UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

                           Commission File No. 0-15205

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

            Delaware                                            59-2518405
(State or other jurisdiction of                               (IRS Employer
 incorporation or organization)                             Identification No.)

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

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

                                    No Change
              (Former name, former address and former fiscal year,
                         if changed since last report)

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 |_|

As of August 10, 2001, there were 13,779,991  shares of the Registrant's  Common
Stock outstanding.


<PAGE>

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

                         ELCOTEL, INC. AND SUBSIDIARIES
                             (Debtor-in-Possession)
                 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                (Dollars, except per share amounts in thousands)

                                                        June 30,      March 31,
                                                          2001          2001
                                                        --------      ---------
ASSETS
Current assets:
    Cash                                                $  3,027       $  3,637
    Accounts and notes receivable,
      less allowance for credit
        losses of $2,141 and $2,092                        4,655          4,948
    Inventories                                            3,275          3,477
    Refundable income taxes                                    5             22
    Prepaid expenses and other
      current assets                                       1,292            830
                                                        --------       --------
          Total current assets                            12,254         12,914
Property, plant and equipment, net                         3,769          4,026
                                                        --------       --------
                                                        $ 16,023       $ 16,940
                                                        ========       ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities Not Subject to Compromise:
  Current liabilities: -
    Accounts payable                                    $  1,439       $  2,017
    Deferred revenue                                         463            756
    Customer advances                                          5             41
    Accrued expenses and other
      current liabilities                                  2,019          1,188
    Notes, debt and capital lease
      obligations payable - current                           16             35
                                                        --------       --------
          Total current liabilities                        3,942          4,037

Liabilities subject to compromise                         16,489         16,797
                                                        --------       --------
                                                          20,431         20,834
                                                        --------       --------
Commitments and contingencies                                 --             --
Stockholders' deficiency:
    Common stock, $.01 par value,
      40,000,000 shares authorized,
      13,831,991 shares issued                               138            138
    Additional paid-in capital                            47,565         47,565
    Accumulated deficit                                  (51,649)       (51,138)
    Accumulated other comprehensive loss                    (285)          (282)
    Less - cost of 52,000 shares of
      common stock in treasury                              (177)          (177)
                                                        --------       --------
          Total stockholders' deficiency                  (4,408)        (3,894)
                                                        --------       --------
                                                        $ 16,023       $ 16,940
                                                        ========       ========

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


                                       2
<PAGE>

                         ELCOTEL, INC. AND SUBSIDIARIES
                             (Debtor-in-Possession)
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                          AND OTHER COMPREHENSIVE LOSS
                    (In thousands, except per share amounts)

                                                           Three Months Ended
                                                                June 30,
                                                         ----------------------
                                                           2001          2000
                                                         --------      --------
Revenues and net sales:
  Product sales                                          $  4,366      $  7,113
  Service revenues                                          2,216         2,158
                                                         --------      --------
                                                            6,582         9,271
                                                         --------      --------
Cost of revenues and sales:
  Cost of products sold                                     2,974         5,285
  Cost of services                                          1,899         1,983
                                                         --------      --------
                                                            4,873         7,268
                                                         --------      --------
Gross profit                                                1,709         2,003
                                                         --------      --------
Other costs and expenses:
    Selling, general and administrative                     1,042         2,175
    Engineering, research and development                     581         1,094
    Reorganization costs                                      617            --
    Amortization of goodwill and
      indentified intangible assets                            --           448
    Interest (income) expense, net
      (contractual interest $680 for
      the three months ended June 30, 2001)                   (20)          420
                                                         --------      --------
                                                            2,220         4,137
                                                         --------      --------
Net loss                                                     (511)       (2,134)
Other comprehensive loss, net of tax:
Holding loss on marketable securities                          (3)         (169)
                                                         ========      ========
Comprehensive loss                                       $   (514)     $ (2,303)
                                                         ========      ========
Loss per common and common
  equivalent share:
      Basic                                              $  (0.04)     $  (0.16)
                                                         ========      ========
      Diluted                                            $  (0.04)     $  (0.16)
                                                         ========      ========
Weighted average number of common and
  common equivalent shares outstanding:
      Basic                                                13,780        13,742
                                                         ========      ========
      Diluted                                              13,780        13,742
                                                         ========      ========

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


                                       3
<PAGE>

                         ELCOTEL, INC. AND SUBSIDIARIES
                             (Debtor-in-Possession)
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

                                                             Three Months Ended
                                                                  June 30,
                                                             -------------------
                                                               2001       2000
                                                             --------   --------
Cash flows from operating activities
    Net loss                                                 $  (511)   $(2,134)
    Adjustments to reconcile net loss to net
      cash provided by (used for) operating activities:
        Depreciation and amortization                            255      1,128
        Provision for credit losses                               39         95
        Loss on disposition of equipment                           1         --
        Provisions for obsolescence and warranty
          expense                                                136        190
        Stock option compensation                                  5         22
        Value of services received in return for
          issuance of common stock purchase warrants              --         24
        Changes in operating assets and liabilities:
          Accounts and notes receivable                         (792)       573
          Inventories                                            137        979
          Refundable income taxes                                 17         --
          Prepaid expenses and other current assets             (465)        29
          Other assets                                            --       (180)
          Accounts payable                                       283       (679)
          Deferred revenue                                      (293)        20
          Customer advances                                      (36)        31
          Accrued expenses and other current liabilities         658       (418)
                                                             -------    -------
      Net cash used for operating activities                    (566)      (320)
                                                             -------    -------
Cash flows from investing activities
    Capital expenditures                                          --        (71)
    Proceeds from disposition of equipment                         1         --
    Capitalized software expenditures                             --       (419)
                                                             -------    -------
      Net cash provided by (used for) investing activities         1       (490)
                                                             -------    -------
Cash flows from financing activities
    Principal payments on notes payable and
      capital lease obligations                                  (45)      (198)
                                                             -------    -------
      Net cash used for financing activities                     (45)      (198)
                                                             -------    -------
Decrease in cash                                                (610)    (1,008)
Cash, beginning of period                                      3,637      1,153
                                                             -------    -------
Cash, end of period                                          $ 3,027    $   145
                                                             =======    =======

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


                                       4
<PAGE>

                         ELCOTEL, INC. AND SUBSIDIARIES
                             (Debtor-in-Possession)
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars, except per share amounts, in thousands)

1. GENERAL

      Elcotel, Inc. ("Elcotel") and its wholly owned subsidiaries (collectively,
the "Company"), debtor-in-possession,  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,  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 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.

      On January 22, 2001 (the "Petition  Date"),  Elcotel and its subsidiaries,
Technology  Service  Group,  Inc. and Elcotel  Direct,  Inc.  (collectively  the
"Debtors"),  filed voluntary  petitions  seeking  protection and  reorganization
under Chapter 11 of the United States  Bankruptcy Code (the  "Bankruptcy  Code")
under Case Numbers 01-01077-8C1,  01-01078-8C1 and 01-01079-8C1 (the "Chapter 11
Proceedings"). The Chapter 11 Proceedings have been consolidated for the purpose
of  joint  administration  under  Case  Number  01-01077-8C1.  The  Debtors  are
currently operating their businesses as debtor-in-possession ("DIP") pursuant to
orders of relief under the jurisdiction of the United States  Bankruptcy  Court,
Middle District of Florida Tampa Division (the "Bankruptcy Court"). As such, the
debtors  cannot  engage in  transactions  considered  to be outside the ordinary
course of business without obtaining Bankruptcy Court approval. See Note 2.

      The accompanying  unaudited condensed  consolidated  financial  statements
have been prepared on a going concern basis of accounting and in accordance with
AICPA  Statement  of  Position  90-7,   "Financial   Reporting  by  Entities  in
Reorganization  Under the  Bankruptcy  Code,"  which the Company  adopted on the
Petition  Date.  In  the  opinion  of  management,  the  accompanying  unaudited
condensed consolidated financial statements reflect all adjustments necessary to
present  fairly the financial  position and results of operations of the Company
in accordance with accounting principles generally accepted in the United States
of America applicable to a going concern,  which contemplates the realization of
assets and payment of liabilities in the ordinary course of business.

      The  events  resulting  in the  Company's  filing  for  relief  under  the
Bankruptcy Code,  including recurring operating losses and its inability to meet
its debt  service  requirements,  raise  substantial  doubt about the  Company's
ability to continue as a going  concern.  The  continuation  of the Company as a
going concern is dependent upon,  among other things,  the terms of the ultimate
plan of  reorganization  and


                                       5
<PAGE>

confirmation  thereof under the  Bankruptcy  Code and the ability of the Company
to: (i) obtain  adequate  sales and revenues to achieve  profitable  operations;
(ii) generate  sufficient cash from operations and financing sources to meet its
obligations;  (iii) continue to be authorized to use cash  collateral;  and (iv)
obtain adequate post  reorganization  financing.  There can be no assurance that
the Company's  proposed Joint Plan of Reorganization  (the "Plan") filed on July
16, 2001 (see Note 2) will be approved by the Bankruptcy  Court or that the Plan
will allow the Company to operate  profitably.  Actions of the Bankruptcy  Court
regarding the Plan and other  matters  during the Chapter 11  Proceedings  could
change  materially  the  financial  condition  and/or  outlook  of the  Company.
Furthermore,  the future availability or terms of financing cannot be determined
in light of the Chapter 11  Proceedings  and there can be no assurance  that the
amounts  available  through  any  financing  will  be  sufficient  to  fund  the
operations of the Company until the Plan is acted upon by the Bankruptcy  Court.
In addition, the Company may experience difficulty in attracting and maintaining
customers and appropriate personnel and in continuing normal business operations
during the pendency of the Chapter 11 Proceedings.

      The accompanying  unaudited condensed consolidated financial statements do
not include any adjustments  relating to  recoverability  and  classification of
recorded  asset amounts or the amount and  classification  of  liabilities  that
might be necessary  should the Company be unable to continue as a going concern.
In addition,  as a result of the  reorganization  proceedings  under Chapter 11,
realization of assets and liquidation of liabilities are subject to uncertainty,
and the Debtors may take, or be required to take,  actions that may cause assets
to be realized,  or liabilities  to be liquidated,  for amounts other than those
reflected  in  the  Company's   unaudited   condensed   consolidated   financial
statements.   The  amounts  reported  in  the  Company's   unaudited   condensed
consolidated  financial  statements do not give effect to any adjustments of the
carrying  value of assets or  amounts  of  liabilities  that  might  result as a
consequence  of  actions  that may be taken  as a result  of the  reorganization
proceedings.

      The accompanying  unaudited  condensed  consolidated  balance sheet of the
Company at June 30, 2001 and the unaudited condensed consolidated  statements of
operations and other comprehensive loss for the three months ended June 30, 2001
and 2000 and of cash flows for the three months ended June 30, 2001 and 2000 are
condensed and have been prepared  pursuant to the rules and  regulations  of the
Securities  and Exchange  Commission  without  audit.  Certain  information  and
footnote  disclosures  normally  included in  financial  statements  prepared in
accordance with accounting principles generally accepted in the United States of
America  have been  condensed  or  omitted.  In the opinion of  management,  the
financial  information  included  herein  reflects  all  adjustments  considered
necessary to present  fairly the  financial  position of the Company at June 30,
2001 and the results of its operations and cash flows for all periods presented,
and, all such adjustments are of a normal and recurring  nature.  The results of
operations  for the  three  months  ended  June  30,  2001  are not  necessarily
indicative of the results for the full fiscal year.

      The Company's unaudited condensed  consolidated  financial  statements for
the three  months ended June 30, 2000 have been  reclassified  to conform to the
presentation  at and for the three  months ended June 30,  2001.  The  condensed
consolidated balance sheet at March 31, 2001 has been derived from the Company's
audited consolidated financial statements as of and for the year ended March 31,
2001. It is suggested  that these  unaudited  condensed  consolidated  financial
statements be read in conjunction with the consolidated financial statements and
notes  thereto  included  in the  Company's  Annual  Report on Form 10-K for the
fiscal year ended March 31, 2001.

2. PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

      Under the Bankruptcy  Code,  actions by creditors to collect  pre-petition
indebtedness  are stayed and other  contractual  obligations may not be enforced
against the Debtors absent obtaining relief from the


                                       6
<PAGE>

Bankruptcy Court. As  debtor-in-possession,  the Debtors have the right, subject
to Bankruptcy Court approval and certain other limitations,  to assume or reject
executory  contracts and leases. If the Debtors reject an executory  contract or
lease, the Debtors are relieved from their  obligations to perform further under
the  contract  or lease but are  subject to a claim for  damages  for the breach
thereof.  Any damages  resulting from rejection are treated as general unsecured
claims in the  reorganization.  Pre-petition  claims,  which were  contingent or
unliquidated  at  the  commencement  of a  Chapter  11  proceeding,  may  become
allowable  against the Debtors in amounts fixed by the  Bankruptcy  Court during
the claims  reconciliation  process.  Substantially  all  liabilities  as of the
Petition Date are subject to compromise or settlement under the Plan to be voted
upon by creditors, equity holders and other affected parties and approved by the
Bankruptcy Court. The accompanying  consolidated balance sheets at June 30, 2001
and March 31, 2001 include approximately $16,489 and $16,797,  respectively,  of
liabilities  subject to  compromise  or  settlement  pursuant  to the Chapter 11
Proceedings as follows:

                                                       June 30,    March 31,
                                                         2001        2001
                                                       --------    ---------

Accounts payable                                       $ 2,710     $ 2,895
Accrued expenses and other current liabilities           1,843       1,940
Customer advances                                          482         482
Notes, debt and capital lease obligations               11,454      11,480
                                                       -------     -------
                                                       $16,489     $16,797
                                                       =======     =======

      The liabilities subject to compromise  represent the Company's estimate of
known or  potential  claims to be  resolved  in  connection  with the Chapter 11
Proceedings.  Such claims remain  subject to future  adjustments  as substantial
uncertainty  exists  regarding  the  measurement  of certain of the  liabilities
subject to compromise,  and rulings by the Bankruptcy  Court could result in the
reclassification  of certain  liabilities  subject to compromise pursuant to the
Chapter 11  Proceedings.  Adjustments  may result from:  (1)  negotiations;  (2)
actions of the  Bankruptcy  Court;  (3)  further  developments  with  respect to
disputed  claims;  (4)  the  determination  as to the  value  of any  collateral
securing  claims;  (5)  proofs of  claim;  (6)  future  rejection  of  executory
contracts or leases; and (7) other events.

      Schedules  were filed with the  Bankruptcy  Court setting forth the assets
and  liabilities  of the  Debtors as of the  Petition  Date as  recorded  in the
Debtors'  accounting  records.  Claimants may file claims that differ from those
reflected in the  Company's  accounting  records.  Any  differences  between the
Company's  records and claims  filed by  creditors  will be  reconciled  and any
differences may be resolved by negotiated  agreement between the Debtors and the
claimant or by the Bankruptcy Court as part of the claims reconciliation process
in the Chapter 11 Proceedings.

      The Company filed the Plan on July 16, 2001, which proposed the resolution
of  liabilities  subject to  compromise  and  matters  related to the  Company's
emergence  from  bankruptcy.  Pursuant to the Plan,  Bank of America,  N.A. (the
"Bank")  would  receive  $4,000 in cash payable from the proceeds of a revolving
credit facility that the Debtors are attempting to obtain, the proceeds from the
sale of the  Company's  real  estate  estimated  at  approximately  $2,400 and a
subordinated  note in the  principal  amount  of  $4,798  (the  "Bank  Note") in
satisfaction  of the Bank's secured claims.  As proposed,  the terms of the Bank
Note would  provide  for:  (i)  interest at a rate of twelve  percent  (12%) per
annum,  which  would be payable  when the  Company's  ratio of  earnings  before
interest,  taxes,  depreciation and amortization (as defined) to senior interest
expense under the revolving  credit facility  exceeds 5 to 1; (ii) a maturity of
six (6) years;  and (iii) the payment of principal  based on the Company's  cash
flow.  In addition,  the Plan provides for the Debtors'  unsecured  creditors to
receive  shares of  Convertible  Preferred  Stock in an


                                       7
<PAGE>

aggregate face amount of $2,500 (the "Preferred Stock"). As proposed,  the terms
of the Preferred Stock would provide for: (i) the holders thereof to convert, at
their  discretion,  the shares of Preferred Stock into that aggregate  number of
shares of the  Company's  common  stock that  would be equal to a 30%  ownership
interest in the  Company;  (ii)  dividends  at a rate of eight  percent (8%) per
annum,  which  would be  payable  based on the  Company's  cash  flow  after the
repayment of the Bank Note; and (iii)  redemption by March 31, 2008,  subject to
the  conversion  option.  The  Company's  current  stockholders  would retain an
approximate 70% ownership in the Company.

      There can be no assurance  that the  creditors  and equity  holders of the
Debtors will approve the Plan,  that the Bankruptcy  Court will confirm the Plan
or that the Plan will  allow the  Company  to  continue  to  operate  or operate
profitably.  Also,  there can be no assurance  that  amendments  to the Plan and
other actions during the Chapter 11 Proceedings will not have a material adverse
effect on the financial  condition and/or outlook of the Company and its ability
to reorganize.  Furthermore, there is no assurance that the Company will be able
to secure the financing required to consummate the Plan, or that such financing,
if available, will not be on onerous terms.

      A plan of  reorganization  must be confirmed by the Bankruptcy  Court upon
certain  findings  being  made  by  the  Bankruptcy  Court  as  required  by the
Bankruptcy  Code. The Bankruptcy  Court may confirm a plan  notwithstanding  the
non-acceptance  of the plan by an impaired class of creditors or equity security
holders  if  certain  requirements  of the  Bankruptcy  Code are met.  A plan of
reorganization confirmed by the Bankruptcy Court could also result in holders of
the Company's  common stock receiving no value for their  interests.  Because of
such  possibilities,   the  value  of  the  Company's  common  stock  is  highly
speculative, and the common stock may have no value.

      The Bankruptcy  Court  established  May 29, 2001 as the deadline (the "Bar
Date") for creditors to file claims against the Debtors.  Notices were mailed to
all creditors of the Debtors  advising them that claims against the Debtors must
be submitted to the Bankruptcy Court by the Bar Date. Creditors who are required
to file claims but fail to meet the Bar Date are forever barred from voting upon
or receiving distributions under any plan of reorganization.

      Approximately  $12,325 of the Company's  liabilities subject to compromise
pursuant  to the  Chapter  11  Proceedings  relate  to  amounts  (principal  and
interest)  owed to the Bank  pursuant  to notes  (the "Bank  Notes"),  which are
collateralized  by substantially  all of the assets of the Company.  The amounts
outstanding pursuant to the terms of the Bank Notes are  undercollateralized and
are impaired under the Plan. Accordingly,  the obligations,  including principal
and accrued interest,  payable to the Bank are classified as liabilities subject
to compromise pursuant to the Chapter 11 Proceedings.

      The  Bankruptcy  Court has issued  orders  providing  the Company with the
authority to pay pre-petition and post-petition compensation, benefits and other
employee  obligations to and on behalf of its employees,  officers and directors
and to use its cash balances and cash collections  (which are part of the Bank's
collateral)  to  operate  the  Debtors'  businesses  in the  ordinary  course of
business for goods and services  received after the Petition Date. The Company's
authority to use cash  collateral  pursuant to a fifth interim order approved by
the Bankruptcy  Court on May 23, 2001 expires on August 17, 2001.  Prior to that
date, the Company plans to request  authority to continue to use cash collateral
to operate the  Debtors'  businesses  past that date.  However,  there can be no
assurance  that the  Bankruptcy  Court will continue to authorize the Debtors to
use cash collateral to operate their businesses.

      On May 3, 2001, the Bankruptcy Court approved a settlement agreement dated
April 6, 2001 between the Company and one of its customers  that provides for an
offset of approximately  $1,562 of the Company's  pre-petition  accounts payable
against accounts  receivable due from the customer.  The


                                       8
<PAGE>

obligations  payable  to and the  receivable  from the  customer  relate  to the
Company's purchases and sales, respectively, pursuant to a certain refurbishment
sales agreement between the parties.  The order of the Bankruptcy Court provides
for the offset of the Company's  payable  obligation to the customer against its
accounts  receivable due from the customer in the amounts of $562 on May 3, 2001
(the date the Bankruptcy  Court approved the  settlement  agreement),  $100 each
month during the period  beginning  April 1, 2001 and ending June 30, 2001;  $75
each month during the period  beginning  July 1, 2001 and ending March 31, 2002;
and $25 during the month ending April 30, 2001. Accordingly,  $700 and $1,562 of
pre-petition  accounts payable obligations are classified as current liabilities
in the accompanying  condensed  consolidated  balance sheet at June 30, 2001 and
March 31, 2001,  respectively.  The offset of accounts  payable against accounts
and notes  receivable  during the three  months  ended June 30, 2001  aggregated
$1,046, including $184 of liabilities incurred subsequent to the Petition Date.

      On May 31, 2001, the Bankruptcy  Court issued an order approving a binding
letter  agreement  dated  March 29,  2001  between  the  Company  and one of its
customers  that  provides for the offset of a  pre-petition  $1,000  deposit (or
customer advance) liability of the Company against accounts  receivable due from
the customer and that set forth the primary  terms of a new supply  agreement(s)
between the parties.  The  obligations  payable to and the  receivable  from the
customer  relate to a cash advance from the customer and sales to the  customer,
respectively, pursuant to sales and purchase agreements between the parties. The
order of the Bankruptcy  Court  provides for the offset of the customer  advance
obligation against the Company's accounts receivable from the customer as of the
date of the  order and  authorized  the  Company  to enter  into the new  supply
agreement(s).  Accordingly,  the $1,000 pre-petition customer advance obligation
was offset against accounts and notes  receivable in the accompanying  condensed
consolidated balance sheets at June 30, 2001 and March 31, 2001.

      On June 28, 2001, the Bankruptcy Court approved the Company's Key Employee
Retention and Severance Plan (the  "Retention  Plan") and authorized the Company
to make payments  pursuant to the terms of the Retention Plan. On that date, the
Bankruptcy Court also authorized the Company to pay incentive  bonuses and sales
commissions  to  certain  officers  accrued  as of  March  31,  2001  and  sales
commissions  to a certain  officer  for fiscal  year 2002.  The  Retention  Plan
provides for the payment of retention bonuses aggregating  approximately $766 to
officers and key employees between the date of the order of the Bankruptcy Court
and June 1, 2002. In addition,  the  Retention  Plan provides for the payment of
emergence bonuses  aggregating  approximately $646 to officers and key employees
when and if the Company's Plan is substantially  consummated.  In addition,  the
Retention  Plan  provides for payment of severance  benefits to officers and key
employees aggregating  approximately $607 upon termination of employment without
cause  during the  pendency  of the  Chapter 11 cases  provided,  however,  that
payments  of  emergence  bonuses  shall be credited  against any such  severance
benefits.  During the three months ended June 30, 2001, the Company accrued,  as
reorganization  costs,  retention  compensation of $221 pursuant to the terms of
the Retention Plan.

      Under   certain   manufacturing   agreements   between   the  Company  and
subcontractors,  the Company is committed to purchase inventory that is acquired
by the  subcontractors  pursuant  to  purchase  orders  issued  by the  Company.
Subsequent to the Petition  Date,  the Company has  continued its  relationships
with such subcontractors or their successors.  However, as result of the Chapter
11 Proceedings and/or the potential rejection of contractual agreements pursuant
to the Bankruptcy Code, these subcontractors may file claims against the Company
that include the value of inventory  purchased to fulfill the  Company's  orders
and such  claims may be  substantially  greater  than the  applicable  liability
reflected in the accompanying condensed  consolidated financial statements.  The
Company believes that its purchase  commitments under these agreements may range
from $2,000 to $2,500 at June 30, 2001 and March 31, 2001.

      Elcotel has operated its business and the business of its  subsidiaries as
a combined entity subsequent to business combinations or the date of acquisition
of certain net assets of other entities.


                                       9
<PAGE>

Accordingly,  the assets and  liabilities of the acquired  operations  have been
used to  generate  sales,  revenues,  assets and  liabilities  of  Elcotel,  and
intercompany  receivables  and  payables  do not  reflect  the  operations  from
acquired  assets.  There is no assurance as to how this matter will be addressed
by the Bankruptcy Court or as the resolution of any intercompany receivables and
payables.

      Management believes that the matters discussed in the preceding paragraphs
have a significant  impact on the value of the bankruptcy estates of the Debtors
and therefore the amounts available to unsecured  creditors.  Also, the ultimate
resolution of the  obligations  payable to the Bank will determine in large part
the cost of ending  the  Chapter  11  Proceedings.  There are other  significant
issues that will arise as a result of the Chapter 11 Proceedings,  including the
measure of damages arising from the Debtors' rejection of burdensome contractual
obligations.  Resolution of these and other complex  issues  brought  before the
Bankruptcy  Court are expected to result in  substantial  legal,  accounting and
other  professional  fees and  expenses.  During the three months ended June 30,
2001, the Company accrued  reorganization related professional fees and expenses
of approximately $497.  Aggregate  reorganization costs of $617 during the three
months ended June 30, 2001 include the  professional  fees and expenses and $141
in accrued  compensation  pursuant to the Retention Plan, net of interest income
on cash balances of $21.

      The  Company  discontinued  payments  related to its Bank  obligations  in
September 2000 and suspended  payments,  as of the Petition Date, with regard to
most  other  prepetition  obligations.  Management  cannot  predict at this time
whether (or when) its Plan will be approved or whether its provisions related to
debt service or other  payments of  pre-petition  obligations  will be approved.
Provisions of the Debtors' confirmed Plan, if any, may differ significantly from
those set forth herein,  and such differences may be material.  Material changes
in the provisions of the Plan or the inability of the Debtors to obtain approval
of the Plan could  have a  material  adverse  effect on the  Company  and on the
rights of its creditors and shareholders.

      Information  regarding  additional  aspects  of the  Debtors'  Chapter  11
Proceedings is included in other notes herein.

2. INVENTORIES

      Inventories at June 30, 2001 and March 31, 2001 are summarized as follows:

                                                      June 30,      March 31,
                                                        2001           2001
                                                      --------      ---------

Finished products                                     $   534        $   621
Work-in-process                                           725            642
Purchased components                                    4,439          4,572
                                                      -------        -------
                                                        5,698          5,835
Reserve for obsolescence                               (2,423)        (2,358)
                                                      -------        -------
                                                      $ 3,275        $ 3,477
                                                      =======        =======


                                       10
<PAGE>

4. NOTES, DEBT AND CAPITAL LEASE OBLIGATIONS

      Notes,  debt and capital  lease  obligations  payable at June 30, 2001 and
March 31, 2001 are summarized as follows:

                                                           June 30,    March 31,
                                                             2001        2000
                                                           --------    ---------

Secured Promissory Notes Payable to Bank,
  due September 30, 2000:
   Revolving credit lines                                   $ 6,376     $ 6,376
   Installment/term note                                      3,072       3,072
   Mortgage note                                              1,750       1,750
Capital lease obligations                                       256         282
Unsecured promissory note, payable in thirty equal
   monthly installments of $6 including interest                 16          35
                                                            -------     -------
                                                             11,470      11,515
 Less - Amount not subject to compromise
     classified as current                                      (16)        (35)
                                                            -------     -------
 Notes, debt and capital lease obligations classified
     as liabililities subject to compromise                 $11,454     $11,480
                                                            =======     =======

      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 the Bank. On April 12, 2000, the Company  entered into a
Forbearance and Modification  Agreement (the  "Forbearance  Agreement") with the
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 revolving credit
lines, an installment note and a mortgage note was accelerated to July 31, 2000.
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 floating prime interest rate
(11.5% at April 12, 2000). In addition,  the  availability  of additional  funds
under a $2,000 export  revolving credit line (none of which was outstanding) and
a $1,500  equipment  revolving  credit line ($281 of which was  outstanding) was
cancelled.  Further,  the  Forbearance  Agreement  permitted an  overadvance  of
indebtedness  outstanding  under the Company's  working capital revolving credit
line and  installment  note of $2,800  through  June 30, 2000 and $1,500 for the
remainder of its term.

      Effective July 31, 2000, the Company entered into a Second Forbearance and
Modification  Agreement (the "Second  Forbearance  Agreement").  Pursuant to the
Second  Forbearance  Agreement,  the maturity date of  indebtedness  outstanding
under the Loan  Agreements  was extended to September 30, 2000 and the fixed and
floating  interest rates of outstanding notes were increased to three percentage
points  above the  bank's  prime  interest  rate  (12.5% at July 31,  2000).  In
addition,  the permitted  overadvance under the working capital revolving credit
line and installment note was increased to $2,800.

      The Second  Forbearance  Agreement  expired on  September  30,  2000,  and
accordingly,  all obligations  outstanding  under the Loan Agreements became due
and payable on that date.  During  September 2000, the Company was  experiencing
difficulties in its negotiations with the Bank to either


                                       11
<PAGE>

restructure  the debt or enter  into a third  forbearance  agreement  with terms
acceptable  to the  Company.  Accordingly,  the Company  ceased  making  monthly
principal and interest  payments in September  2000, and upon  expiration of the
Second  Forbearance  Agreement  defaulted on the payment of the obligations that
matured on September 30, 2000. The Company and the Bank  continued  negotiations
regarding   restructuring   and/or  forbearance  until  such  negotiations  were
terminated in December 2000.

      On January 12, 2001,  the Bank filed a lawsuit  against the Company in the
Circuit Court of the Twelfth Judicial Circuit in and for Manatee County, Florida
Civil  Division  (the  "Court") to foreclose on the mortgage and other  security
agreements on the Company's  real and personal  property and  substantially  all
other assets of the Company (the "Collateral")  securing  obligations payable to
the Bank pursuant to the terms of the Loan Agreements. The suit alleged that the
Company  failed  to pay its  obligations  under  the Loan  Agreements  including
principal of approximately $11,200,  non-default interest of approximately $509,
default interest,  fees, expenses and costs and breached other terms of the Loan
Agreements, and requested the Court to enter a judgment of foreclosure,  appoint
a receiver to take possession and control over the Collateral and award the Bank
such other and further relief appropriate under the circumstances.

      As  described  in Note 2,  Elcotel and its  subsidiaries  filed  voluntary
petitions for  reorganization  under Chapter 11 of the United States  Bankruptcy
Code on  January  22,  2001.  Section  362 of the  Bankruptcy  Code  imposes  an
automatic stay that precludes the Bank from taking any remedial  action pursuant
to the foreclosure suit.

      The Company  believes that the fair value of the  Collateral  securing the
debt outstanding under the Loan Agreements is substantially less than the amount
of the obligations outstanding under the Loan Agreements and the Bank's claim is
impaired under the Plan.  Accordingly,  the Company ceased accruing  interest on
the debt  outstanding  under  the Loan  Agreements  as of the  Petition  Date in
accordance  with SOP 90-7.  As a result of the Company's  default  regarding the
payment of the  obligations  due the Bank in  September  2000,  the  contractual
(default)  interest  rate on the debt  outstanding  under  the  Loan  Agreements
increased to 25% per annum.

5. STOCKHOLDERS' DEFICIENCY

      Changes in  stockholders'  deficiency  for the three months ended June 30,
2001 are summarized as follows:

<TABLE>
<CAPTION>
                                                                 Accumulated
                                         Additional                 Other
                              Common      Paid-in   Accumulated  Comprehensive    Treasury
                               Stock      Capital     Deficit        Loss           Stock       Total
                             --------    ---------- ------------  -------------  ------------  ---------

<S>                          <C>         <C>         <C>           <C>            <C>         <C>
Balance at March 31, 2001    $    138    $ 47,565    $(51,138)     $   (282)      $   (177)   $ (3,894)
Holding loss on marketable
  securities, net of tax                                                 (3)                       (3)
Net loss for the period                                  (511)                                   (511)
                             --------    --------    --------      --------       --------    --------
Balance at June 30, 2001     $    138    $ 47,565    $(51,649)     $   (285)      $   (177)   $ (4,408)
                             ========    ========    ========      ========       ========    ========

</TABLE>


                                       12

<PAGE>

6. SUPPLEMENTAL CASH FLOW INFORMATION

      A summary of the  Company's  supplemental  cash flow  information  for the
three months ended June 30, 2001 and 2000 is as follows:

                                                              2001        2000
                                                            --------    --------

Cash paid (received) during the period for:
    Interest                                                $   (38)     $   332
    Income taxes                                                (17)          --

Non-cash investing and financing activities:
    Equipment acquired under capital lease
      obligations                                                --          140
    Offset of accounts payable against accounts
      and notes receivable                                    1,046           --
    Unrealized loss on marketable securities
      resulting in an increase in stockholders'
      deficiency and decrease in prepaid expenses
      and other current assets                                    3          169
    Increase in prepaid expenses and decrease in
      stockholders' deficiency upon issuance of
      common stock purchase warrants                             --           45

7. LOSS PER SHARE

      Loss  per  common  share is  computed  in  accordance  with  Statement  of
Financial  Accounting  Standards No. 128,  Earnings Per Share ("SFAS 128"). SFAS
128 requires  disclosure of basic earnings (loss) per share and diluted earnings
(loss) per share.  Basic  earnings  (loss) per share is computed by dividing net
income  (loss)  by the  weighted  average  number  of  shares  of  common  stock
outstanding during the period.  Diluted earnings (loss) per share is computed by
dividing net income  (loss) by the weighted  average  number of shares of common
stock outstanding and potential  dilutive common shares  outstanding  during the
period.

      The weighted average number of shares of common stock  outstanding used to
compute  basic loss per share for the three  months ended June 30, 2001 and 2000
was  13,779,991  shares  and  13,742,391  shares,  respectively.  There  were no
potential  dilutive common shares outstanding during the three months ended June
30, 2001 and 2000 for purposes of computing diluted loss per share.

8. DISCLOSURE 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's  customers include private payphone operators and telephone
companies  in  the  United  States  and  certain   foreign   countries  and  its
distributors.  The Company evaluates  segment  performance based on gross profit
and its  overall  performance  based on profit or loss  from  operations  before
income taxes.

      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


                                       13
<PAGE>

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 and gross  profit.  General  operating
expenses, including depreciation on shared assets, amortization and interest are
not included in the information  provided to the chief operating  decision maker
to measure performance of reportable segments.

      Revenues and net sales and gross profit (loss) of each reportable  segment
for the three months ended June 30, 2001 and 2000 is set forth below:

                                             2001                   2000
                                     -------------------    --------------------
                                     Revenues     Gross     Revenues     Gross
                                      and Net     Profit     and Net     Profit
                                       Sales      (Loss)      Sales      (Loss)
                                     --------    -------    --------    --------

Payphone segment                      $ 6,388    $ 1,732     $ 8,352    $ 2,431
Internet appliance segment                194        (23)        919       (428)
                                      -------    -------     -------    -------
                                      $ 6,582    $ 1,709     $ 9,271    $ 2,003
                                      =======    =======     =======    =======

      Revenues and net sales of each  reportable  segment by customer  group for
the three months ended June 30, 2001 and 2000 is summarized as follows:

                                                             2001       2000
                                                            ------     ------

Payphone segment:
  Telephone companies                                       $5,375     $5,642
  Private operators and distributors                           539      2,043
  International operators                                      474        667
Internet appliance segment:
  International operators                                        8        897
  Telephone companies                                          186          5
  Private operators and distributors                            --         17
                                                            ------     ------
                                                            $6,582     $9,271
                                                            ======     ======

      The  Company  does not  allocate  assets or other  corporate  expenses  to
reportable segments. A reconciliation of segment gross profit information to the
Company's condensed consolidated financial statements for the three months ended
June 30, 2001 and 2000 is as follows:

                                                             2001        2000
                                                            ------      ------

Total gross profit of  reportable segments                $ 1,709      $ 2,003
Unallocated corporate expenses                             (2,220)      (4,137)
                                                          -------      -------
Loss before income taxes                                  $  (511)     $(2,134)
                                                          =======      =======


                                       14
<PAGE>

      Information  with  respect to service  revenues  and product  sales of the
Company's  reportable  segments  during the three months ended June 30, 2001 and
2000 is set forth below:

                                                               2001        2000
                                                              ------      ------

Payphone segment:
  Payphone terminals                                          $2,318     $2,725
  Printed circuit board control modules and kits               1,301      2,894
  Components, assemblies and other products                      589        580
  Repair, refurbishment and upgrade services                   2,106      1,938
  Other services                                                  74        215
Internet appliance segment:
   Internet appliance terminals and components                   162        914
   Service and advertising revenues                               32          5
                                                              ------     ------
                                                              $6,582     $9,271
                                                              ======     ======

      The Company  markets its products and services in the United States and in
certain foreign  countries.  The Company's  international  business  consists of
export sales,  and the Company does not presently  have any foreign  operations.
Sales by  geographic  region for the three  months  ended June 30, 2001 and 2000
were as follows:

                                                     2001        2000
                                                    ------      ------

United States                                       $6,101      $7,706
Canada                                                   7         959
Latin America                                          471         606
Asia Pacific                                             3          --
                                                    ------      ------
                                                    $6,582      $9,271
                                                    ======      ======

9. SUBSEQUENT EVENT

      On August  16,  2001,  the  Company  sold its real  property  housing  its
corporate  headquarters for an aggregate sales price of $3,050. The net proceeds
from  the  transaction  after  selling  expenses  approximated  $2,897.  The net
proceeds  were used to pay  property  taxes of  approximately  $86 and to reduce
obligations payable to the Bank by approximately  $2,811. In connection with the
transaction,  the Company  entered into a lease  agreement  for a portion of the
premises.  The  lease  agreement  has an  original  term  of five  years  and is
renewable  at the option of the  Company for two  additional  terms of two years
each. The monthly base lease payment approximates $21. In addition,  the Company
is  obligated  to pay its pro rata  share of  maintenance,  property  taxes  and
insurance  costs  related to the leased  property.  Pursuant to the terms of the
lease,  the Company  prepaid  base lease  payments  for the initial  year of the
original lease term in the amount of $250.


                                       15
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

      All dollar amounts, except per share data, in this Management's Discussion
and  Analysis of Financial  Condition  and Results of  Operations  are stated in
thousands.

Forward Looking Statements

      The  statements  contained in this  discussion of financial  condition and
results of operations  which are not historical  facts contain  forward  looking
statements,  usually  containing the words  "believe",  "estimate",  "expect" or
similar  expressions,  regarding  the  Company's  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.  These
statements  are made  pursuant  to the safe  harbor  provisions  of the  Private
Securities  Litigation  Reform Act of 1995. Such statements  reflect our current
view with respect to future events and are subject to risks,  uncertainties  and
assumptions  related to various  factors that could cause our actual  results to
differ  materially  from those expected by us,  including  competitive  factors,
customer relations, the risk of obsolescence of our products, relationships with
suppliers,  the risk of adverse  regulatory action affecting our business or the
business  of our  customers,  changes  in the  international  business  climate,
product  introduction  and  market  acceptance,   general  economic  conditions,
seasonality,  changes in  industry  practices,  the  ability  of the  Company to
continue as a going concern, the outcome of our bankruptcy proceedings discussed
herein and other uncertainties  detailed in this report and in our other filings
with the  Securities and Exchange  Commission.  Such  information  may change or
become   invalid   after  the  date  of  this   report,   and  by  making  these
forward-looking  statements,  the Company  undertakes no obligation to update or
revise these statements for revisions or changes after the date hereof.

Overview

      On January 22, 2001 (the "Petition  Date"),  Elcotel and its  subsidiaries
(the  "Debtors")  filed in the  United  States  Bankruptcy  Court in the  Middle
District of Florida (the  "Bankruptcy  Court")  voluntary  petitions  for relief
under Chapter 11 title 11 of the United States Bankruptcy Code (collectively the
"Chapter 11 Proceedings").  The Company is presently operating its business as a
debtor-in-possession  and is subject to the  jurisdiction and supervision of the
Bankruptcy  Court.  As a  debtor-in-possession,  the  Company is  authorized  to
operate its business but may not engage in transactions  outside of the ordinary
course of its business without the approval of the Bankruptcy Court.

      The Company continues to experience  substantial  declines in revenues and
net sales and in related gross profit as a result of industry  conditions beyond
its 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 the increased  volume of dial-around  (toll free and access code) calls. The
Company's  revenues and net sales declined by 29% to $6,582 for the three months
ended June 30, 2001 (first quarter of fiscal 2002) as compared to $9,271 for the
three months ended June 30, 2000 (first  quarter of fiscal 2001).  However,  the
Company's  net loss for the first  quarter of fiscal 2002  decreased to $511, or
($.04) per diluted  share,  from $2,134,  or ($.16) per diluted  share,  for the
corresponding  period of fiscal  2001 as a result  of:  (i) a 50%  reduction  in
selling,  general and  administrative  expenses  and  engineering,  research and
development expenses,  which declined in the aggregate by $1,646; (ii) a decline
in amortization of goodwill and intangible  assets of $448 related to impairment
losses  recognized in fiscal 2001;  and (iii) a decrease in interest  expense of
$440 related to the cessation of interest accruals on bank  indebtedness  during
the  Chapter  11   Proceedings,   which  were  partially   offset  by  estimated
reorganization  costs of $617 in the first quarter of fiscal 2002 and a decrease
in gross profit of $294.


                                       16
<PAGE>

      Because of the Chapter 11 Proceedings,  our liquidity,  capital  resources
and results of  operations  are  subject to a number of risks and  uncertainties
including,  but not limited to, the following: (i) the approval of the Company's
Joint Plan of Reorganization filed on July 16, 2001 (the "Reorganization  Plan")
and oversight of our  operations by the Bankruptcy  Court,  including the use of
cash collateral;  (ii) our ability to sell the real estate housing our corporate
offices and  lease-back  the portion  thereof  required for the operation of the
business;  (iii) risks  associated  with third  parties  seeking  and  obtaining
approval of the Bankruptcy  Court to terminate the exclusivity  periods to amend
and solicit acceptance of the Reorganization  Plan and the time for us to accept
or reject  executory  contracts and leases as provided in the Bankruptcy Code or
otherwise approved by Bankruptcy Court; (iv) risks associated with third parties
seeking and obtaining  approval of the Bankruptcy Court for the appointment of a
Chapter  11  trustee  or  to  convert  the  Company's  reorganization  cases  to
liquidation  cases;  (v) our ability to operate  successfully  under  Chapter 11
Proceedings  and achieve  planned  sales and  margins;  (vi)  potential  adverse
developments  with respect to our liquidity or results of operations;  (vii) our
ability to purchase  materials and negotiate and maintain terms with  suppliers;
(viii) our ability to achieve further cost savings; (ix) our ability to attract,
retain and compensate key executives and employees; (x) trends in the economy as
a whole and in particular the public communication  industry;  (xi) the seasonal
nature of our  business  and our  ability  to  predict  customer  demand for our
payphone and Internet  appliance  products  and  services;  (xii) our ability to
attract and retain customers;  (xiii)  uncertainties with respect to the trading
of  our  common  stock;   and  (xiv)  risks  related  to  the  confirmation  and
consummation of the Reorganization Plan.

The Chapter 11 Proceedings

      Under the Bankruptcy  Code,  actions by creditors to collect  pre-petition
indebtedness  are stayed and other  contractual  obligations may not be enforced
against   us  absent   obtaining   relief   from  the   Bankruptcy   Court.   As
debtor-in-possession,  we have the right,  subject to Bankruptcy  Court approval
and certain  other  limitations,  to assume or reject  executory  contracts  and
leases.  If we reject an executory  contract or lease,  we are relieved from our
obligations to perform  further under the contract or lease but are subject to a
claim for damages for the breach thereof.  Any damages  resulting from rejection
are  treated as general  unsecured  claims in the  reorganization.  Pre-petition
claims, which were contingent or unliquidated at the commencement of the Chapter
11  Proceedings,  may become  allowable  against Debtors in amounts fixed by the
Bankruptcy Court during the claims reconciliation process.  Substantially all of
our  liabilities as of the Petition Date are subject to compromise or settlement
under the Reorganization Plan to be voted upon by creditors,  equity holders and
other affected  parties and approved by the Bankruptcy  Court.  Our consolidated
balance sheet at June 30, 2001 and March 31, 2001 includes approximately $16,489
and $16,797,  respectively,  of liabilities  subject to compromise or settlement
pursuant to the Chapter 11 Proceedings as follows:

                                                        June 30,       March 31,
                                                          2001           2001
                                                       ----------     ----------

Accounts payable                                         $ 2,710       $ 2,895
Accrued expenses and other current liabilities             1,843         1,940
Customer advances                                            482           482
Notes, debt and capital lease obligations                 11,454        11,480
                                                         -------       -------
                                                         $16,489       $16,797
                                                         =======       =======

      The liabilities  subject to compromise  represent our estimate of known or
potential  claims to be resolved in connection  with the Chapter 11 Proceedings.
Such claims remain  subject to future  adjustments  as  substantial  uncertainty
exists  regarding  the  measurement  of  certain of the  liabilities  subject to


                                       17
<PAGE>

compromise,   and  rulings  by  the   Bankruptcy   Court  could  result  in  the
reclassification  of certain  liabilities  subject to compromise pursuant to the
Chapter 11  Proceedings.  Adjustments  may result from:  (1)  negotiations;  (2)
actions of the  Bankruptcy  Court;  (3)  further  developments  with  respect to
disputed  claims;  (4)  the  determination  as to the  value  of any  collateral
securing  claims;  (5)  proofs of  claim;  (6)  future  rejection  of  executory
contracts or leases; and (7) other events.

      Schedules  and  statements  of  financial  affairs  were  filed  with  the
Bankruptcy Court setting forth,  among other things,  our assets and liabilities
as of the Petition  Date as recorded in our  accounting  records.  Claimants may
file claims that differ from those reflected in our accounting records.  Certain
of the schedules have since been amended and all of the schedules and statements
of  financial   affairs  are  subject  to  further  amendment  or  modification.
Differences between our records and claims filed by creditors will be reconciled
and any differences may be resolved by negotiated agreement between the claimant
and us or by the Bankruptcy Court as part of the claims  reconciliation  process
in the Chapter 11 Proceedings. That process, in light of the number of creditors
of the Company, may take considerable time to complete.  Accordingly,  the exact
number and amount of allowed  claims is not  presently  known,  and  because the
settlement  terms of such  allowed  claims is  subject  to  confirmation  of the
Reorganization Plan, the ultimate distribution with respect to allowed claims in
not presently ascertainable.

      The Company's  Reorganization Plan addressed the resolution of liabilities
subject to  compromise  and  matters  related to the  Company's  emergence  from
bankruptcy.  Pursuant to the  Reorganization  Plan,  Bank of America,  N.A. (the
"Bank")  would  receive  $4,000 in cash payable from the proceeds of a revolving
credit facility that the Debtors are attempting to obtain, the proceeds from the
sale of the  Company's  real  estate  estimated  at  approximately  $2,400 and a
subordinated  note in the  principal  amount  of  $4,798  (the  "Bank  Note") in
satisfaction  of the Bank's secured claims.  As proposed,  the terms of the Bank
Note would  provide  for:  (i)  interest at a rate of twelve  percent  (12%) per
annum,  which  would be payable  when the  Company's  ratio of  earnings  before
interest,  taxes,  depreciation and amortization (as defined) to senior interest
expense under the revolving  credit facility  exceeds 5 to 1; (ii) a maturity of
six (6) years;  and (iii) the payment of principal  based on the Company's  cash
flow. In addition,  the Reorganization  Plan provides for the Debtors' unsecured
creditors to receive shares of Convertible  Preferred Stock in an aggregate face
amount  of  $2,500  (the  "Preferred  Stock").  As  proposed,  the  terms of the
Preferred Stock would provide for: (i) the holders thereof to convert,  at their
discretion,  the shares of Preferred Stock into that aggregate  number of shares
of the Company's common stock that would be equal to a 30% ownership interest in
the Company;  (ii)  dividends at a rate of eight  percent (8%) per annum,  which
would be payable  based on the  Company's  cash flow after the  repayment of the
Bank Note;  and (iii)  redemption by March 31, 2008,  subject to the  conversion
option.  The Company's  current  stockholders  would retain an  approximate  70%
ownership in the Company.

      There can be no assurance  that the  creditors  and equity  holders of the
Debtors will approve the  Reorganization  Plan,  that the Bankruptcy  Court will
confirm the Reorganization  Plan or that the Reorganization  Plan will allow the
Company to  continue  to operate or operate  profitably.  Also,  there can be no
assurance that  amendments to the  Reorganization  Plan and other actions during
the  Chapter  11  Proceedings  will not have a  material  adverse  effect on the
financial condition and/or outlook of the Company and its ability to reorganize.
Furthermore,  there is no assurance  that the Company will be able to secure the
financing  required  to  consummate  the  Reorganization   Plan,  or  that  such
financing, if available, will not be on onerous terms.

      A plan of  reorganization  must be confirmed by the Bankruptcy  Court upon
certain  findings  being  made  by  the  Bankruptcy  Court  as  required  by the
Bankruptcy  Code. The Bankruptcy  Court may confirm a plan  notwithstanding  the
non-acceptance  of the plan by an impaired class of creditors or equity security
holders  if  certain  requirements  of the  Bankruptcy  Code are met.  A plan of
reorganization  could  also  result


                                       18
<PAGE>

in holders of the Company's common stock receiving no value for their interests.
Because of such possibilities, the value of the Company's common stock is highly
speculative, and the common stock may have no value.

      The Bankruptcy  Court  established  May 29, 2001 as the deadline (the "Bar
Date") for creditors to file claims against the Debtors.  Notices were mailed to
all of our creditors  advising them that claims  against us must be submitted to
the Bankruptcy Court by the Bar Date.  Creditors who are required to file claims
but fail to meet the Bar Date are forever  barred from voting upon or  receiving
distributions under the Reorganization Plan.

      Approximately  $12,325 of the Company's  liabilities subject to compromise
pursuant  to the  Chapter  11  Proceedings  relate  to  amounts  (principal  and
interest)  owed to Bank of America,  N.A.  (the  "Bank")  pursuant to notes (the
"Bank Notes"),  which are  collateralized  by substantially all of the assets of
the Company. The amounts outstanding pursuant to the terms of the Bank Notes are
undercollateralized and impaired under the Reorganization Plan. Accordingly, the
obligations,  including principal and accrued interest,  payable to the Bank are
classified  as  liabilities  subject to  compromise  pursuant  to the Chapter 11
Proceedings.

      The  Bankruptcy  Court has issued  orders  providing  the Company with the
authority to pay pre-petition and post-petition compensation, benefits and other
employee  obligations to and on behalf of its employees,  officers and directors
and to use its  cash  balances  and  cash  collections  (which  are  part of the
collateral  securing  obligations  pursuant  to the Bank  Notes) to operate  the
Debtors'  businesses  in the  ordinary  course of business and pay for goods and
services  received after the Petition Date. The Company's  authority to use cash
collateral pursuant to a fifth interim order approved by the Bankruptcy Court on
May 23, 2001 expires on August 17, 2001.  Prior to that date, we plan to request
authority to continue to use cash collateral to operate our businesses past that
date. However, there can be no assurance that the Bankruptcy Court will continue
to authorize the use of cash collateral to operate our businesses.

      On May 3, 2001, the Bankruptcy Court approved a settlement agreement dated
April 6, 2001 between the Company and one of its customers  that provides for an
offset of approximately  $1,562 of the Company's  pre-petition  accounts payable
against accounts  receivable due from the customer.  The obligations  payable to
and the  receivable  from the customer  relate to the  Company's  purchases  and
sales, respectively, pursuant to a certain refurbishment sales agreement between
the parties.  The order of the  Bankruptcy  Court provides for the offset of the
Company's payable obligation to the customer against its accounts receivable due
from the customer in the amounts of $562 on May 3, 2001 (the date the Bankruptcy
Court  approved  the  settlement  agreement);  $100 each month during the period
beginning  April 1, 2001 and ending  June 30,  2001;  $75 each month  during the
period  beginning  July 1, 2001 and ending  March 31,  2002;  and $25 during the
month ending  April 30,  2001.  Accordingly,  the $1,562  pre-petition  accounts
payable  obligation  is  classified  as a  current  liability  in the  Company's
condensed  consolidated  balance sheet at March 31, 2001. The offset of accounts
payable against accounts and notes receivable during the three months ended June
30, 2001 aggregated $1,046, including $184 of liabilities incurred subsequent to
the Petition Date.

      On May 31, 2001, the Bankruptcy  Court issued an order approving a binding
letter  agreement  dated  March 29,  2001  between  the  Company  and one of its
customers  that  provides for the offset of a  pre-petition  $1,000  deposit (or
customer advance) liability of the Company against accounts  receivable due from
the customer and that set forth the primary  terms of a new supply  agreement(s)
between the parties.  The  obligations  payable to and the  receivable  from the
customer  relate to a cash advance from the customer and sales to the  customer,
respectively, pursuant to sales and purchase agreements between the parties. The
order of the Bankruptcy  Court  provides for the offset of the customer  advance
obligation


                                       19
<PAGE>

against the Company's  accounts  receivable  from the customer as of the date of
the order and authorized the Company to enter into the new supply  agreement(s).
Accordingly, the $1,000 pre-petition customer advance obligation has been offset
against  accounts and notes receivable in the Company's  condensed  consolidated
balance sheet at March 31, 2001.

      On June 28, 2001, the Bankruptcy Court approved the Company's Key Employee
Retention and Severance Plan (the  "Retention  Plan") and authorized the Company
to make payments  pursuant to the terms of the Retention Plan. On that date, the
Bankruptcy Court also authorized the Company to pay incentive  bonuses and sales
commissions  to  certain  officers  accrued  as of  March  31,  2001  and  sales
commissions  to a certain  officer  for fiscal  year 2002.  The  Retention  Plan
provides for the payment of retention bonuses aggregating  approximately $766 to
officers and key employees between the date of the order of the Bankruptcy Court
and June 1, 2002. In addition,  the  Retention  Plan provides for the payment of
emergence bonuses  aggregating  approximately $646 to officers and key employees
when and if the Company's Reorganization Plan is substantially  consummated.  In
addition,  the  Retention  Plan  provides for payment of  severance  benefits to
officers and key employees  aggregating  approximately  $607 upon termination of
employment  without cause during the pendency of the Chapter 11 cases  provided,
however,  that payments of emergence  bonuses shall be credited against any such
severance benefits.

      On June 29, 2001, the Bankruptcy Court issued a preliminary order granting
the Company's motion for the entry of orders  scheduling an auction for the sale
of the Company's real property and approving bidding procedures and scheduling a
hearing to approve the sale thereof.  On August 2, 2001,  the  Bankruptcy  Court
approved agreements for the sale of the Company's real property at a sales price
of $3,050 and the lease for a portion of the property by the Company.

      Under   certain   manufacturing   agreements   between   the  Company  and
subcontractors,  the Company is committed to purchase inventory that is acquired
by the  subcontractors  pursuant  to  purchase  orders  issued  by the  Company.
Subsequent to the Petition  Date,  the Company has  continued its  relationships
with such subcontractors, or their successors. However, as result of the Chapter
11 Proceedings and/or the potential rejection of contractual agreements pursuant
to the Bankruptcy Code, these subcontractors may file claims against the Company
that include the value of inventory  purchased to fulfill the  Company's  orders
and such  claims may be  substantially  greater  than the  applicable  liability
reflected in the Company's  consolidated  financial  statements at June 30, 2001
and March 31, 2001.  The Company  believes that its purchase  commitments  under
these  agreements may range from $2,000 to $2,500 at June 30, 2001 and March 31,
2001.

      Elcotel has operated its business and the business of its  subsidiaries as
a combined entity subsequent to business combinations or the date of acquisition
of certain net assets of other entities. Accordingly, the assets and liabilities
of the acquired  operations have been used to generate sales,  revenues,  assets
and  liabilities of Elcotel,  and  intercompany  receivables and payables do not
reflect the  operations  from acquired  assets.  There is no assurance as to how
this matter will be addressed by the Bankruptcy Court or as to the resolution of
any intercompany receivables and payables.

      Management believes that the matters discussed in the preceding paragraphs
have a significant  impact on the value of the bankruptcy estates of the Debtors
and  therefore  the amounts  available  to unsecured  creditors  not referred to
above. Also, the ultimate resolution of the obligations payable to the Bank will
determine in large part the cost of ending the Chapter 11 Proceedings. There are
other  significant  issues  that  will  arise  as a  result  of the  Chapter  11
Proceedings,  including  the measure of damages  arising  from the  rejection of
burdensome contractual obligations. Resolution of these and other complex issues
brought before the Bankruptcy Court are expected to result in substantial legal,
accounting  and other  professional  fees and expenses.  During the three months
ended June 30, 2001, the Company


                                       20
<PAGE>

accrued  reorganization  related professional fees and expenses of approximately
$497. Aggregate  reorganization costs of $617 during the three months ended June
30,  2001  include  the  professional  fees and  expenses  and  $141 in  accrued
compensation  pursuant to the Retention  Plan, net of $21 of interest  income on
cash balances.

      The  Company  discontinued  payments  related to its Bank  obligations  in
September 2000 and suspended  payments,  as of the Petition Date, with regard to
most  other  prepetition  obligations.  Management  cannot  predict at this time
whether  (or when) the  Reorganization  Plan will be  approved  or  whether  its
provisions related to debt service or other payments of pre-petition obligations
will be approved.  Provisions of the Debtors' confirmed  Reorganization Plan, if
any, may differ  significantly from those set forth herein, and such differences
may be material.  Material changes in the provisions of the Reorganization  Plan
or the inability of the Debtors to obtain  approval of the  Reorganization  Plan
could have a material  adverse  effect on the  Company  and on the rights of its
creditors and shareholders.

Going Concern

      The  Company's  condensed  consolidated  financial  statements  have  been
prepared on a going concern basis of accounting,  which contemplates  continuity
of  operations,  the  realization  of assets  and  payment  of  liabilities  and
commitments  in the  ordinary  course of business.  The events  resulting in the
Company's filing for relief under the United States  Bankruptcy Code,  including
the  Company's  recurring  operating  losses and its  inability to meet its debt
service  requirements  raise  substantial  doubt about the Company's  ability to
continue as a going concern.  The continuation of the Company as a going concern
and the  appropriateness  of using the going  concern  basis is dependent  upon,
among  other  things,  the  terms of the  ultimate  plan of  reorganization  and
confirmation  thereof under the  Bankruptcy  Code and the ability of the Company
to:  obtain  adequate  sales and  revenues  to  achieve  profitable  operations;
generate  sufficient  cash from  operations  and  financing  sources to meet its
obligations;  continue  to be  authorized  to use cash  collateral;  and  obtain
adequate post  reorganization  financing.  There can be no assurance  that these
conditions can be met.

      The Company's condensed  consolidated  financial statements do not include
any adjustments  relating to recoverability and classification of recorded asset
amounts or the amount and  classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.  In addition,  as a
result of the reorganization proceedings under Chapter 11, realization of assets
and liquidation of liabilities  are subject to uncertainty,  and we may take, or
be  required  to  take,  actions  that  may  cause  assets  to be  realized,  or
liabilities  to be  liquidated,  for amounts  other than those  reflected in the
Company's condensed consolidated financial statements. Further, the confirmation
of the  Reorganization  Plan could materially change the amounts reported in the
Company's condensed consolidated  financial statements.  The amounts reported in
the Company's condensed  consolidated financial statements do not give effect to
any  adjustments of the carrying value of assets or amounts of liabilities  that
might  result  as a  consequence  of  actions  that may taken as a result of the
reorganization  proceedings  or that might be necessary as a consequence  of the
confirmed Reorganization Plan.

      At this time,  it is not possible to predict the outcome of the Chapter 11
Proceedings or their effects on the Company's business. The Company's liquidity,
capital  resources,  results of  operations  and  ability to continue as a going
concern  are  subject to known and unknown  risks and  uncertainties,  including
those set forth above and elsewhere in this report.  Therefore,  there can be no
assurance that our cash balances and projected cash flows from  operations  will
provide  adequate  liquidity to conduct our  business for an extended  period of
time.


                                       21
<PAGE>

Results of Operations

      The following table shows certain line items in the accompanying unaudited
condensed consolidated statements of operations and other comprehensive loss for
the three months ended June 30, 2001 and 2000 that are discussed  below together
with amounts expressed as a percentage of sales.

                                                    Percent             Percent
                                          2001     of Sales    2000    of Sales
                                        --------   --------  --------  --------

Revenues and net sales                   $6,582      100%     $9,271     100%
Cost of revenues and sales                4,873       74       7,268      78
Gross profit                              1,709       26       2,003      22
Selling, general and administrative
  expenses                                1,042       16       2,175      23
Engineering, research and
  development expenses                      581        9       1,094      12
Reorganization costs                        617        9          --      --
Amortization of goodwill and
  intangible assets                          --       --         448       5
Interest (income) expense                   (20)      --         420       5

      Revenues  and Net Sales.  Revenues  and net sales by business  segment and
customer  group for the three months ended June 30, 2001 and 2000  together with
the  increase or decrease  and with the  increase  or  decrease  expressed  as a
percentage change is set forth below:

                                                            Increase  Percentage
                                        2001      2000     (Decrease)   Change
                                      --------  --------   ---------- ----------

Payphone Business:
  Telephone companies                   $5,375   $5,642    $  (267)        (5%)
  Private operators and distributors       539    2,043     (1,504)       (74)
  International operators                  474      667       (193)       (30)
Internet Appliance Business:
  International operators                    8      897       (889)       (99)
  Telephone companies                      186       22        164        745
                                        ------   ------    -------        ---
                                        $6,582   $9,271    $(2,689)       (29%)
                                        ======   ======    =======    =======

      Revenues and net sales of our payphone business and our Internet appliance
business  declined by 24% and 79%,  respectively,  primarily due to decreases in
volume, which are primarily attributable to declining payphone usage and related
revenues  and  financial   difficulties  and/or  changes  in  customer  business
practices  created  thereby.  Domestically,  the Company  believes that payphone
service  providers are removing  unprofitable  terminals and  maintaining  their
installed bases rather than acquiring new equipment or upgrading technology.  In
addition,  many of the domestic and  international  payphone  service  providers
served by the Company are  experiencing  financial  difficulties  as a result of
declining revenues,  and have been forced to curtail capital  expenditures.  The
Company believes that the conditions  adversely  affecting the domestic industry
will continue in the  foreseeable  future,  and cannot  predict when, or if, its
revenues will begin to stabilize.


                                       22
<PAGE>

      Revenues  and net sales from  products  and  services for the three months
ended June 30, 2001 and 2000 together with the increase or decrease and with the
increase or decrease expressed as a percentage change is set forth below:

                                                            Increase  Percentage
                                        2001      2000     (Decrease)   Change
                                      --------  --------   ---------- ----------

Products:
   Payphone terminals                 $2,318     $2,725     $  (407)       (15%)
   Grapevine terminals
     and components                      162        914        (752)       (82)
   Payphone circuit board
     control modules and kits          1,301      2,894      (1,593)       (55)
   Components, assemblies
     and other products                  589        580           9          2
Services:
   Repair, refurbishment
     and upgrade services              2,106      1,938         168          9
   Other payphone services                74        215        (141)       (66)
   e-Prism management
     services and advertising             32          5          27        540
                                      ------     ------     -------    -------
                                      $6,582     $9,271     $(2,689)       (29%)
                                      ======     ======     =======    =======


      As compared  to the first  quarter of fiscal  2001,  net sales of payphone
products  declined by 32% and revenues from payphone repair,  refurbishment  and
upgrade services  increased by 9%, such  fluctuations  reflecting the industry's
trend of  maintaining  the  installed  base of terminals  versus  acquiring  new
equipment  and  technology.  The  decline in volume of  payphone  circuit  board
control modules and payphone terminals is primarily  attributable to weak demand
from private payphone service  providers and distributors.  In addition,  during
fiscal 2001, we  discontinued  our activities  related to the resale of operator
services, and our service revenues from such resale activities declined by $184.

      We have not yet been able to  develop  the  market  for the  products  and
services of our  Internet  appliance  business.  Domestically,  one of the major
inter-exchange  carriers is still  conducting  its market trial of our Grapevine
terminals and  services,  and one of the RBOCs that had been  conducting  market
trials has recently  decided to  terminate  the trial.  Internationally,  Canada
Payphone  Corporation,  which  accounted for the majority of Grapevine  terminal
sales during the first  quarter of fiscal  2001,  has not  purchased  additional
terminals  pursuant to the terms of established  purchase and sales  agreements,
which we believe is attributable to its financial  turnaround efforts.  Revenues
and net sales of our Internet  appliance  business  during the first  quarter of
fiscal 2002 consisted primarily of Grapevine terminal sales recognized under the
terms of the market trial agreement with the inter-exchange  carrier referred to
above,  and revenues  from  e-prism  management  services  provided to customers
operating  Grapevine  terminals.  The future  success of our Internet  appliance
business is dependent  upon our ability  and/or the ability of our  customers to
generate  revenues  from  new  services  and/or  advertisements  placed  on  the
Grapevine  terminals.  To date,  such  revenues have not been  significant,  and
because of present economic  conditions and other factors affecting the Internet
and  electronic  advertising  industries,  it is  uncertain  whether the Company
and/or its customers will be able to generate any  meaningful  revenues from new
services or advertising  placements in the foreseeable future. In the event that
the Company and/or its customers are unable to generate any meaningful  revenues
from new services or  advertising  placements  in the  foreseeable  future,  the
prospects of this business segment would be materially adversely affected.


                                       23
<PAGE>

      Cost of  Revenues  and  Sales and  Gross  Profit.  Cost of sales and gross
profit as a percentage of net sales approximated 74% and 26%, respectively,  for
the first quarter of fiscal 2002 as compared to 78% and 22%,  respectively,  for
the first quarter of fiscal 2001. Gross profit of our payphone business declined
to $1,732 (27% of sales) for the first quarter of fiscal 2002 compared to $2,431
(29% of sales) for the same period of fiscal 2001  primarily  due to the decline
in sales of high-margin printed circuit board modules.  The gross profit loss of
our Internet  appliance  business declined to $23 compared to $428 for the first
quarter of fiscal 2001 due to a decline in depreciation and amortization of $179
as a result of impairment  write-offs  of  capitalized  software and  long-lived
assets in the fourth  quarter of fiscal 2001 and cost  reductions,  primarily in
personnel, effected during fiscal 2001.

      Selling,  General  and  Administrative  Expenses.   Selling,  general  and
administrative  expenses  decreased by $1,133 or approximately  52% in the first
quarter of fiscal  2002 as  compared to the first  quarter of fiscal  2001.  The
decrease in such expenses is primarily due to cost reductions  initiated  during
fiscal 2001 and a decrease in professional  fees of $194, which included credits
related to the  forgiveness of  liabilities  aggregating  $231 to  professionals
approved by the Bankruptcy Court to represent the Company during the pendency of
the Chapter 11 Proceedings.

      Engineering,  Research and Development Expenses.  During the first quarter
of fiscal  2002,  we  continued  to invest in the market  trials of our Internet
terminal appliances and back office management software. However, as a result of
cost  reductions  (primarily  related to personnel),  engineering,  research and
development  expenses  during the  quarter  decreased  by 47% as compared to the
first  quarter of fiscal 2001.  In addition,  the Company  capitalized  software
development  costs of $419 in the first  quarter  of fiscal  2001.  No  software
development costs were capitalized during the first quarter of fiscal 2002.

      Reorganization Costs.  Reorganization costs represent expenses incurred by
the  Company  resulting  from  the  Chapter  11  Proceedings   specific  to  the
reorganization  process and consist of  estimated  legal and other  professional
fees of $497 and  compensation  of $141 accrued  pursuant to the Retention Plan,
net of interest income on cash balances of $21.

      Amortization of Goodwill and Identified Intangible Assets. The decrease in
amortization of goodwill and identified  intangible  assets is due to impairment
write-offs  of goodwill and  intangible  assets in the fourth  quarter of fiscal
2001 as a result of our  evaluation of the  recoverability  of the assets of our
payphone business.

      Interest  (income)  expense.  The Company reported  interest income of $20
during the first quarter of fiscal 2002 versus  interest  expense of $420 during
the first quarter of fiscal 2001. As a result of the Chapter 11 Proceedings,  we
ceased accruing interest on the Bank Notes as of the Petition Date.  Contractual
interest on Bank Notes for the first  quarter of fiscal 2002 at the default rate
of 25% per annum approximated $700.

Liquidity and Capital Resources

      Liquidity.  On January 22, 2001,  the Debtors  filed the Chapter 11 cases,
which will affect the Company's  liquidity and capital resources in fiscal 2002.
Presently,  we are operating our business as a debtor-in-  possession  under the
jurisdiction and supervision of the Bankruptcy  Court, and we have no sources of
external  financing.  We have been unable to draw any additional  advances under
our Bank loan  agreements  (the  "Loan  Agreements")  since  November  1999.  In
addition,  all outstanding  obligations  under the Loan Agreements became due on
September  30, 2000,  and in September  2000,  we ceased  making  principal  and
interest  payments  under  the Loan  Agreements  in order to  retain  sufficient
working capital to operate our business. The Company's cash balances at June 30,
2001 aggregate $3,027.


                                       24
<PAGE>

      The events  resulting in the Company's  filing for relief under the United
States Bankruptcy Code,  including  recurring operating losses and its inability
to meet its  debt  service  requirements,  raise  substantial  doubt  about  the
Company's  ability to continue to fund its operations and to continue as a going
concern.  The ability of the Company to continue to fund its  operations  and to
continue as a going concern is dependent upon, among other things,  the terms of
the  confirmed  Reorganization  Plan, if any, and the ability of the Company to:
obtain adequate sales and revenues to achieve  profitable  operations;  generate
sufficient cash from operations and financing  sources to meet its  obligations;
continue to be  authorized  to use cash  collateral;  and obtain  adequate  post
reorganization financing. There can be no assurance that these conditions can be
met. The Company's condensed  consolidated  financial  statements do not include
any adjustments  relating to recoverability and classification of recorded asset
amounts or the amount and  classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.  In addition,  as a
result of the reorganization proceedings under Chapter 11, realization of assets
and liquidation of liabilities  are subject to uncertainty,  and we may take, or
be  required  to  take,  actions  that  may  cause  assets  to be  realized,  or
liabilities  to be  liquidated,  for amounts  other than those  reflected in the
condensed  consolidated  financial  statements.  Further,  a  confirmed  plan of
reorganization  could  materially  change the amounts  reported in the Company's
consolidated  financial  statements.  The  amounts  reported  in  the  Company's
condensed   consolidated   financial  statements  do  not  give  effect  to  any
adjustments of the carrying value of assets or amounts of liabilities that might
result  as a  consequence  of  actions  that  may  taken  as  a  result  of  the
reorganization  proceedings  or that might be  necessary as a  consequence  of a
confirmed plan of reorganization.

      The Retention  Plan  authorized by the  Bankruptcy  Court on June 28, 2001
provides for the payment of retention bonuses aggregating  approximately $766 to
officers and key employees between the date of the order of the Bankruptcy Court
and June 1, 2002. In addition,  the  Retention  Plan provides for the payment of
emergence bonuses  aggregating  approximately $646 to officers and key employees
when and if the Company's Reorganization Plan is substantially  consummated.  In
addition,  the  Retention  Plan  provides for payment of  severance  benefits to
officers and key employees  aggregating  approximately  $607 upon termination of
employment  without cause during the pendency of the Chapter 11 cases  provided,
however,  that payments of emergence  bonuses shall be credited against any such
severance benefits. Payments of retention bonuses pursuant to the Retention Plan
will aggregate  approximately $144 in July 2001, $144 in September 2001, $286 in
March 2002 and $192 in June 2002.

      At this time,  it is not possible to predict the outcome of the Chapter 11
Proceedings or their effects on the Company's  business.  The Company  believes,
but  cannot  assure,  that its cash  balances  and  projected  cash  flows  from
operations  should provide  adequate  liquidity to conduct its business while it
pursues the  confirmation of its  Reorganization  Plan.  However,  the Company's
liquidity, capital resources, results of operations and ability to continue as a
going  concern  are subject to known and unknown  risks and  uncertainties,  and
there can be no assurance  that its cash balances and projected  cash flows will
be sufficient to fund its operations  while it pursues the  confirmation  of its
Reorganization Plan and/or for the next twelve months.

      As of March 31, 2000,  we were in default on certain  financial  covenants
contained  in 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 the
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


                                       25
<PAGE>

one and one-half  percentage  points 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
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,  2001 and  2000)  was  cancelled.  In  addition,  the
Forbearance Agreement permitted 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 were 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.

      We entered  into a Second  Forbearance  and  Modification  Agreement  (the
"Second Forbearance  Agreement") with the Bank on July 31, 2000. Under the terms
of the Second  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 extended
to September 30, 2000. In addition, the annual interest rates of the installment
note and mortgage note were increased to 12.5%,  the annual  interest rate under
the revolving  credit lines was increased  from two  percentage  points over the
Bank's floating prime rate to three percentage  points above the Bank's floating
prime  interest  rate (12.5% at July 31,  2000).  In addition,  the  Forbearance
Agreement permitted an overadvance of indebtedness outstanding under the $10,000
working capital revolving credit line and the $4,000  installment note of $2,800
through  September  30,  2000  based on the value of  collateral  consisting  of
eligible  accounts  receivable and  inventories.  However,  we were 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 Second Forbearance Agreement.

      Upon the default on the covenants of our Loan Agreements, we began efforts
to restructure the debt obligations  payable under the Loan Agreements and raise
additional  capital and/or financing to refinance such debt obligations,  and to
raise capital to begin the initial  phases of a rollout of our new Grapevine and
e-Prism products.  However, we were unable to obtain commitments for new capital
or  financing.  Furthermore,  after the  expiration  of the  Second  Forbearance
Agreement,  we were  unable to effect a  restructuring  of our debt  obligations
under the Loan  Agreements  or  negotiate  a third  forbearance  agreement  with
acceptable  terms,  and we ceased  making  principal  and interest  payments and
defaulted on the payment of the obligations payable under the Loan Agreements on
September 30, 2000.

      During the first  quarter of fiscal 2002, we used $74 of cash (as compared
to $1,165 of cash in the first quarter of fiscal 2001) 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.

      As part of our efforts to reorganize  under Chapter 11, we are  attempting
to secure an asset based financing line,  additional equity capital and/or other
sources of funding to refinance and  restructure  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 believe that our efforts to secure  additional  financing and  reorganize the
Company may be successful.  However,  there can be no assurance that our efforts
will be successful, or if successful,  that such financing would be available on
satisfactory terms or that our  Reorganization  Plan will be accepted by parties
in interest  and approved by the  Bankruptcy  Court.  In  addition,  there is no
assurance  that any  such  financing  would  provide  the  funding  required  to
refinance  or  restructure  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 and market trial


                                       26
<PAGE>

efforts,  or abandon our Internet appliance business 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  may  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 or that our  Reorganization  Plan will be
confirmed by the Bankruptcy Court, or that such plan will be consummated.

      Financing Activities. We fund our operations, working capital requirements
and capital  expenditures from internally  generated cash flows. In the past, we
borrowed  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 were  permitted  when such  requirements  exceeded  cash
provided by operations,  if any. We also used the financing available under bank
credit lines to fund  operations and payments on long-term debt when  necessary.
At June 30, 2001 and for the three months  ended June 30, 2001 and 2000,  we are
unable to borrow any  additional  funds under the terms of our credit lines.  At
June 30, 2001, our cash balances aggregated approximately $3,027.

      At June 30, 2001 and March 31,  2001,  outstanding  debt under our $10,000
working  capital line amounted to $6,095 and  outstanding  debt under our $4,000
installment  note  amounted to $3,072,  respectively.  Outstanding  indebtedness
under our mortgage note amounted  $1,750 at June 30, 2001 and March 31, 2001. We
also had  outstanding  indebtedness of $281 under our capital  equipment  credit
line at June 30, 2001 and March 31, 2001.

      Aggregate  principal  payments  under  notes  payable  and  capital  lease
obligations  during the three  months  ended June 30, 2001 and 2000 were $45 and
$198, respectively.

      Indebtedness  outstanding  under our Loan Agreements is  collateralized by
substantially  all of our  assets.  Our  Loan  Agreements,  as  modified  by the
forbearance  agreements,  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  agreements,  require us to
comply with specific financial  covenants,  including  covenants with respect to
working capital and net worth. The Company is in default of these requirements.


                                       27
<PAGE>

      Operating   Activities.   Cash  flows  provided  by  (used  in)  operating
activities  for the three months ended June 30, 2001 and 2000 are  summarized as
follows:

                                                         2001         2000
                                                       --------     --------

Net income (loss)                                       $(511)      $(2,134)
Non-cash charges and credits, net                         436         1,459
                                                        -----       -------
                                                          (75)         (675)
                                                        -----       -------
Changes in operating assets and liabilities:
  Accounts and notes receivable                          (792)          573
  Inventories                                             137           979
  Accounts payable, accrued expenses and
    other current liabilities                             612        (1,046)
  Refundable taxes and other operating assets            (448)         (151)
                                                        -----       -------
                                                         (491)          355
                                                        -----       -------
                                                        $(566)      $  (320)
                                                        =====       =======

      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 three  months  ended June 30, 2001 and 2000,  we used $75 and $675 of
cash to fund operating  losses net of non-cash  charges and credits.  During the
three  months  ended  June 30,  2001,  we used $491 of cash to fund  changes  in
operating  assets and liabilities as compared to the three months ended June 30,
2000 when $355 of cash was provided by net  decreases  in  operating  assets and
liabilities.

      Our operating assets and liabilities are comprised principally of accounts
and notes receivable,  inventories (and prepayments  related thereto),  accounts
payable, accrued expenses and other current liabilities. During the three months
ended June 30, 2001,  we generated  $137 and $612 of cash through  reductions in
inventories  and  increases  in accounts  payable,  accrued  expenses  and other
current  liabilities,  respectively.  The increase in accounts payable,  accrued
expenses and other  current  liabilities  during the three months ended June 30,
2001 consisted primarily of accrued professional fees and retention compensation
related to the Chapter 11  Proceedings.  In  addition,  during the three  months
ended June 30, 2001, we used $792 and $448 of cash to fund increases in accounts
receivable and other  operating  assets,  respectively.  Cash used to fund other
operating  assets  consisted  primarily  of  prepayments  related  to  inventory
purchases.  In  comparison,  during the three  months  ended June 30,  2000,  we
generated  $573  and $979 of cash  through  reductions  in  accounts  and  notes
receivable and  inventories,  respectively,  and used $1,046 and $151 of cash to
fund  decreases  in  accounts  payable,   accrued  expenses  and  other  current
liabilities and increases in other operating assets, respectively.

      Substantially  all of our  liabilities as of the Petition Date are subject
to compromise or settlement  under the  Reorganization  Plan to be voted upon by
creditors,  equity  holders  and other  affected  parties  and  approved  by the
Bankruptcy Court. Our consolidated  balance sheet at June 30, 2001 and March 31,
2001  includes  approximately  $16,489  and  $16,797 of  liabilities  subject to
compromise pursuant to the Chapter 11 Proceedings. Such claims remain subject to
future  adjustments as substantial  uncertainty exists regarding the measurement
of  certain  of the  liabilities  subject  to  compromise,  and  rulings  by the
Bankruptcy  Court could result in the  reclassification  of certain  liabilities
subject to compromise  pursuant to the Chapter 11  Proceedings.  Adjustments may
result from: (1) negotiations;  (2) actions of the Bankruptcy Court; (3) further
developments  with respect to disputed claims;  (4) the  determination as to the
value of any  collateral  securing  claims;  (5)  proofs  of claim;  (6)  future
rejection of contracts or leases; and (7) other events.


                                       28
<PAGE>

      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  (including  prepayments)  could  have  a
significant  effect  on  our  liquidity.   Accounts  and  notes  receivable  and
inventories  represented  in the aggregate 65% of our current assets at June 30,
2001 and March 31, 2001, respectively.  Also, prepaid expenses and other current
assets  increased  from  $830 at March  31,  2001 to  $1,292  at June  30,  2001
primarily  due to  prepayments  to  suppliers  for  purchase  of  inventory.  We
experience  varying  accounts  receivable  collection  periods  from our various
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.  As of June 30, 2001,  we have not entered into any
significant  commitments  for the  purchase  of capital  assets.  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.  During the three months ended June 30, 2000, the Company did not acquire
any capital  assets.  Net cash used for  investing  activities  during the three
months  ended  June 30,  2000  amounted  to $490,  which  consisted  of  capital
expenditures of $71 and capitalized software development costs of $419.

Impact of Inflation

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

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, as amended
and interpreted,  established  accounting and reporting standards for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts,  and hedging  activities.  All  derivatives,  whether  designated  as
hedging  relationships  or not,  will be  required to be reported on the balance
sheet at fair value.  If the derivative is designated in a cash flow hedge,  the
changes  in  fair  value  of  the   derivative   will  be  recognized  in  other
comprehensive  (loss) income and will be recognized in the  statements of income
when the hedged item affects  earnings.  SFAS 133 defines new  requirements  for
designation  and  documentation  of  hedging  relationships,  as well as ongoing
effectiveness  assessments  in order to use hedge  accounting.  For a derivative
that does  qualify  as a hedge,  changes in fair  value  will be  recognized  in
earnings.  The Company adopted SFAS 133, as amended,  on April 1, 2001. Based on
management's  evaluation of the various issues related to SFAS 133 no derivative
instruments,   as  defined  by  SFAS  133,  were   identified  by  the  Company.
Accordingly,  there  was no  effect  on  the  Company's  consolidated  financial
position or operations as a result of the adoption of SFAS 133.

      On  July  20,  2001,  the  Financial  Accounting  Standards  Board  issued
Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142
requires that goodwill and other intangible  assets with indefinite useful lives
no longer be amortized,  but instead  tested for  impairment at


                                       29
<PAGE>

least annually.  SFAS 142 requires entities to perform a transitional assessment
of whether there is an  indication  that the goodwill is impaired as of the date
of  adoption.  Entities  will then  have a  transition  period  from the date of
adoption to determine the fair value of each  reporting unit and if goodwill has
been impaired. Any goodwill impairment loss will be recognized as the cumulative
effect of a change in  accounting  principle no later than the end of the fiscal
year of adoption. SFAS 142 also requires entities to review its other intangible
assets for  impairment  and to reassess the useful lives of such assets and make
any necessary adjustments. As of March 31, 2001, the Company had written-off its
goodwill and other  intangible  assets as a result of its  impairment  analysis.
Therefore,  the adoption of SFAS 142 will not have a  significant  effect on the
Company's consolidated financial position or results operations.

      In July 2001, the Financial Accounting Standards Board issued Statement of
Financial  Accounting Standards No. 141 ("SFAS 141"),  "Business  Combinations."
SFAS 141 requires the purchase  method of accounting  for business  combinations
initiated  after June 30, 2001 and eliminates the  pooling-of-interests  method.
The  Company  does not  believe  that  the  adoption  of SFAS  141  will  have a
significant impact on its consolidated financial statements.

Item 3. 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 $18 and $21 at June 30, 2001 and March 31, 2001, respectively,
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  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 Agreements effective April 12, 2000 and July 31, 2000,
the  annual  interest  rates  of  our  bank   indebtedness   were  increased  by
approximately 500 basis points.  In addition,  upon the default on the covenants
of our loan agreements, the annual rates of our bank indebtedness were increased
to 25% per annum (the default  rate).  Based on the  outstanding  balance of our
debt  obligations  at March 31, 2001,  an increase in interest  rates to 25% per
annum  would  result in  additional  interest  expense of  approximately  $1,400
annually.  In addition,  changes in interest  rates impact the fair value of our
notes receivable and debt obligations.

      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.


                                       30
<PAGE>

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

      On January 12, 2001,  Bank of America,  N.A. (the "Bank") filed a lawsuit,
case number  2001-CA-000192,  against the  Company and its  subsidiaries  in the
Circuit Court of the Twelfth Judicial Circuit in and for Manatee County, Florida
Civil  Division  (the  "Court") to foreclose  on a mortgage  and other  security
agreements on the Company's  real and personal  property and  substantially  all
other assets of the Company (the "Collateral")  securing  obligations payable to
the Bank pursuant to the terms of the loan  agreements  between the Bank and the
Company (the "Loan Agreements"). The suit alleged that the Company failed to pay
its obligations under the Loan Agreements  including  principal of approximately
$11.2 million, non-default interest of approximately $509,000, default interest,
fees,  expenses and costs and breached other terms of the Loan  Agreements,  and
requested  the Court to enter a judgment of  foreclosure,  appoint a receiver to
take  possession  and control over the  Collateral and award the bank such other
and further relief appropriate under the circumstances.

      On January  22,  2001,  Elcotel and its  subsidiaries  filed in the United
States  Bankruptcy Court in the Middle District of Florida  voluntary  petitions
for relief under chapter 11 title 11 of the United States  Bankruptcy Code under
Case Numbers 01-01077-8C1,  01-01078-8C1 and 01-01079-8C1.  The Chapter 11 cases
have been consolidated for the purpose of joint administration under Case Number
01-01077-8C1.

      As a result of the  Chapter 11  Proceedings,  all  litigation  against the
Company was automatically  stayed on January 22, 2001 pursuant to Section 362 of
the Bankruptcy  Code,  precluding the Bank or other  plaintiffs  from taking any
remedial action against the Company.

Item 6. Exhibits and Reports on Form 8-K

      (a) Exhibits:

      The following exhibits are filed herewith as part of this report:

          Exhibit
             No.                   Description of Exhibit
          -------                  ----------------------
                                           None

      (b) Reports on Form 8-K:

      On  August  1,  2001,  the  Company  filed a  current  report  on Form 8-K
reporting  that it had filed,  on July 16, 2001, a Joint Plan of  Reorganization
(the  "Plan")  and a  Disclosure  Statement  pursuant  to  Section  1125  of the
Bankruptcy Code with respect to the Plan (the "Disclosure Statement").


                                       31
<PAGE>

                                   SIGNATURES

      Pursuant to the  requirements of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                             Elcotel, Inc.
                                             ----------------------------
                                             (Registrant)

Date: August 15, 2001                        By:  /s/ William H. Thompson
                                             ----------------------------
                                             William H. Thompson
                                             Senior Vice President,
                                             Administration and Finance
                                             (Principal Accounting and
                                             Financial Officer)


                                       32