries and its distributors.  During the year ended March
31, 2000, the Company modified the way it analyzes its business. Previously, the
Company  analyzed its business  based on three  customer  groups  consisting  of
domestic   telephone   companies,   domestic  private  payphone   operators  and
international  customers.  Because of the development of its Internet  business,
the Company now analyzes its business based on two segments, the payphone market
segment and the Internet appliance market segment.

      The accounting policies of the segments are the same as those described in
the summary of significant  accounting policies set forth in Note 1. The Company
evaluates segment  performance based on gross profit and its overall performance
based on profit or loss from operations before income taxes.


                                       84
<PAGE>

         The products and services  provided by each of the reportable  segments
are similar in nature,  particularly  with  regard to public  telecommunications
terminals and related services.  However,  the public terminals  provided by the
Internet  appliance  segment  provide the  capability  to access  internet-based
content  in  addition  to their  public  telecommunications  capability  and the
services of this  segment  include the  management  of content  delivered to the
interactive  terminals.   There  are  no  transactions  between  the  reportable
segments.  External  customers  account for all sales revenue of each reportable
segment.  The information that is provided to the chief operating decision maker
to measure the profit or loss of reportable  segments  includes  sales,  cost of
sales  based  on  standards  and  gross  profit  based on  standards.  Operating
expenses, including depreciation,  amortization and interest are not included in
the  information  provided  to the chief  operating  decision  maker to  measure
performance of reportable segments.

      The sales  revenue  and gross  profit of each  reportable  segment for the
years ended March 31, 2000, 1999 and 1998 is set forth below:

<TABLE>
<CAPTION>
                                            2000                       1999                       1998
                                   ------------------------    ------------------------    ------------------------
                                     Sales     Gross Profit      Sales     Gross Profit     Sales      Gross Profit
                                   --------    ------------    --------    ------------    --------    ------------
<S>                                <C>           <C>           <C>           <C>           <C>           <C>
Payphone segment                   $ 47,217      $ 16,091      $ 65,263      $ 24,607      $ 46,250      $ 19,869
Internet appliance
  segment                                78            19            --            --            --            --
                                   --------      --------      --------      --------      --------      --------
                                   $ 47,295      $ 16,110      $ 65,263      $ 24,607      $ 46,250      $ 19,869
                                   ========      ========      ========      ========      ========      ========
</TABLE>

      The sales  revenue of each  reportable  segment by customer  group for the
years ended March 31, 2000, 1999 and 1998 is summarized as follows:

                                                 2000        1999          1998
                                               -------      -------      -------

       Payphone segment:
         Private operators                     $10,366      $20,081      $18,684
         Telephone companies                    27,209       32,507       15,999
         Distributors                            3,360        4,995        2,368
         International operators                 6,282        7,680        9,199
       Internet appliance segment:
         International operators                    78           --           --
                                               -------      -------      -------
                                               $47,295      $65,263      $46,250
                                               =======      =======      =======

      The  Company  does not  allocate  assets or other  corporate  expenses  to
reportable segments. A reconciliation of segment gross profit information to the
Company's financial statements is as follows:

                                                 2000        1999         1998
                                               --------    --------    --------

Total gross profit of reportable segments      $ 16,110    $ 24,607    $ 19,869
Unallocated cost of sales                        (3,995)     (2,979)     (2,264)
Unallocated corporate expenses                  (20,017)    (21,054)    (14,995)
                                               --------    --------    --------
(Loss) income before income taxes              $ (7,902)   $    574    $  2,610
                                               ========    ========    ========


                                       85
<PAGE>

      Information  with  respect  to  sales  of  products  and  services  of the
Company's  reportable  segments  during the years ended March 31, 2000, 1999 and
1998 is set forth below:

                                                      2000      1999       1998
                                                     -------   -------   -------

Payphone segment:
  Payphone terminals                                 $12,896   $23,758   $22,920
  Printed circuit board control modules and kits      15,056    18,790    10,436
  Components, assemblies and other products            5,804    12,200    10,070
  Repair, refurbishment and upgrade services          12,363     9,895     2,285
  Other services                                       1,098       620       539
Internet appliance segment:
  Internet appliance terminals                            78        --        --
                                                     -------   -------   -------
                                                     $47,295   $65,263   $46,250
                                                     =======   =======   =======

      The Company  markets its products and services in the United States and in
certain  foreign  countries.   The  Company's  international  payphone  business
consists of export sales,  and the Company does not  presently  have any foreign
operations.  Sales by geographic region for the years ended March 31, 2000, 1999
and 1998 were as follows:

                                                 2000         1999         1998
                                               -------      -------      -------

United States                                  $40,935      $57,583      $37,051
Canada                                           2,851        3,197        2,012
Latin America                                    3,023        3,943        6,168
Europe, Middle East and Africa                     410           41          195
Asia Pacific                                        76          499          824
                                               -------      -------      -------
                                               $47,295      $65,263      $46,250
                                               =======      =======      =======

      During the years ended March 31, 2000 and 1999, one customer accounted for
39% and 20%,  respectively,  of the Company's sales. During the year ended March
31, 1998, no single customer  accounted for 10% or more of the Company's  sales.
Ten domestic customers and five international customers account for $4,735 (62%)
and $1,826 (24%),  respectively,  of the Company's accounts  receivable at March
31, 2000.  The domestic  customers  primarily  include  telephone  companies and
distributors.  The international customers include cellular carriers and private
operators in Canada, Puerto Rico, Guatemala and Ecuador. Five domestic customers
and three  international  customers account for (net of specific  allowances for
credit losses) $479 (21%) and $1,276 (57%) respectively,  of the Company's notes
receivable at March 31, 2000. The domestic  customers  include private operators
and  the  international  customers  include  a  telephone  company  and  private
operators in Mexico and the Philippines.

NOTE 13 - SAVINGS PLAN

      The Company has a savings plan pursuant to Section  401(k) of the Internal
Revenue Code, whereby eligible employees may voluntarily contribute a percentage
of their compensation,  but not in excess of the maximum allowed under the Code.
The TSG 401(k)  retirement and profit sharing plan was merged into the Company's
savings plan on January 1, 1999,  and the Company's  plan was amended to include
provisions at least as favorable as those of the TSG plan.  The Company  matches
up to 50% of the  participants'  contributions,  up to an  additional  2% of the
participants'  compensation.  Participants are 100% vested with respect to their
contributions to the plan. Vesting in Company matching contributions


                                       86
<PAGE>

begins at 20% after one year of service with the Company and increases  annually
each year thereafter  until full (100%) vesting upon five years of service.  The
plan pays retirement benefits based on the participant's vested account balance.
Benefit  distributions  are  generally  available  upon a  participant's  death,
disability or retirement.  Participants  generally qualify to receive retirement
benefits  upon  reaching the age of 65.  Early  retirees  generally  qualify for
benefits provided they have reached age 55 and have completed 5 years of service
with  the  Company.  Benefits  are  payable  in lump  sums  equal to 100% of the
participant's  account balance.  Plan expense  approximated $189, $151 and $114,
respectively, for the years ended March 31, 2000, 1999 and 1998.

NOTE 14 - OTHER CHARGES (CREDITS)

      Other  charges  (credits) for the year ended March 31, 2000 consist of the
restructuring charges discussed in Note 8.

      During  the year  ended  March 31,  1999,  the  Company  was  involved  in
negotiations  concerning a possible  business  combination with an international
telecommunications  equipment  manufacturer.  During  April  1999,  the  Company
decided  that the terms  and  conditions  of the  business  combination  as then
proposed  would not be, at that time,  in the best  long-term  interests  of the
Company's   stockholders,   and  terminated  the  negotiations.   In  connection
therewith,  the Company  charged to  operations  approximately  $1.2  million of
expenses,  consisting  primarily of legal,  accounting and  consulting  fees and
expenses  incurred by the Company during the negotiations and in connection with
due diligence investigations. This charge, together with charges of $490 related
to the  reorganization  discussed in Note 8 and other  miscellaneous  charges of
$42, are reflected as other charges  (credits) in the accompanying  consolidated
statement of operations and other comprehensive income (loss) for the year ended
March 31, 1999.

NOTE 15 - COMMITMENTS AND CONTINGENCIES

Litigation

      The Company is a defendant  in a punitive  class  action  alleging  that a
former customer of the Company that filed for bankruptcy  conspired with its own
officers and professionals,  and with various telephone suppliers (including the
Company) to defraud  investors  in that  customer by  operating a Ponzi  scheme.
Allegations include unlawful business practices,  fraudulent and unfair business
practices,  false and misleading  advertising,  fraud and deceit,  conspiracy to
defraud,  negligence and negligent  misrepresentation,  violations of California
law,  professional  negligence and legal malpractice and spoliation of evidence.
On September 28, 1998, the Company's  Motion for Summary Judgment was granted by
the Court and the Court dismissed the Company from the class action. On December
11, 1998,  the plaintiffs  appealed the Court's  decision to grant the Company's
Motion  for  Summary  Judgment.  On June 8, 2000,  the Court of  Appeal,  Fourth
Appellate District, Division One of the State of California affirmed the Summary
Judgment  entered  by the  Superior  Court of San  Diego  County in favor of the
Company.

      While the Company is subject to various other legal proceedings incidental
to its business, there are no such pending legal proceedings, which are believed
to be material to the business of the Company.


                                       87
<PAGE>

Operating Leases

      Minimum  future  rental  payments at March 31,  2000 under  non-cancelable
operating  leases with an initial term of more than one year are  summarized  as
follows:

                       Fiscal 2001                 $266
                       Fiscal 2002                  161
                       Fiscal 2003                  123
                       Fiscal 2004                  112
                       Fiscal 2005                   66
                                                   ----
                                                   $728
                                                   ====

      Rent  expense  for  the  years  ended  March  31,  2000,   1999  and  1998
approximated $399, $421 and $253, respectively.

Royalty and Technology Transfer Fee Agreements

      Pursuant to the terms of patent license and technology transfer agreements
entered  into in  connection  with the  acquisition  of the Lucent  assets,  the
Company  agreed to pay  royalties  and fees with  respect  to sales of  acquired
products. In addition, during the year ended March 31, 2000, the Company entered
into various other license  agreements  regarding  technology  used its Internet
appliance products.  Royalties and fees under these agreements during the fiscal
years ended  March 31,  2000,  1999 and 1998  approximated  $318,  $220 and $86,
respectively.

Employment Contracts

      On October 15, 1999, the Company hired a new President and Chief Executive
Officer.  The employment agreement between the Company and its new President and
Chief  Executive  Officer  expires on  October  11,  2002 and may be  terminated
earlier  by either  party  with 30 days  prior  written  notice.  The  agreement
provides for minimum annual base compensation of $250 and incentive compensation
of up to 50% of base  compensation  at the discretion of the Board of Directors,
subject  to a  minimum  of 25% of base  compensation  for the  period  beginning
October 15, 1999 and ending  December 31, 2000. In addition,  under the terms of
the agreement,  the President and Chief Executive Officer is entitled to receive
benefits made available to other executives of the Company and  reimbursement of
relocation  expenses of $40. Further,  the agreement provides for the payment of
severance  compensation  if the Company  terminates the agreement  without cause
equal to $250 unless the remaining  term of the agreement is less than 12 months
in which event such  amount is  prorated  over the  remainder  of the term.  The
employment agreement also contains  confidentiality and non-compete  provisions.
Pursuant to the terms of the agreement,  the Company  granted  options under the
1999  Plan to  purchase  539,988  shares  of the  Company's  common  stock at an
exercise price of $1.67 per share (see Note 10).

      In  addition,  the Company has entered  into  employment  agreements  with
certain of its other  officers that continue in effect until either party to the
agreement  terminates the agreement with at least 60 days prior written  notice,
subject to certain earlier termination  provisions.  Pursuant to the agreements,
the officers are entitled to minimum compensation  aggregating $380 annually. In
addition,  if these  agreements are terminated by the Company without cause, the
officers are entitled to receive the amount of  compensation  and benefits  they
would  otherwise  have  received  for a period  of six  months  from the date of
termination  and  thereafter  until they locate  employment  comparable to their
employment  at the date of  termination  but not for a period longer than twelve
months from the date of termination of employment.


                                       88
<PAGE>

NOTE 16 - LIQUIDITY

      During the year ended March 31, 2000,  the Company  reported a net loss of
$11,188.  Although sales and revenues from the Company's core payphone  business
began to decline in the previous  year,  the Company  believed  that the decline
would stabilize. However, based on reduced sales and revenues for the year ended
March 31, 2000, non-recurring charges related to an aborted business combination
during  the year  ended  March  31,  1999  and  significant  investments  in the
development  of the  Company's  Internet  terminal  appliances  and back  office
software systems,  the Company breached one of the financial covenants contained
in the loan agreements between the Company and its bank, as further described in
Note 7. As a result of the covenant default, the bank stopped advancing funds to
the Company under the revolving credit lines provided under the loan agreements,
and had the right to accelerate the maturity of outstanding  indebtedness  under
the loan agreements. On April 12, 2000, the Company entered into the Forbearance
Agreement pursuant to which the maturity date of indebtedness  outstanding under
the loan agreements was changed to July 31, 2000.

         The Company will not be able to pay its outstanding  bank  indebtedness
on  July  31,  2000  unless  it is  able  to  raise  additional  capital  and/or
restructure the bank  indebtedness,  and may not be able to remain in compliance
with the terms of the  Forbearance  Agreement  until July 31, 2000. As a result,
the Company is attempting to secure an  asset-based  financing  arrangement  and
raise  additional  equity  capital  and/or  other  sources of funding  through a
private placement of securities.

      The Company believes that its efforts to raise  additional  capital and/or
other funding will be successful,  and that it will be able to refinance  and/or
restructure its outstanding bank  indebtedness.  If the Company is successful in
raising  additional  equity capital,  the percentage  ownership of the Company's
then current stockholders will be reduced and such reduction may be substantial.
However, there is no assurance that the Company's efforts will be successful, or
if  successful,  that such  financing  would  not be on  onerous  terms.  If the
Company's  efforts to raise  additional  equity capital and/or other funding and
refinance and/or restructure its bank debt are not successful, the Company could
experience difficulties meeting its obligations and it may be unable to continue
normal operations, except to the extent permitted by its bank.

      Cash flows from  operations  will not be  adequate  to fund the  Company's
obligations and operations for the next twelve months without raising additional
capital. The Company may require additional funds during or after such period in
addition to that  currently  sought.  Additional  financing may not be available
except on onerous terms,  or at all. If the Company cannot raise adequate funds,
if and when necessary, to satisfy its capital requirements, it may have to limit
its operations  significantly,  which would adversely affect its prospects.  The
Company's future capital requirements depend upon many factors,  including,  but
not  limited  to,  the level of sales and  revenues  of its  payphone  business,
success of its Internet appliance business,  the extent to which it develops and
upgrades its network,  the extent to which it expands its content  solutions and
delivery  capabilities  and the rate at which it expands its sales and marketing
operations.


                                       89
<PAGE>

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
        AND FINANCIAL DISCLOSURES

      None.

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The  following  sets forth the name and age of each director and executive
officer of the Company,  their  positions  and offices  with the Company,  their
period of service with the Company and their  business  experience  for at least
the last five years, and with respect to directors,  their principal  occupation
and other directorships held in public companies.

Directors

      Directors  are  elected  to serve  for a  one-year  term and  until  their
successors are elected and qualified.  Directors of the Company who were serving
as such at the end of fiscal 2000 are as follows:

         Name                               Age                 Director Since

         Michael J. Boyle                    54                       1999
         Joseph M. Jacobs                    47                       1998
         Charles H. Moore                    70                       1993
         Thomas E. Patton                    59                       1989
         Mark L. Plaumann                    44                       1997

      Michael J. Boyle has served as President  and Chief  Executive  Officer of
the Company since  October  1999. He became  Chairman of the Company in February
2000.  Prior to joining  Elcotel Mr. Boyle was the  President and CEO of Phoenix
Wireless Group  ("Phoenix"),  a venture capital funded software  development and
services  company  serving  the  wireless  and IP  industry.  Phoenix  developed
advanced  software  based  features  and  services  designed  to  integrate  the
converging networks in voice, data and wireless. Mr. Boyle was with Phoenix from
January 1998 until its sale to Lucent  Technologies  Inc. in June of 1999.  From
May of 1991 to January 1998, Mr. Boyle served as Senior Vice President,  General
Manager of  Operations  for Fujitsu  Business  Communications  Systems (a wholly
owned  subsidiary  of Fujitsu  Limited),  a provider  of wireless  and  wireline
telecommunications  equipment and software for enterprise customers and backbone
networks.  From June 1989 to May 1991, he served as Division President of Bell +
Howell Corporation and a senior member of a management led privatization of this
public  corporation.  From May  1982 to June  1989,  Mr.  Boyle  served  as Vice
President and General Manager at ROLM/IBM.  Previously, Mr. Boyle held a variety
of sales and management roles for the Xerox Corporation and in his own business.
Mr.  Boyle holds a Masters in  Management  degree from  Northwestern  University
Kellogg School of Management.

      Mr.  Jacobs was  appointed a director of the Company in February  1998 and
resigned as a director in June 2000.  Mr.  Jacobs has been  President of Wexford
Management LLC, a manager of several private investment  partnerships  including
Wexford  Partners Fund L.P.,  since its inception in January 1996. From May 1994
to January 1996, he was President and sole shareholder of Concurrency Management
Corporation,  the predecessor to Wexford  Management LLC. From 1982 to May 1994,
Mr.  Jacobs was employed by, and since 1988 was the  President  of, Bear Stearns
Real Estate Group, Inc.


                                       90
<PAGE>

      Mr.  Moore has been a director of the Company  since  December  1993.  Mr.
Moore has  served  as  Deputy to the  Chairman  of the  Committee  to  Encourage
Corporate  Philanthropy  since  November  1999.  Mr.  Moore was the  Director of
Athletics for Cornell  University  from November  1994 to September  1999.  From
November 1992 to October 1994,  Mr. Moore was Vice Chairman of Advisory  Capital
Partners, Inc., an investment advisory firm. From July 1988 to October 1992, Mr.
Moore served as President and Chief Executive Officer of Ransburg Corporation, a
producer of industrial  coating  systems and equipment,  and from August 1991 to
October  1992 as  Executive  Vice  President  of Illinois  Tool Works,  Inc.,  a
multinational  manufacturer  of highly  engineered  components and systems.  Mr.
Moore is  currently  a director of The Sports  Authority  and is Chairman of the
Audit Committee of the United States Olympic Committee.

      Mr. Patton has been a director of the Company since July 1989.  Mr. Patton
has been a partner in the Washington,  D.C. law firm of Tighe, Patton, Tabackman
& Babbin,  engaged in civil and criminal  business  litigation,  securities  law
enforcement matters,  corporate finance and corporate  compliance,  since August
1994.  From 1979 until July 1994,  Mr.  Patton was a partner in the  Washington,
D.C. law office of Schnader,  Harrison, Segal & Lewis, LLP, engaged in civil and
criminal securities litigation and general business litigation.  Mr. Patton also
serves on the board of  directors  of  Information  Exchange,  Inc., a financial
services marketing database company.

      Mr.  Plaumann  became a director  of the  Company in  December  1997.  Mr.
Plaumann has been a Managing  Director of  Greyhawke  Capital  Advisors  LLC, an
investment  firm,  since June 1998,  and a consultant to Wexford  Management LLC
since March 1998.  From January 1996 to March 1998, Mr. Plaumann was Senior Vice
President of Wexford  Management  LLC, a manager of several  private  investment
partnerships.  From  February  1995 to January  1996,  Mr.  Plaumann  was a Vice
President or director of the  predecessor  entities of Wexford  Management  LLC.
From 1990 to January  1995,  Mr.  Plaumann was a managing  director of Alvarez &
Marsal, Inc., a crisis management  consulting firm. From 1985 to 1990, he served
in several capacities with American  Healthcare  Management,  Inc., an owner and
operator of hospitals,  most recently as its  President.  From 1974 to 1985, Mr.
Plaumann  was with Ernst & Young LLP in several  capacities  in its auditing and
consulting divisions. Mr. Plaumann is a director of Vivax Medical Corporation, a
manufacturer  of  specialty  beds and wound care  products.  Mr.  Plaumann was a
director of TSG prior to the acquisition of TSG in December 1997.

Executive Officers

      Executive  officers are elected by the Board of Directors  and serve until
they resign or are removed by the Board. The Company's  executive  officers that
were serving as such at the end of fiscal 2000 are as follows:

         Name                     Age      Positions and Offices

         Michael J. Boyle         54       President, Chief Executive Officer
                                           and Chairman of the Board

         Daniel S. Fragen         41       Senior Vice President, Worldwide
                                           Sales and Marketing

         David F. Hemmings        53       Senior Vice President, Business
                                           Development and Technology/Systems
                                           Development

         Kenneth W. Noack         62       Vice President, Operations

         William H. Thompson      47       Senior Vice President, Administration
                                           & Finance, Chief Financial Officer
                                           and Secretary


                                       91
<PAGE>

      The business  experience of Mr. Boyle is set forth above under the listing
of directors of the Company.

      Mr. Fragen joined the Company as Senior Vice President of Worldwide  Sales
and  Marketing in March 2000.  From October 1997 to March 2000,  Mr.  Fragen was
Vice President of Sales and most recently President of the U.S. and Canada Sales
Division of Perle Systems,  Inc., which developed,  manufactured,  and sold data
communications products aimed at the remote access marketplace.  From April 1989
to  October  1997,  he  held  various  executive  positions  including  Regional
Vice-President/General  Manager and General Manager of National  Distribution of
Fujitsu Business  Communications  Systems,  Inc. Prior to that, between 1980 and
1999, Mr. Fragen held various sales positions with Pitney Bowes Corp., Automatic
Data Processing, Inc., ITT Business Communications Corp. and Merorex Telex, Inc.
Mr. Fragen holds a Masters in  Management  degree from  Northwestern  University
Kellogg School of Management.

      Mr.  Hemmings  joined the Company in June 1998 as Senior  Vice  President,
Business Development and  Technology/Systems  Development.  From June 1997 until
May 1998, he was President of NetInvest, LLC, a company developing satellite and
cellular network operations in developing  countries  worldwide.  From July 1993
until May 1997,  Mr.  Hemmings was  Executive  Vice  President of the  worldwide
network and business  systems groups for Brite Voice  Systems,  Inc., a publicly
held  voice  processing  supplier.  From 1991 to June 1993,  he was Senior  Vice
President of Boston Technology,  Inc., a publicly held voice mail supplier.  His
previous  employment  included  management  positions with such organizations as
Sprint and Harris Corporation.

      Mr.  Noack joined the Company in July 1992 as Director of  Operations  and
has served as Vice  President of Operations  since  January  1993.  From 1973 to
1992, Mr. Noack held various management and executive positions,  including Vice
President  of  Manufacturing  and Vice  President  of  Operations  Planning  and
Materials,  with  AT&T  Paradyne  Corporation  in Largo,  Florida.  Prior to his
employment with AT&T Paradyne Corporation,  he held various management positions
with a division of Universal Oil Products and a division of Sunbeam Corporation.
Mr. Noack holds a Bachelors degree in Operations  Management from the University
of Wisconsin, Milwaukee.

      Mr.   Thompson   joined  the   Company  as  Senior   Vice   President   of
Administration/Finance in December 1997, was elected Secretary in February 1998,
and became the Chief  Financial  Officer in December 1998. From February 1994 to
December 1997, Mr. Thompson served as Vice President of Finance, Chief Financial
Officer and Secretary of Technology  Service Group, Inc., and from 1990 to 1994,
he served as its Vice President of Finance. From 1983 to 1990, Mr. Thompson held
various  financial  executive  positions with Cardiac Control  Systems,  Inc., a
publicly held medical device manufacturer.  From 1974 to 1983, Mr. Thompson held
various positions,  most recently as Audit Manager, with  PriceWaterhouseCoopers
LLP,  certified  public  accountants.  Mr. Thompson holds a Bachelors of Science
degree in Accountancy  from Florida State  University and is a Certified  Public
Accountant in the State of Florida.

                                   ----------


                                       92
<PAGE>

Item 11. EXECUTIVE COMPENSATION

      This item  contains  information  about  compensation,  stock  options and
employment   arrangements  and  other  information  concerning  certain  of  our
executive officers.

                           Summary Compensation Table

      The  following  table sets  forth the  compensation  earned  for  services
rendered  during the fiscal years indicated by each of the persons who served as
our Chief  Executive  Officer  during the year ended March 31, 2000 and our four
most  highly  compensated  executive  officers  other  than the Chief  Executive
Officer whose salary and bonus exceeded $100,000 during the year ended March 31,
2000, three of whom were serving as executive  officers as of March 31, 2000 and
one of whom that was not  serving as an  executive  officer as of March 31, 2000
("named executive officers").

<TABLE>
<CAPTION>
                                                                                         Long Term
                                                                                         Compen-
                                                                                         sation
                                                     Annual Compensation                 Awards
                                           -----------------------------------------   ------------
            (a)                 (b)         (c)            (d)              (e)            (g)          (i)
                                                                           Other       Securities
                                                                          Annual        Underlying    All Other
                                                                          Compen-        Option/       Compen-
    Name and Principal                                                    sation          SARs         sation
         Position                Year      Salary ($)      Bonus ($)      ($) (1)        (#) (2)        ($)
--------------------------      ------    -----------     -----------     -------       ----------    ---------
<S>                              <C>         <C>            <C>              <C>           <C>           <C>
Michael J. Boyle (3)             2000        105,894        47,414 (4)        5,949        539,988           28 (5)
Chairman, President and          1999             --            --               --             --           --
Chief Executive Officer          1998             --            --               --             --           --

C. Shelton James (6)             2000        143,335            --               --         76,750       75,854 (7)
Chairman, Acting President       1999         94,250            --               --         50,000        2,117
& Chief Executive Officer        1998         90,613        34,995               --         34,000        2,066

Tracey L. Gray (8)               2000         92,339            --               --             --       48,141 (9)
President and Chief              1999        195,635            --               --         50,000        5,168
Executive Officer                1998        162,396        65,710               --         41,000        4,621

Eduardo Gandarilla (10)          2000        186,824        18,000               --         65,000        4,020 (11)
Executive Vice President         1999        215,600         7,500           19,868         35,000        4,371
                                 1998        184,753        17,665               --         10,000        4,338

David F. Hemmings (12)           2000        157,788            --              231         65,000        5,095 (13)
Senior Vice President            1999        118,519        15,000           15,480         50,000        4,054
                                 1998             --            --               --             --           --

Kenneth W. Noack                 2000        108,904            --               --         55,000        2,689 (14)
Vice President                   1999        105,250         6,000               --         25,000        2,802
                                 1998         97,467        16,387               --          8,000        2,580

William H. Thompson (15)         2000        134,385            --            8,273         70,000        3,013 (16)
Senior Vice President            1999        124,532        12,000           17,221         25,000        1,592
                                 1998         35,551         3,725               --         30,000          281
</TABLE>

----------


                                       93
<PAGE>

Footnotes to Summary Compensation Table

(1)   Other annual  compensation  with respect to Mr. Boyle, Mr.  Gandarilla and
      Mr.  Thompson  represents  reimbursements  of relocation  expenses  and/or
      related  income  taxes.  Other  annual  compensation  with  respect to Mr.
      Hemmings   includes   reimbursement   of   relocation   expenses   and  an
      employment-signing bonus of $15,000 in 1999.

(2)   Represents the number of shares of common stock underlying options granted
      under our 1991 Stock Option  Plan,  except with respect to Mr. Boyle whose
      stock options were granted under our 1999 Stock Option Plan.

(3)   Mr.  Boyle  joined the Company on October 15,  2000 as its  President  and
      Chief Executive  Officer and was appointed as our Chairman on February 15,
      2000.


(4)   Includes  bonus  compensation  of $47,414  accrued  but not paid under the
      terms of Mr. Boyle's employment agreement.

(5)   Represents the taxable portion of Company paid group term life insurance.

(6)   Mr. James  served as our  Chairman  until he resigned on February 15, 2000
      and served as our acting  President and Chief Executive  Officer from June
      10, 1999 to October 15, 1999.

(7)   Includes the taxable  portion of Company paid group term life insurance of
      $396 and  matching  contributions  of  $3,343  that we made to our  401(k)
      savings plan for the account of the  executive.  Also  includes  severance
      payments of $72,115 under the terms of the  employment  agreement  between
      the Company and Mr. James.

(8)   Mr. Gray served as our  President  and Chief  Executive  Officer  until he
      retired in June 1999.

(9)   Includes the taxable  portion of Company paid group term life insurance of
      $457 and matching contributions of $615 that we made to our 401(k) savings
      plan for the account of the executive.  Also includes  payments of $47,069
      under the terms of the  retirement  agreement  between the Company and Mr.
      Gray.

(10)  Mr.  Gandarilla  resigned from his position as Executive Vice President of
      Sales  and  Marketing  on March 22,  2000.  The  salary of Mr.  Gandarilla
      includes  sales  commissions  paid  to  Mr.  Gandarilla  under  his  sales
      compensation plan.

(11)  Includes the taxable  portion of Company paid group term life insurance of
      $138 and  matching  contributions  of  $3,882  that we made to our  401(k)
      savings plan for the account of the executive.

(12)  Mr.  Hemmings  joined  the  Company  on June 1,  1998 as its  Senior  Vice
      President of Business Development and Technology/Systems Development.

(13)  Includes the taxable  portion of Company paid group term life insurance of
      $138 and  matching  contributions  of  $3,380  that we made to our  401(k)
      savings  plan for the  account  of the  executive.  Also  includes  $1,577
      related to additional life insurance premiums paid by the Company.

(14)  Includes the taxable  portion of Company paid group term life insurance of
      $396 and  matching  contributions  of  $2,293  that we made to our  401(k)
      savings plan for the account of the executive.

(15)  Mr.  Thompson  joined the Company on December  18, 1997 as its Senior Vice
      President of Administration and Finance upon the acquisition of Technology
      Service Group, Inc.

(16)  Includes the taxable  portion of Company paid group term life insurance of
      $90 and  matching  contributions  of  $2,923  that  we made to our  401(k)
      savings plan for the account of the executive.


                                       94
<PAGE>

Stock Option Grants in the Last Fiscal Year

      The following table sets forth certain  information  with respect to stock
options to purchase  shares of our common stock that were granted to each of the
named executive officers during the year ended March 31, 2000.

<TABLE>
<CAPTION>
                                                                                                  Potential
                                                                                              Realizable Value at
                                                                                                Assumed Annual
                                                                                              Rates of Stock Price
                                                                                                 Appreciation
                                    Individual Grants                                         for Option Term (4)
-------------------------------------------------------------------------------------------------------------------
           (a)                   (b)              (c)            (d)            (e)           (f)            (g)
                                               % of Total
                               Number           Options
                                 of            Granted to
                             Securities        Employees      Exercise
                             Underlying        in Fiscal        Price       Expiration
Name                           Options            Year        ($/Share)        Date            5%            10%
------------------           ----------        ----------      --------     ----------     ---------      ---------
<S>                           <C>                 <C>         <C>           <C>            <C>            <C>
Michael J. Boyle              539,998 (1)         40.1%       $ 1.6700      10/15/04       $ 519,992      $ 892,321
C. Shelton James                6,250 (2)          0.5%       $ 6.1875      02/20/01              --             --
                               20,500 (2)          1.5%       $ 6.0000      05/22/02              --             --
                               50,000 (2)          3.7%       $ 4.5625      02/15/00              --             --
Eduardo Gandarilla             30,000 (3)          2.2%       $ 1.8750      07/16/04          14,354         32,843
                               35,000 (3)          2.6%       $ 5.3440      02/25/05          48,884        110,667
David F. Hemmings              30,000 (3)          2.2%       $ 1.8750      07/16/04          14,354         32,843
                               35,000 (3)          2.6%       $ 5.3440      02/25/05          48,884        110,667
Kenneth W. Noack               20,000 (3)          1.5%       $ 1.8750      07/16/04           9,569         21,896
                               35,000 (3)          2.6%       $ 5.3440      02/25/05          48,884        110,667
William H. Thompson            30,000 (3)          2.2%       $ 1.8750      07/16/04          14,354         32,843
                               40,000 (3)          3.0%       $ 5.3440      02/25/05          55,867        126,476
</TABLE>


----------

(1)   These  options were granted  under the 1999 Stock Option Plan  pursuant to
      the terms of an  employment  agreement  effective  October  15, 1999 at an
      exercise price less than the per share market value of our common stock on
      the grant date, which was $1.938 per share. The options become exercisable
      in  increments  of 15,000 shares at the end of each month during the first
      twenty-four  (24)  months  after  the date of grant and in  increments  of
      14,999  shares  at the end of each  month  during  the  succeeding  twelve
      months.

(2)   These  options were granted  under the 1991 Stock Option Plan  pursuant to
      the terms of an employment  agreement  effective June 10, 1999 at exercise
      prices that were above the per share  market  value of our common stock on
      the date of grant.  Options  to  purchase  12,791  shares of common  stock
      became  exercisable  on the 10th of each of the months  beginning  in July
      1999 and ending in  November  1999 and the  remaining  options to purchase
      12,975 shares became exercisable on December 10, 1999.

(3)   These  options  were  granted at an exercise  price equal to the per share
      market  value of our common  stock on the grant date.  The options  become
      exercisable  twenty-five  percent each year  beginning  one year after the
      date of grant.


                                       95
<PAGE>

(4)   The  potential  realizable  value is  calculated  based on the term of the
      option (five  years) at its date of grant.  It is  calculated  by assuming
      that our stock  price on the date of grant  appreciates  at the  indicated
      annual  rate  compounded  annually  for the  entire  term  of the  option;
      however,  the named  executives will not actually realize any benefit from
      the option unless the market value of our stock in fact increases over the
      option  exercise  price.  The  potential  realizable  value of the options
      granted to Mr. Boyle  assuming that our stock price  appreciates at 0% for
      the term of the option was $144,719.

Aggregated  Stock Option  Exercises in the Last Fiscal Year and Fiscal  Year-End
Option Values

      The following  table sets forth for each of the named  executive  officers
certain  information  with respect to stock  options  exercised  during the year
ended March 31, 2000 and the number and value of exercisable  and  unexercisable
options  held by named  executive  officers  as of March 31,  2000.  The  "Value
Realized" on "Shares  Acquired on Exercise" during the year ended March 31, 2000
is based on the difference  between the closing market price of our common stock
on the  exercise  date and the option  exercise  price per share.  The "Value of
Unexercised  In-the-Money Options at Fiscal Year End" is based on the difference
between the closing  market  price of our common stock on March 31, 2000 ($3.156
per share) and the option exercise price per share.

<TABLE>
<CAPTION>
            (a)                     (b)           (c)              (d)                    (e)
                                                                Number of
                                                               Securities               Value of
                                                               Underlying             Unexercised
                                                               Unexercised            In-the-Money
                                                               Options at              Options at
                                  Shares                         Fiscal                  Fiscal
                                 Acquired                       Year-End                Year-End
                                    on           Value        Exercisable/            Exercisable/
                                 Exercise      Realized       Unexercisable          Unexercisable
Name                                (#)           ($)              (#)                    ($)
-----------------------------    --------      --------      ---------------        ----------------

<S>                               <C>           <C>          <C>                    <C>
Michael J. Boyle                      --            --       90,000/499,988         133,740/668,682
C. Shelton James                  62,500        99,783       68,750/54,500               0/0
Tracey L. Gray                        --            --         39,250/0                  0/0
Eduardo Gandarilla                51,250        30,421           0/0                     0/0
David F. Hemmings                     --            --       12,500/102,500            0/38,430
Kenneth W. Noack                      --            --       19,000/77,750             0/25,620
William H. Thompson                   --            --       79,000/103,750          69,413/38,430
</TABLE>

Employment  Contracts  and  Termination  of  Employment  and  Change in  Control
Arrangements

      Mr.  Michael J. Boyle.  We entered into an employment  agreement  with Mr.
Boyle that became  effective as of October 15, 1999.  The  employment  agreement
expires on October 11, 2002 and may be  terminated  earlier by either party with
30 days prior written  notice.  The agreement  provides for minimum  annual base
compensation  of $250,000 and an annual bonus of up to 50% of base  compensation
at the  discretion of the Board of Directors,  subject to a minimum bonus of 25%
of base  compensation  for the  period  beginning  October  15,  1999 and ending
December 31, 2000. In addition,  under the terms of the agreement,  Mr. Boyle is
entitled to receive  benefits made available to other  executives of the Company
and  reimbursement  of relocation  expenses of $40,000.  Further,  the agreement
provides for the payment of severance compensation if the Company terminates the
agreement  without  cause equal to  $250,000


                                       96
<PAGE>

unless the remaining  term of the agreement is less than twelve (12) months,  in
which  event  such  amount is  prorated  over the  remainder  of the  term.  The
employment agreement also contains  confidentiality and non-compete  provisions.
Under the terms of the agreement, we granted options under our 1999 Stock Option
Plan to Mr. Boyle to purchase  539,988 shares of our common stock at an exercise
price of $1.67 per share.

      Mr.  C.  Shelton  James.  Effective  June 10,  1999,  we  entered  into an
employment  agreement with Mr. James,  which superceded an employment  agreement
that was  effective  as of October 20,  1998.  The  agreement,  which  contained
certain  extension and renewal  provisions,  expired on December 10, 1999. Under
the terms of the agreement,  Mr. James served as our acting  President and Chief
Executive  Officer  (until  October  15,  1999) and as  Chairman of our Board of
Directors,  and was paid a salary on an annual basis of $250,000. Mr. James also
received  reimbursement  of  reasonable  business  expenses,  a  non-accountable
expense allowance of $2,000 monthly,  the same benefits as made available to the
other senior  executives on the same terms as such executives and such bonus, if
any, as the Board of Directors determined.  In addition,  under the terms of the
agreement,  options to purchase  6,250,  20,500 and 50,000  shares of our common
stock were granted to Mr. James at per share exercise  prices of $6.1875,  $6.00
and $4.5625,  respectively.  Options to purchase  12,791  shares of common stock
became  exercisable on the 10th of each of the months beginning in July 1999 and
ending in November  1999 and the  remaining  options to purchase  12,975  shares
became  exercisable  on December 10, 1999. As a result of the  expiration of the
employment  agreement,  options held by Mr. James continue in effect until their
expiration  dates,  which vary through July 13, 2003.  Also,  Mr. James received
compensation  during a severance  period of three months after expiration of the
agreement.  In addition,  the agreement  provided that options held by Mr. James
would immediately vest in the event of a change in control of the Company. Under
the terms of the  agreement,  we indemnify Mr. James with respect to claims made
against him as a director,  officer and/or employee of the Company or any of its
subsidiaries   to  the  fullest   extent   permitted  by  our   Certificate   of
Incorporation, our Bylaws and Delaware corporation law.

      Mr. Tracey L. Gray.  Effective June 11, 1999, we entered into a retirement
agreement  with Mr.  Gray  that  superceded  an  employment  agreement  that was
effective as of October 20,  1998.  Under the terms of the  agreement,  Mr. Gray
retired as our  President  and Chief  Executive  Officer  and as an officer  and
employee of our subsidiaries.  Under the terms of the agreement, Mr. Gray became
a  consultant  to the Company  effective  June 14, 1999 for a period of 30 days,
which was subject to an  extension  of up to 30 days upon notice from our acting
President and Chief Executive  Officer.  During the consulting  period, Mr. Gray
received compensation based on an annual salary rate of $200,000,  reimbursement
of business  expenses  and other  benefits,  other than stock  options and bonus
payments, that he was entitled to receive prior to his retirement.  In addition,
we agreed to pay Mr.  Gray  compensation  at a rate of $75,000  annually  and to
reimburse the cost of his medical  insurance under our employee medical plan for
a period of two years after the consulting period.  Further,  under the terms of
agreement all vested options to purchase  shares of our common stock held by Mr.
Gray remain exercisable until their expiration dates. In addition,  we indemnify
Mr. Gray with respect to claims made against him as a director,  officer  and/or
employee  of  the  Company  or any of our  subsidiaries  to the  fullest  extent
permitted  by  our  Certificate  of  Incorporation,   our  Bylaws  and  Delaware
corporation law.

      Other Executive Officers. Each of Messrs. Gandarilla,  Hemmings, Noack and
Thompson  (the  "Officers")  entered  into  employment  agreements  that  became
effective as of December 10, 1998 and that continue in effect until either party
terminates the agreement with at least 60 days prior written notice,  subject to
certain earlier termination  provisions.  The agreements provide for the payment
of base annual salaries of at least $155,000, $150,000, $105,000 and $125,000 to
Messrs. Gandarilla,  Hemmings, Noack and Thompson,  respectively, while employed
by the Company, and with respect to Mr. Gandarilla the payment of commissions on
the basis  determined  by the  Company.  The base  salaries of the  Officers are
subject to annual review for merit and other  increases at the discretion of the
Board.  The Officers are


                                       97
<PAGE>

reimbursed (in  accordance  with Company policy from time to time in effect) for
all reasonable  business  expenses  incurred by them in the performance of their
duties.

      Under the terms of the  agreements,  the Officers are entitled to the same
benefits  made  available  to other  senior  executives  on the same  terms  and
conditions  as such  executives.  The Officers  are also  entitled to receive an
annual  incentive  bonus,  if any, as determined or approved by the Board or the
Compensation  Committee under the Company's  incentive  compensation plan. Also,
under the terms of the agreements,  the Officers will be granted such options to
purchase shares of our common stock as approved by the Compensation Committee.

      In addition,  the agreements provide that all outstanding  options held by
the  Officers  immediately  vest in the  event of a  change  in  control  of the
Company,  including the transfer,  exchange or sale of substantially  all of the
Company's assets to a  non-affiliated  third party, a merger or consolidation of
the Company  pursuant to which the stockholders of the Company own less than 50%
of the surviving entity or the entity into which the common stock of the Company
is  converted  or if  any  person,  other  than  Wexford  Management  LLC or its
affiliates or Fundamental Management Corporation or its affiliates,  becomes the
owner  directly or  indirectly  of  securities  of the Company or its  successor
representing  35% or more of the combined  voting power of the  Company's or its
successor's  securities then outstanding.  Also, vested outstanding options held
by the Officers  continue in effect in accordance  with their terms,  but not to
exceed one year from the date of  termination  of  employment in the event their
employment is terminated  other than for cause or upon death or  disability.  In
addition,  if the agreements are  terminated by the Company  without cause,  the
Officers are entitled to receive the amount of  compensation  and benefits  they
would  otherwise  have  received  for a period  of six  months  from the date of
termination  and  thereafter  until they locate  employment  comparable to their
employment  at the date of  termination  but not for a period longer than twelve
months from the date of termination of employment.

      Under the terms of the  agreements,  the  Officers  are  indemnified  with
respect to claims made against them as officers and/or  employees of the Company
or any of its subsidiaries to the fullest extent permitted by our Certificate of
Incorporation, our Bylaws and Delaware corporation law.

      On  March  22,  2000,  Mr.  Gandarilla  and the  Company  entered  into an
employment  termination agreement (the "Termination  Agreement") that superceded
the agreement  effective  December 10, 1998.  Under the terms of the Termination
Agreement,  the Company agreed to pay Mr. Gandarilla  severance  compensation of
$80,000 over a period of six months.

Directors' Compensation

      Directors who are not employees  receive an annual  retainer fee of $5,000
plus $1,500 for each Board meeting  attended,  and $500 for each Board committee
meeting attended.  Directors are also reimbursed for expenses in attending Board
and Board committee meetings.

      Non-employee directors automatically receive "formula" stock option grants
under our Directors' Stock Option Plan. Each non-employee director first elected
to the Board automatically receives an option to purchase 4,000 shares of common
stock  on the  date of his or her  election  to the  Board.  In  addition,  each
non-employee  director  then  serving  on a  committee  of the  Board  and  each
non-employee  director  then  serving as chairman  of a  committee  of the Board
automatically  receives  on the last day of the fiscal year (March 31) an option
to purchase 1,000 shares of common stock with respect to each such committee and
each such  chairmanship.  In addition,  on July 13, 1998, the  Directors'  Stock
Option  Plan  was  amended  to  provide  for  the  grant  of  stock  options  to
non-employee  directors at the discretion of the  Compensation  and Stock Option
Committee.


                                       98
<PAGE>

      On March 31,  2000,  formula  options to purchase  3,000  shares of common
stock were granted to each of Messrs.  Jacobs,  Moore, Patton and Plaumann under
the  Directors'  Stock  Option  Plan at an  exercise  price of $3.16 per  share.
Options granted under the Directors' Stock Option Plan become fully  exercisable
one year after the date of grant and expire five years from the date of grant.

      Also, the Board approved the payment of certain additional fees to members
of a Special Acquisition  Committee  established during the year ended March 31,
1999. Total fees paid to Messrs. Jacobs, Moore, Patton and Plaumann for the year
ended March 31, 2000, including additional fees paid to Messrs. Moore and Patton
as members of the Special Acquisition  Committee,  aggregated $11,250,  $16,050,
$14,350 and $16,250, respectively.

Compensation Committee Interlocks and Insider Participation

      The Compensation Committee of the Board, which during the year ended March
31, 2000 consisted of Messrs.  Jacobs and Plaumann,  makes decisions  concerning
executive  compensation.  Messrs.  Jacobs and Plaumann are neither  officers nor
employees of the Company or any of its subsidiaries. During the year ended March
31, 2000, none of our executive  officers served as a member of the compensation
committee  or as  director  of another  entity of which any  executive  officers
thereof served as a director or member of our Compensation Committee.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT

      The following tables sets forth certain information  regarding  beneficial
ownership  of our  outstanding  common  stock  at  June  2,  2000  according  to
information  supplied to us by: (i) each person we know to own beneficially more
than 5% of our common stock; (ii) each of our directors; (iii) each of the named
executive officers; and (iv) all of our current directors and executive officers
as a group.  Under rules adopted by the  Securities and Exchange  Commission,  a
person is deemed to be a beneficial  owner of common stock with respect to which
he has or shares voting power (which includes the power to vote or to direct the
voting of the  security),  or  investment  power  (which  includes  the power to
dispose of, or to direct the  disposition  of, the  security).  A person is also
deemed to be the  beneficial  owner of  shares  with  respect  to which he could
obtain voting or investment  power within 60 days,  such as upon the exercise of
options or warrants. The numbers and percentages assume for each person or group
listed,  the exercise of all  warrants and stock  options held by such person or
group that are exercisable  within 60 days of June 2, 2000, but not the exercise
of such  warrants  and  stock  options  owned by any  other  person.  Except  as
otherwise  indicated in the footnotes,  we believe that the beneficial owners of
our common stock listed below have sole investment and voting power with respect
to the shares of common stock shown as beneficially owned by them.

Security Ownership of Certain Beneficial Owners

Name and Address                           Number of Shares          Percentage
of Beneficial Owner                        Beneficially Owned        of Class
--------------------------------------------------------------------------------

Wexford Partners Fund L.P.                 2,613,269 (1)               19.1%
411 West Putnam Avenue
Greenwich, Connecticut 06830

----------

(1)   Includes  12,000 shares that may be purchased by Mr.  Jacobs,  a director,
      and an affiliate of Wexford  Partners Fund L.P., and 4,000 shares that may
      be purchased by Mr. Plaumann,  a director of the


                                       99
<PAGE>

      Company,  and a consultant to and former employee of Wexford Partners Fund
      L.P.,  upon exercise of stock  options  within 60 days as to which Wexford
      Partners Fund L.P. exercises shared voting or investment power.

Security Ownership of Management

<TABLE>
<CAPTION>
                                                         Number of Shares         Percentage
Name                                                     Beneficially Owned        of Class
--------------------------------------------------------------------------------------------
<S>                                                           <C>       <C>           <C>
Michael J. Boyle                                              150,000   (1)               *
Joseph M. Jacobs                                            2,609,269   (2)           18.9%
Charles H. Moore                                               18,100   (3)               *
Thomas E. Patton                                               17,000   (4)               *
Mark L. Plaumann                                               12,000   (5)               *
Eduardo Gandarilla                                                 --                     *
Tracey L. Gray                                                104,784   (6)               *
David F. Hemmings                                              32,500   (7)               *
C. Shelton James                                              157,018   (8)            1.1%
Kenneth W. Noack                                               56,910   (9)               *
William H. Thompson                                            93,379   (10)              *
All directors and executive officers as
as a group (9 persons)                                      2,989,158   (11)          21.1%
</TABLE>

  * Less than 1%

----------

      (1)   Represents  150,000  shares that may be purchased  upon  exercise of
            stock options within 60 days.

      (2)   Includes  2,597,269 shares held by Wexford Partners Fund L.P., as to
            which shares Mr. Jacobs disclaims beneficial  ownership,  and 12,000
            shares that may be purchased  upon exercise of stock options  within
            60 days.

      (3)   Includes  75 shares held by Mr.  Moore's  wife and 25 shares held by
            Mr.  Moore's  daughter.  Also  includes  17,000  shares  that may be
            purchased upon exercise of stock options within 60 days.

      (4)   Includes  500 shares  held  jointly  with Mr.  Patton's  wife.  Also
            includes  16,000 shares that may be purchased upon exercise of stock
            options within 60 days.

      (5)   Represents  12,000  shares that may be  purchased  upon  exercise of
            stock options within 60 days.

      (6)   Includes  39,250 shares that may be purchased upon exercise of stock
            options within 60 days.

      (7)   Represents  32,500  shares that may be  purchased  upon  exercise of
            stock options within 60 days.

      (8)   Includes  89,750 shares that may be purchased upon exercise of stock
            options within 60 days.

      (9)   Includes  32,250 shares that may be purchased upon exercise of stock
            options within 60 days.

      (10)  Includes  92,750 shares that may be purchased upon exercise of stock
            options within 60 days.

      (11)  Includes 2,597,269 shares held by Wexford Partners Fund L.P. and 600
            shares  held by family  members as to which  shares  the  respective
            officers and directors disclaim beneficial ownership.  Also includes
            364,500  shares that may be purchased upon exercise of stock options
            within 60 days.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      On March 2, 2000,  the Company  engaged  Greyhawke  Capital  Advisors  LLC
("Greyhawke"),  of which Mr. Plaumann serves as a Managing Member, to assist the
Company in the  preparation  of its  business  plan and to assist the Company to
raise capital. Under the terms of the agreement to assist the


                                      100
<PAGE>

Company in the  preparation of its business plan, the Company agreed to pay fees
equal to $175 per hour and to issue common  stock  purchase  warrants  providing
Greyhawke with the right to purchase a number of shares of the Company's  common
stock equal to six times cash fees earned by Greyhawke  divided by the per-share
exercise price of the warrants, which will equal 120% of the market price of the
Company's common stock on the date of issuance of the warrants.  Under the terms
of the agreement to assist the Company to raise  capital,  the Company agreed to
pay fees equal to three (3) percent of gross financing  proceeds received by the
Company  as a result of the  efforts  of  Greyhawke  and to issue  common  stock
purchase  warrants  providing  Greyhawke  with the right to purchase a number of
shares of the  Company's  common stock equal to six (6) percent of the equity or
equity  equivalents  purchased by the investor  with an exercise  price equal to
120% of the per-share  price of capital raised through the efforts of Greyhawke.
Warrants  issued under the terms of the  agreements  will expire five years from
the date of issuance  and will  contain  certain  anti-dilution  provisions.  In
addition,  the  Company  agreed to pay all  reasonable  out of  pocket  expenses
incurred by Greyhawke in the performance of services under the agreements and to
indemnify  Greyhawke  against certain losses,  claims,  damages,  liabilities or
costs  arising  out of the  performance  of  such  services.  Either  party  may
terminate the  agreements  by written  notice at any time. As of March 31, 2000,
the Company has not incurred any fees or issued any warrants  under the terms of
the agreements.

      On March 1, 2000, the Company engaged Wexford  Management LLC ("Wexford"),
of which Mr. Jacobs serves as President,  to assist the Company in  negotiations
with its bank, to raise equity capital and to perform other  services  requested
by the Company.  Under the terms of the agreement the Company agreed to pay fees
equal to two (2) percent of the gross financing proceeds received by the Company
as a result of the  efforts of  Wexford  and fees equal to $375 per hour for any
other services rendered to the Company.  In addition,  the Company agreed to pay
all reasonable out of pocket expenses  incurred by Wexford in the performance of
services under the agreements and to indemnify  Wexford  against certain losses,
claims,  damages,  liabilities  or costs arising out of the  performance of such
services. Either party may terminate the agreements upon twenty four hours prior
written  notice.  As of March 31,  2000,  the Company has not  incurred any fees
under the terms of the agreement.

      In connection with the acquisition of Technology  Service Group, Inc., the
Company  entered into a  stockholders'  agreement  with  Fundamental  Management
Corporation and Wexford Partners Fund, L.P., each of which was then a beneficial
owner of over 5% of the  Company's  outstanding  common  stock.  Pursuant to the
stockholders' agreement, the Company has agreed to file a registration statement
with respect to the Company's  common stock owned by Wexford Partners Fund, L.P.
or Fundamental  Management  Corporation within 45 days after any request by such
persons. The Company would generally bear the expenses of such registration.


                                      101
<PAGE>

                                     PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

      (a)   List of Documents filed as part of this Report.

            (1)   Financial   Statements  -  See  the  index  to  the  financial
                  statements in Item 8.

            (2)   Financial Statement Schedules - See the index to the financial
                  statement schedules in Item 8.

            (3)   Exhibits -

Exhibit No.                                             Description of Exhibit

3.1         Certificate of Incorporation,  as amended (incorporated by reference
            to Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the
            quarter ended December 31, 1999)

3.2         By-Laws,  as amended  (incorporated  by  reference to Exhibit 3.2 to
            Registrant's Annual Report on Form 10-K for the year ended March 31,
            1992)

4.1         Form of Common  Stock  Certificate  (incorporated  by  reference  to
            Registrant's  Registration  Statement on Form 8-A dated November 21,
            1986)

4.2         Representative's Warrant Agreement between Technology Service Group,
            Inc. and Brookehill Equities,  Inc. dated May 10, 1996 (incorporated
            by reference to Exhibit 4.3 to Registrant's  Registration  Statement
            on Form S-4, File No. 333-38439)

4.3         Supplemental  Warrant Agreement  between the Registrant,  Technology
            Service Group, Inc. and Brookehill Equities, Inc. dated December 18,
            1997  (incorporated  by  reference  to Exhibit  4.4 to  Registrant's
            Annual Report on Form 10-K for the year ended March 31, 1999)

4.4         Rights Agreement,  dated as of May 10, 1999,  between Registrant and
            American Stock Transfer and Trust Company (incorporated by reference
            to Exhibit 99.1 to Registrant's Form 8-K dated April 19, 1999)

10.1*       1991 Stock Option  Plan,  as amended  (incorporated  by reference to
            Exhibit 10.1 to Registrant's  Quarterly  Report on Form 10-Q for the
            quarter ended December 31, 1999)

10.2*       Directors Stock Option Plan, as amended  (incorporated  by reference
            to Exhibit 10.2 to  Registrant's  Quarterly  Report on Form 10-Q for
            the quarter ended December 31, 1999)

10.3*       1999 Stock Option Plan (incorporated by reference to Exhibit 10.3 to
            Registrant's  Quarterly  Report on Form 10-Q for the  quarter  ended
            December 31, 1999)


                                      102
<PAGE>

10.4*       1994  Omnibus  Stock  Plan  of  Technology   Service   Group,   Inc.
            (incorporated  by reference to Exhibit 10.3 to  Registrant's  Annual
            Report on Form 10-K for the year ended March 31, 1998)

10.5        Restated Loan Agreement  between  Registrant and  NationsBank,  N.A.
            dated November 25, 1997  (incorporated  by reference to Exhibit 10.1
            to Registrant's  Quarterly Report on Form 10-Q for the quarter ended
            December 31, 1997)

10.6        First Amendment to Loan and Security  Agreement  between  Registrant
            and  NationsBank,   N.A.  dated  March  29,  1999  (incorporated  by
            reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K
            for the year ended March 31, 1999)

10.7        Promissory Note between Registrant and NationsBank, N.A. dated March
            29, 1999  (incorporated by reference to Exhibit 10.7 to Registrant's
            Annual Report on Form 10-K for the year ended March 31, 1999)

10.8        First   Replacement   Promissory   Note   between   Registrant   and
            NationsBank, N.A. dated March 29, 1999 (incorporated by reference to
            Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the year
            ended March 31, 1999)

10.9        Second   Replacement   Promissory   Note  between   Registrant   and
            NationsBank, N.A. dated March 29, 1999 (incorporated by reference to
            Exhibit 10.9 to Registrant's Annual Report on Form 10-K for the year
            ended March 31, 1999)

10.10       Mortgage   Modification   and  Future  Advance   Agreement   between
            Registrant and NationsBank,  N.A. November 26, 1997 (incorporated by
            reference to Exhibit 10.3 to Registrant's  Quarterly  Report on Form
            10-Q for the quarter ended December 31, 1997)

10.11       Business Loan Agreement between Elcotel, Inc. and NationsBank,  N.A.
            dated June 29, 1999  (incorporated  by  reference to Exhibit 10.3 to
            Registrant's  Quarterly  Report on Form 10-Q for the  quarter  ended
            June 30, 1999) Commercial  Security Agreement between Elcotel,  Inc.
            and  NationsBank,  N.A. dated June 29, 1999 10.12  (incorporated  by
            reference to Exhibit 10.4 to Registrant's  Quarterly  Report on Form
            10-Q for the quarter ended June 30, 1999)

10.13       Promissory Note between Elcotel,  Inc. and  NationsBank,  N.A. dated
            June  29,  1999  (incorporated  by  reference  to  Exhibit  10.5  to
            Registrant's  Quarterly  Report on Form 10-Q for the  quarter  ended
            June 30, 1999)

10.14       Export-Import  Bank of the United States Working  Capital  Guarantee
            Program Borrower  Agreement  between Elcotel,  Inc. and NationsBank,
            N.A. dated June 29, 1999  (incorporated by reference to Exhibit 10.6
            to Registrant's  Quarterly Report on Form 10-Q for the quarter ended
            June 30, 1999)

10.15       Forbearance and Modification  Agreement  between  Elcotel,  Inc. and
            Bank of America, N.A. dated April 12, 2000 (filed herewith)

10.16       Mortgage and Security  Agreement  between Elcotel,  Inc. and Bank of
            America, N.A. dated April 12, 2000 (filed herewith)


                                      103
<PAGE>

10.17       Mortgage  Modification  Agreement between Elcotel,  Inc. and Bank of
            America, N.A. dated April 12, 2000 (filed herewith)

10.18*      Employment  Agreement  between  Elcotel,  Inc.  and Michael J. Boyle
            dated October 15, 1999 (incorporated by reference to Exhibit 10.1 to
            Registrant's  Quarterly  Report on Form 10-Q for the  quarter  ended
            September 30, 1999)

10.19*      Retirement Agreement between Elcotel,  Inc. and Tracey L. Gray dated
            June  11,  1999  (incorporated  by  reference  to  Exhibit  10.2  to
            Registrant's  Quarterly  Report on Form 10-Q for the  quarter  ended
            June 30, 1999)

10.20*      Employment  Agreement  between  Elcotel,  Inc. and C. Shelton  James
            dated June 10, 1999  (incorporated  by  reference to Exhibit 10.1 to
            Registrant's  Quarterly  Report on Form 10-Q for the  quarter  ended
            June 30, 1999)

10.21*      Employment  Agreement  between  Elcotel,  Inc. and David F. Hemmings
            dated December 10, 1998  (incorporated  by reference to Exhibit 10.3
            to Registrant's  Quarterly Report on Form 10-Q for the quarter ended
            December 31, 1998)

10.22*      Employment  Agreement between Elcotel,  Inc. and William H. Thompson
            dated December 10, 1998  (incorporated  by reference to Exhibit 10.4
            to Registrant's  Quarterly Report on Form 10-Q for the quarter ended
            December 31, 1998)

10.23*      Employment  Agreement  between  Elcotel,  Inc.  and Kenneth W. Noack
            dated December 10, 1998  (incorporated  by reference to Exhibit 10.5
            to Registrant's  Quarterly Report on Form 10-Q for the quarter ended
            December 31, 1998)

10.24*      Employment  Agreement between Elcotel,  Inc. and Eduardo  Gandarilla
            dated December 10, 1998  (incorporated  by reference to Exhibit 10.9
            to Registrant's  Quarterly Report on Form 10-Q for the quarter ended
            December 31, 1998)

10.25*      Employment  Termination  Agreement between Elcotel, Inc. and Eduardo
            Gandarilla effective April 2, 2000 (filed herewith)

10.26       Technology  and Transfer  Agreement  between  Registrant  and Lucent
            Technologies   Inc.  dated  September  30,  1997   (incorporated  by
            reference to Exhibit 2.2 to  Registrant's  Form 8-K dated  September
            30, 1997)

10.27       Patent License Agreement between Registrant and Lucent  Technologies
            Inc. dated September 30, 1997  (incorporated by reference to Exhibit
            2.3 to Registrant's Form 8-K dated September 30, 1997)

10.28       Stockholders' Agreement (incorporated by reference to Exhibit 2.3 to
            Registrant's Registration Statement on Form S-4, File No. 333-38439)


                                      104
<PAGE>

21.1        Subsidiaries of the Registrant (filed herewith)

23.1        Independent Auditor's Consent (filed herewith)

27          Financial Data Schedule (Edgar filing only)

*  Management compensation agreements and plans.

      (b)   Reports on Form 8-K

            The  Registrant  filed no  reports  on Form 8-K  during  the  fourth
            quarter of the year ended March 31, 2000.


                                      105
<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the Company has duly caused this Report to be signed on its behalf
by the undersigned thereunto duly authorized, on the 5th day of July 2000.

                                      ELCOTEL, INC.

                                      By: /s/Michael J. Boyle
                                          --------------------------------------
                                             Michael J. Boyle
                                             President & Chief Executive Officer

KNOW ALL MEN BY THESE  PRESENTS,  that each individual  whose signature  appears
below  constitutes and appoints each of Michael J. Boyle and William H. Thompson
jointly and severally his true and lawful  attorneys-in-fact and agent with full
powers of substitution  for him and in his name,  place and stead in any and all
capacities to sign on his behalf, individually and in each capacity stated below
and to file any and all  amendments  to this Annual Report on Form 10-K with the
Securities and Exchange  Commission,  granting unto said  attorneys-in-fact  and
agents  and each of them full power and  authority  to do and  perform  each and
every act and thing requisite and necessary to be done in and about the premises
as fully as he might or could do in person,  hereby ratifying and confirming all
that said  attorneys-in-fact  and agents, or any of them, or their substitute or
substitutes may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
           Signature                            Title                               Date
           ---------                            -----                               ----

<S>                                    <C>                                      <C>
By: /s/ Michael J. Boyle               President & Chief Executive              July 5, 2000
    ---------------------------        Officer, Director and
         Michael J. Boyle              Chairman of the Board


By: /s/ William H. Thompson            Senior Vice President,                   July 5, 2000
    ---------------------------        Chief Financial Officer,
         William H. Thompson           Secretary (principal financial
                                       officer)


By: /s/ Scott M. Klein                 Controller (principal                    July 5, 2000
    ---------------------------        accounting officer)
         Scott M. Klein

By: /s/ Charles H. Moore               Director                                 July 5, 2000
    ---------------------------
         Charles H. Moore

By: /s/ Thomas E. Patton               Director                                 July 5, 2000
    ---------------------------
         Thomas E. Patton

By: /s/ Mark L. Plaumann               Director                                 July 5, 2000
    ---------------------------
         Mark L. Plaumann
</TABLE>

                                      106