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

                                    FORM 10-K
(Mark One)

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

                    For the fiscal year ended March 31, 2001
                                       OR
[     ]  TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES
      EXCHANGE ACT OF 1934

     For the transition period from ________________ to ___________________

                         Commission file number 0-15205

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

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

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

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

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

                                      None

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No __

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

The aggregate market value of the voting Common Stock held by  non-affiliates of
the  Registrant at June 15, 2001,  computed by reference to the closing price of
the Registrant's Common Stock on such date as quoted by the Electronic Quotation
Service was approximately $666,308. Shares of Common Stock held by each officer,
director  and  holder of 5% or more of the  outstanding  Common  Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate  status is not  necessarily  a conclusive  determination  for other
purposes.

At June 15, 2001, there were 13,779,991 shares of the Registrant's  Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None

<PAGE>


                                Table of Contents

                                                                            Page

PART I                                                                        4
    Item 1.    THE COMPANY'S BUSINESS                                         4
                  Overview of the Company                                     4
                  Events Leading up to the Chapter 11 Filings                 5
                  The Chapter 11 Proceedings                                  6
                  Reorganization Plan                                         7
                  Impairment of Assets                                        7
                  The Domestic Public Communications Industry                 8
                  The Internet and Public Access Interactive Media Market     9
                  Our Domestic Market Strategy                                10
                  The International Public Communications Industry            12
                  Our International Business Strategy                         12
                  Products and Services of Our Payphone Business              12
                  Products and Services of Our Grapevine Internet Appliance
                     Business                                                 15
                  Sales, Revenues and Distribution                            20
                  Engineering, Research and Development                       27
                  Licenses, Patents and Trademarks                            28
                  Assembly and Sources of Supply                              29
                  Warranty and Service                                        30
                  Backlog                                                     31
                  Competition                                                 31
                  Governmental Regulation                                     33
                  Environmental Matters                                       36
                  Employees                                                   37
                  Seasonality                                                 37
                  Risk Factors                                                37
    Item 2.    PROPERTIES                                                     44
    Item 3.    LEGAL PROCEEDINGS                                              45
    Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS                                                     45
PART II                                                                       46
    Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND
                  RELATED STOCKHOLDER MATTERS                                 46
    Item 6.    SELECTED FINANCIAL DATA                                        47
    Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS                                                  48
                  Overview                                                    48
                  The Chapter 11 Proceedings                                  50
                  Going Concern                                               53
                  Results of Operations                                       54
                  Liquidity and Capital Resources                             61
                  Impact of Inflation                                         66
                  Selected Quarterly Data                                     67
                  Effects of New Accounting Standards                         68


                                       2
<PAGE>

                                Table of Contents
                                   (continued)
                                                                            Page
    Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES
                  ABOUT MARKET RISKS                                         68
    Item 8.    CONSOLIDATED FINANCIAL STATEMENTS
                  AND SUPPLEMENTARY DATA                                     69
    Item 9.    CHANGES IN AND DISAGREEMENTS WITH
                  ACCOUNTANTS ON ACCOUNTING AND
                  FINANCIAL DISCLOSURE                                       108
PART III                                                                     108
    Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF
                  THE REGISTRANT                                             108
                  Directors                                                  108
                  Executive Officers                                         109
                  Section 16(a) Beneficial Ownership Reporting
                    Compliance                                               110
    Item 11.   EXECUTIVE COMPENSATION                                        111
                  Summary Compensation Table                                 111
                  Stock Option Grants in the Last Fiscal Year                113
                  Aggregated Stock Option Exercises in the Last
                    Fiscal Year and Fiscal Year-End Option Values            114
                  Employment Contracts and Termination of Employment
                    and Change in Control Arrangements                       114
                  Directors' Compensation                                    116
                  Compensation Committee Interlocks and Insider
                    Participation                                            117
    Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                  OWNERS AND MANAGEMENT                                      117
                  Security Ownership of Certain Beneficial Owners            118
                  Security Ownership of Management                           118
    Item 13.   CERTAIN RELATIONSHIPS AND RELATED
                  TRANSACTIONS                                               119
PART IV                                                                      120
    Item 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES
                  AND REPORTS ON FORM 8-K                                    120


                                       3
<PAGE>

                                     PART I


Item 1.   THE COMPANY'S BUSINESS

      The  statements  contained in this report which are not  historical  facts
contain forward looking  information,  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
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 of the Company

      Elcotel,  Inc.  ("Elcotel") and its  subsidiaries,  which are collectively
referred to herein as the Company,  we, us or our, was  incorporated  in 1985 to
design, develop,  manufacture and market  microprocessor-based  "smart" payphone
electronics with embedded operating software and back office payphone management
software systems with features and functions required for independent  providers
to compete with the Regional Bell Telephone Operating Companies ("RBOCs") in the
provision of payphone terminals and related public telephone  services.  We have
since expanded our payphone  business through  internal  development and through
acquisitions to supply payphone  terminals that operate in wireless and wireline
telecommunications  networks,  and to supply payphone terminals,  smart payphone
electronics,  management software systems and other products and services to the
RBOCs,  interexchange  carriers  (IXCs) and other  domestic  and foreign  public
communications  providers.  In addition, we have developed what we believe to be
the first non-PC Internet appliances (the "Grapevine(TM)  terminals") for use in
a public  communications  environment,  which will enable the on-the-go  user to
gain  access  to  internet-based   content  through  our  client-server  network
supported by our internally  developed  e-Prism(TM) back office software system.
Our  Grapevine  terminals,  supported by our e-Prism  system,  were  designed to
provide  the  features  of  traditional  smart  payphone  terminals,  to provide
internet-based  content,  to support  e-mail  and  e-commerce  services,  and to
generate  revenues  from  display  advertising,   sponsored  content  and  other
applications  and  services  in  addition to  traditional  revenues  from public
payphones.  Our e-Prism  software  was  designed  to manage and deliver  display
advertising  content,  internet-based  content and personalized  services to the
Grapevine  terminals.  Our Internet  appliance  business generated net sales and
revenues of approximately $1.3 million during the year ended March 31, 2001.

      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  under Case
Numbers 01-01077-8C1,  01-01078-8C1 and 01-01079-8C1  (collectively the "Chapter
11 Proceedings"). The Chapter 11 cases have been consolidated for the purpose of
joint administration under Case Number 01-


                                       4
<PAGE>

01077-8C1.   The   Company   is   presently   operating   its   business   as  a
debtor-in-possession  and is subject to the  jurisdiction and supervision of the
Bankruptcy  Court while it  formulates a plan or plans of  reorganization.  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.

Events Leading up to the Chapter 11 Filings

      The rapid  growth in wireless  telephone  usage has  resulted in declining
payphone usage and revenues.  In addition,  the  Telecommunications  Act of 1996
which was enacted to eliminate  long-standing  legal barriers  separating  local
exchange carriers, long distance carriers and cable television companies, and to
foster  greater  competition  in the  industry,  changed the manner in which the
RBOCs  could  account  for  their  public  communications   businesses,  and  in
particular,  the inclusion of such operations as part of the operations of their
regulated businesses.

      As a result of these and other  factors,  many of the Company's  customers
have  aggressively  reduced the number of payphone  sites they  operate and have
been able to utilize their existing inventories of payphone equipment to curtail
new  equipment  purchases and  programs.  Simultaneously,  there has also been a
widespread  consolidation in the telecommunications  industry. As a consequence,
the total number of installed  payphone terminals and payphone service providers
nationwide  has been greatly  reduced.  The  reduction in the number of payphone
operators  and the  resulting  decrease in  purchases  of  traditional  payphone
products and services have greatly reduced the Company's  revenues from its core
business.  In response to these trends,  the Company designed,  at a substantial
cost,  the  Grapevine and e-Prism  products  (see  "Products and Services of Our
Grapevine Internet Appliance Business," below). During the last three years, the
Company  committed in excess of $15 million to the research and  development  of
its Grapevine  terminal  appliances,  related  embedded  operating  software and
e-Prism management software systems. The combination of decreasing revenues from
the Company's  traditional payphone business,  along with the increased research
and  development  costs  associated  with  its  new  technology,  resulted  in a
deterioration in the Company's  financial  performance  beginning in fiscal 1999
and imposed a severe strain on the Company's capital resources.  As of September
30, 1999, the Company was in default of certain financial covenants contained in
the loan  agreements  between the Company and its senior  secured  lender.  As a
result of the  default,  the  Company  has been  unable  to draw any  additional
advances under its line of credit since November 1999.

      The Company began efforts to restructure the debt  obligations  payable to
its senior secured lender and to raise  additional  capital and/or  financing to
refinance  the  debt,  and to raise  capital  to begin the  initial  phases of a
roll-out of its new Grapevine and e-Prism products. In connection therewith, the
Company entered into a forbearance agreement (the "Forbearance  Agreement") with
its senior  secured  lender on April 12,  2000 (as amended on July 31, 2000 by a
second  forbearance  agreement).  Although  certain  of the  Company's  domestic
customers  have  installed   Grapevine   terminals   pursuant  to  market  trial
agreements,  the  Company  has not  generated  material  revenues  from  the new
technology  (See "Sales,  Revenues and  Distribution  - Our  Grapevine  Internet
Appliance  Business,"  below).  In  addition,  the  Company was unable to obtain
commitments for new capital or financing.  Further,  after the expiration of the
Forbearance  Agreement on September 30, 2000, the Company was unable to effect a
restructuring  of its debt  obligations  with its  senior  secured  lender or to
negotiate a third  forbearance  agreement with terms  acceptable to the Company,
and ceased  making  principal  and  interest  payments to the lender in order to
retain sufficient working capital to operate its businesses.

      On January 12, 2001,  the  Company's  senior  secured  lender  commenced a
foreclosure  action in the Circuit Court of the Twelfth  Judicial Circuit in and
for Manatee  County,  Florida  Civil  Division  (the  "Court") to  foreclose  on
substantially all assets of the Company  collateralizing the obligations payable
to


                                       5
<PAGE>

the lender and  appoint a  receiver  to take  possession  and  control  over the
collateral.  See Item 8. - "Consolidated  Financial  Statements and Supplemental
Data."

The Chapter 11 Proceedings

      Section  362 of  the  Bankruptcy  Code  imposes  an  automatic  stay  that
precludes the Company's senior secured lender and other creditors and interested
parties  from taking any remedial  action in response to any default  outside of
the Chapter 11 Proceedings without obtaining relief from the automatic stay from
the Bankruptcy  Court. In addition,  under the Bankruptcy  Code, the Company may
assume or reject executory contracts and lease obligations.  Parties affected by
these  rejections may file claims with the Bankruptcy  Court in accordance  with
the reorganization  process. The review of the Company's executory contracts and
lease  obligations  and  decisions  with  respect to assuming or  rejecting  the
contracts and the approval of the Bankruptcy Court are pending.

      At the first day hearing held on January 23, 2001,  the  Bankruptcy  Court
entered first day orders granting authority to the Company,  among other things,
to pay pre-petition and  post-petition  employee wages,  salaries,  benefits and
other employee obligations.  The Bankruptcy Court also approved orders providing
for  the  joint  administration  of the  Chapter  11  Proceedings  and  granting
authority, among other things, to pay post-petition obligations to suppliers and
other parties in the ordinary course of business.  Presently,  substantially all
pre-petition liabilities at the Petition Date are considered liabilities subject
to compromise.

      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 a  confirmed  plan of
reorganization,  the ultimate distribution with respect to allowed claims in not
presently ascertainable.

      The  Company  has filed  numerous  motions in its  Chapter 11  Proceedings
whereby it was granted  authority  or  approval  with  respect to various  items
required  by  the   Bankruptcy   Code  and/or   necessary   for  the   Company's
reorganization  efforts.  In addition to motions  pertaining  to the use of cash
collateral to operate the business and adequate protection to our senior secured
lender,  the Company has obtained orders providing for, among other things,  (i)
implementation of employee  retention,  incentive and severance  programs,  (ii)
payment  of  certain   pre-petition   liabilities   and/or   offset  of  certain
pre-petition liabilities against pre-petition accounts receivable; and (iii) the
extension of time to assume or reject executory contracts and lease obligations.

      The Bankruptcy  Court  established  May 29, 2001 as the deadline (the "Bar
Date") for creditors to file claims against the Company.  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 any Chapter 11 plan.


                                       6
<PAGE>

Reorganization Plan

      The  debtors  expect  to  reorganize  under  Chapter  11 and to  propose a
reorganization plan or plans. The Bankruptcy Court has granted extensions of the
exclusivity  periods during which the debtors may file a reorganization  plan or
plans and solicit  acceptances  thereof to July 16, 2001 and September 14, 2001,
respectively. Although management expects to file a reorganization plan or plans
by July 16, 2001,  there can be no  assurance  that the  reorganization  plan or
plans will be confirmed by the  Bankruptcy  Court,  or that such plan(s) will be
consummated.

      The  Company  intends  to develop a plan or plans of  reorganization  (the
"Plan of  Reorganization")  through  negotiation with the Company's key creditor
constituencies  including its senior secured  lender and the official  unsecured
creditors committee.  Substantially all pre-petition liabilities will be subject
to settlement under the Plan of  Reorganization  to be submitted by the Company.
The  Plan of  Reorganization  must be  voted  upon by  each  impaired  class  of
creditors of the Company and approved by the Bankruptcy  Court. No assurance can
be given regarding the timing of the Plan of Reorganization, the likelihood that
such plan will be developed, or the terms of which such plan may be conditioned.
In addition,  there can be no assurance that the Plan of Reorganization  will be
approved by the  requisite  holders of claims and  confirmed  by the  Bankruptcy
Court, or that the Plan of Reorganization will be consummated.  If the Company's
Plan of  Reorganization  is not  accepted  by the  required  number of  impaired
creditors  and equity  holders  and the  Company's  exclusive  right to file and
solicit acceptance of the Plan of Reorganization ends, any party in interest may
subsequently file its own plan of reorganization for the Company. The Bankruptcy
Court may confirm a plan of reorganization notwithstanding the non-acceptance of
the  plan by an  impaired  class of  creditors  or  equity  holders  if  certain
requirements of the Bankruptcy Code are met.

      The  Company  plans to  maximize  the  operating  results of its  payphone
business by maintaining or increasing its market share domestically,  increasing
its  international  export business and implementing  further  restructuring and
cost  reduction  initiatives,  if necessary.  Also, the Company is attempting to
successfully  conclude  market  trials of its  Grapevine  terminal  and  e-Prism
products,  gain market acceptance thereof and establish commercial  distribution
domestically in the next several months. However, there can be no assurance that
the Company can  accomplish  any of these  matters.  The  reorganization  of the
Company  under  Chapter 11 is  dependent  upon the  Company's  ability to obtain
adequate sales and revenues to achieve  profitable  operations and cash flow and
to restructure its debt obligations through the Chapter 11 process.  The Company
believes,  but cannot  assure,  that it has the  ability  to achieve  profitable
operations  and  positive  cash flow from its  payphone  business,  and does not
believe that the market  acceptance  of its  Grapevine  and e-Prism  products is
critical to its reorganization.  Accordingly, the Company is developing its Plan
of Reorganization based on the anticipated  operations of its payphone business.
If the Company is unable to  successfully  conclude the ongoing  market trial of
its Grapevine and e-Prism products in the next several months, the Company plans
to restructure its operations to curtail  investments in its Internet  appliance
business to facilitate the attainment of profitable operations. However, in such
an event,  the  future  growth  prospects  of the  Company  would be  materially
adversely affected. In addition, if payphone industry revenues and the Company's
sales and revenues  continue to contract at rates  experienced over the last two
fiscal  years,  the  Company's  ability to  achieve  profitable  operations  and
reorganize under Chapter 11 would be materially adversely affected.

Impairment of Assets

      During fiscal 2001, we continued to experience significant declines in net
sales  and  revenues  of our  payphone  business  as a result  of the  continued
deterioration  of industry  revenues caused  primarily by the growth in wireless
communications.  Accordingly,  at March 31, 2001,  we performed an evaluation of
the recoverability of the assets of our payphone business,  and concluded that a
significant  impairment of


                                       7
<PAGE>

the long-lived  assets of our payphone business had occurred since the estimated
future cash flows of the business  (undiscounted  and without  interest) are not
expected to be  sufficient  to recover  the  carrying  value of the  assets.  In
addition,  because of: (i) prolonged  market  trials of our Grapevine  terminals
domestically;  (ii) adverse economic conditions presently affecting the Internet
and electronic advertising industries;  (iii) our inability and the inability of
our   customers   to  generate  any   meaningful   advertising   revenues   from
advertisements  placed on  Grapevine  terminals;  (iv)  uncertainties  as to the
market acceptance of our Grapevine terminals; and (v) lack of adequate liquidity
or funding  sources,  as a result of the Chapter 11 filings,  that are needed by
the  Company to continue  to enhance  and market the  products  of its  Internet
appliance business, the Company performed an evaluation of the recoverability of
the assets of its Internet  appliance  business.  The Company  concluded  that a
significant  impairment of the  long-lived  assets of this business  segment had
also occurred.  The impairment was identified  because the estimated future cash
flows  (undiscounted  and without  interest)  are not  presently  expected to be
sufficient  to  recover  the  carrying  value of the  assets.  Accordingly,  the
carrying  values of impaired  assets were written down to their  estimated  fair
value,  which were  determined by recent  appraisals and other estimates of fair
value  based  on  discounted   estimated  cash  flows.  The  Company  recognized
impairment  losses of  approximately  $27,656,000 and $5,564,000  related to its
payphone business and Internet appliance  business,  respectively.  Considerable
management  judgment is necessary to estimate  fair value;  accordingly,  actual
results could vary  significantly  from such  estimates.  The impairment  losses
included the  write-down  of property and equipment by  approximately  $721,000,
goodwill  by  approximately   $21,654,000,   identified   intangible  assets  by
approximately $5,504,000,  capitalized software by approximately $4,783,000, and
other assets by approximately  $558,000.  See Item 8.-  "Consolidated  Financial
Statements and Supplemental Data."

The Domestic Public Communications Industry

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

      The  Telecommunications Act of 1996 (the  "Telecommunications  Act" or the
"Act"), the most comprehensive  reform of communications law since the enactment
of the  Communications  Act of 1934,  eliminated  long-standing  legal  barriers
separating local exchange carriers, long distance carriers, and cable television
companies and preempted  conflicting  state laws in an effort to foster  greater
competition in all  telecommunications  market  sectors,  improve the quality of
services,  and lower prices. In addition,  the Act included specific  provisions
relating to the payphone  operations  of telephone  companies and the payment of
compensation  by long distance  carriers to other PSPs for toll free (800,  866,
877 and 888) calls and access code ("10xxx") calls  (collectively  "dial-around"
calls) made from  payphones to the networks of the long distance  carriers.  See
"Government Regulation," below.

      As a result of the regulatory  changes  created by the Act and regulations
adopted by the FCC to implement its provisions,  and  competition  from cellular
and  other  wireless  forms  of  communication,   we  believe  that  the  public
communications  industry has and continues to undergo fundamental  changes.  The
rapid growth in wireless  telephone  usage has  resulted in  declining  payphone
usage and revenues. In


                                       8
<PAGE>

addition,  the growth in dial-around calls from payphones has further compressed
payphone  revenues.  The  RBOCs,  which  control a major  share of the  payphone
market,  are no  longer  permitted  to  subsidize  their  public  communications
businesses  with profits from their regulated  businesses.  As a result of these
market factors,  the PSPs continue to eliminate  marginal  payphone  sites,  are
building  inventories  of  payphone  equipment  and using these  inventories  to
maintain  their  installed  base,  and  curtailing  new equipment  purchases and
programs to upgrade the installed base while repairing and refurbishing existing
equipment.  Further,  coin  collection  expense is growing while coin revenue is
declining, which is further compressing profit margins of PSPs. We estimate that
the  embedded  base of  payphones  in the  United  States  has  contracted  from
approximately  2.4 million  terminals in operation  in 1998 to  approximately  2
million  terminals  today, and the market is expected to contract further beyond
2001. These industry conditions are adversely affecting the business of the PSPs
as well as the suppliers of products and services to the PSPs, including us.

      We  believe  that  six  PSPs  control  approximately  80% of the  payphone
terminals  in  service in the United  States.  These  PSPs,  which  include  SBC
Communications,   Inc.  ("SBC")  (which  acquired  Pacific  Telesis,   Inc.  and
Ameritech,  Inc.), Verizon (formerly known as Bell Atlantic, Inc. which acquired
NYNEX and GTE), BellSouth  Corporation,  US West, AT&T and Davel Communications,
Inc., are reevaluating their business  strategies,  considering  divestitures of
all or a  portion  of their  installed  base and are also  seeking  new  service
solutions  and revenue  sources,  such as  advertising,  e-mail and content,  to
combat  competition from cellular and other wireless forms of communication  and
stimulate usage of public terminals. BellSouth Corporation announced on February
2, 2001 that it would exit the public communications business by December 2002.

The Internet and Public Access Interactive Media Market

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

      For consumers  on-the-go,  however, the technology to deliver this content
connectivity  on a  twenty-four  hour basis  seven days a week is still  largely
bound to the  home or  office.  Today,  over  fifty  companies  have  introduced
Internet  kiosks in order to stimulate  industry demand and generate new revenue
streams for PSPs.  These kiosks  require the consumer to figure out how and what
information and content to access from the Internet in a limited amount of time.
We believe that Internet kiosks are intimidating,  cumbersome, and difficult and
expensive to deploy.  Consequently,  we do not believe these kiosks  effectively
respond to the emerging need of the  "on-the-go"  consumer for easy,  simple and
widespread  public access to content.  Further,  these  Internet  kiosks are not
physically  configured so that they can serve as a replacement  for the hundreds
of thousands of payphones located in suitable sites.

      The  Internet  is an  increasingly  significant  global  mass  medium  for
conducting  business,   collecting  and  exchanging  information,   facilitating
communication  and  providing  entertainment.  IntelliQuest  estimates  that the
number of Internet  users  worldwide  will grow from  approximately  150 million
users at the end of 1999 to 300 million by the end of 2005. We expect the growth
in  Internet  usage to  translate  into  growth in demand for  public  access of
Internet-based  content  on  simple  devices.  Travel  will  grow from 1 billion
domestic  travelers in 2000 to 1.5 billion  travelers  by 2005  according to the
Travel Industries Association. The potential for out-of-home solutions that keep
travelers connected


                                       9
<PAGE>

to their home and office  presents a  substantial  opportunity  for creating new
services  and  revenues  for PSPs and us. This  opportunity  includes  providing
relevant   information  and  Internet-based   content  partially   supported  by
advertisers  targeting the traveling  public.  We believe that  advertisers  and
businesses  continue  to view the  Internet  as a medium that will evolve into a
valuable tool to reach Internet connected customers, including travelers, and to
enable  transactions that stimulate sales.  Internet  advertising is expected to
increase  in  the  coming  years.  The  Internet   Advertising  Bureau  recorded
web-advertising  revenue of $4.1 billion in 2000 and believes  that such revenue
will exceed  $16.5  billion by 2005.  Notwithstanding,  we believe  that present
economic  conditions  and the  shakeout of  Internet  (or .com)  companies  have
recently  resulted in a decline in interactive  electronic  advertising and also
the value thereof.

      The public access  interactive media market is a hybrid of the out-of-home
media market (which includes local promotions) and interactive media market that
targets  consumers  personally.  We  believe  that  the  current  public  access
interactive  media market has been  limited to a small  number of niche  product
providers primarily offering Internet kiosk-type  workstations.  We also believe
that out-of-home  media  advertisers  continue to search for new ways to improve
the value of their advertising, and that solutions that offer interactivity, the
ability to place an order and track  consumer  response  command a  premium.  In
addition, we believe that targeting specific demographics with local advertising
and  information  in high  profile  locations is more  valuable  than mass media
banner  advertising.  The  interactivity,  reporting  and  ability  to  generate
immediate demand from the Grapevine  terminals are similar to Internet offers in
the home or office. We believe that the possibility of conducting brand-building
campaigns in high profile  locations like airports,  while providing a simple to
use device for making  purchases,  offers  traditional  and on-line  advertisers
significant  value.  Additionally,  pilot and  market  trials  by our  customers
indicate that travelers may pay for new communications services that are easy to
use,  offer  unique  information  relevant to their  location  and allow them to
quickly  connect with their home or office.  The  combination of new pay-for-use
communication  services and advertising  sponsored  content revenues creates new
potential revenues for the PSPs and us.

Our Domestic Market Strategy

      Over the past 100 years,  the  public  telecommunications  industry,  more
commonly known as the "payphone industry",  has made "on-the-go"  communications
possible for millions of people  daily.  A decade ago, the payphone was the only
way most people on the go kept  connected to home or office.  Although  payphone
usage and revenues have declined with the growth of wireless services, payphones
still command the preferred communications site locations,  particularly in high
profile, high traffic locations, such as airports, malls and convention centers.
We  plan  to  continue  to  provide  smart  payphone  electronics,   replacement
components  and repair  and  refurbishment  services  to PSPs and  maximize  the
performance  of our payphone  business  while the installed  base of traditional
payphones and payphone usage revenues  contract and enter into  customer/partner
relationships  with the PSPs to deploy our Grapevine  non-PC  Internet  terminal
appliances in high profile, high traffic locations.  We also plan to develop our
Internet-based content,  information and consumer services business to provide a
content-driven personal communications portal in a public access environment. We
believe that the successful  implementation  of our Internet  business  strategy
will  enable PSPs to  generate  new  revenues  through  user paid fees,  display
advertising,  sponsored supported content and other sources of revenues that are
two  to  four  times  greater  than  the  revenues  generated  from  traditional
payphones.  With  this  strategy,  we  believe  that the  public  communications
payphone  industry  and our  $100  million  to $200  million-estimated  payphone
equipment market can expand to encompass the $4 billion Internet and interactive
media  market.  However,  there can be no assurance as to the  generation of new
revenues  or the amount  thereof,  if any,  or that our  strategy  to expand our
market will be successful.


                                       10
<PAGE>

      In our  Internet  appliance  business,  we intend to  manage  and  deliver
specialized  and  personalized  services to  consumers  in a public  environment
through our Grapevine terminals.  We are focusing on real-world content, such as
directories,  classified  advertisements,  e-mail,  financial  news  and  sports
results, weather forecasts,  horoscopes,  maps, and information on local hotels,
restaurants,  transportation and events. We believe that offering Internet-based
content  that is tailored to travelers  using our  proprietary  technology  will
increase the  convenience,  relevance and enjoyment of consumers'  visits to our
Grapevine  terminals,  thereby promoting  increased traffic and repeat usage. We
also believe that increased  traffic will increase the amount consumers spend on
new and traditional communications while enhancing the value of the advertising,
if any, placed on the terminals.

      The cornerstone of our content  solution is the distribution of content to
consumers  in  airport  concourses  and  airline  lounges,  convention  centers,
shopping malls, hotel lounges and suites, gas stations,  factories and fast food
chains.  This  distribution  would be provided from the same sites that now host
payphones.  Using our proprietary technology,  we intend to integrate real-world
content for  consumers to easily and rapidly  access for their  immediate  needs
without  having to surf the  Internet or hook up their PC. In a business  model,
which assumes that consumers have less than 10 minutes to collect,  store or use
updated information from e-mails,  and to make phone calls,  Grapevine terminals
would help consumers in public areas find  interesting  personalized and generic
information  easily and  quickly.  As  examples,  the  Grapevine  terminals  are
designed to offer immediate delivery of e-mail,  personal  speed-dial numbers or
e-mail  addresses  with  automated  access  allowing  consumers  to  complete  a
transaction while on-the-go.

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

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

      Through the combined sales forces of our customers,  traditional  agencies
and select advertising  representatives  working under our direction, we plan to
offer a variety of national and local  advertising,  sponsorships and promotions
that enable advertisers to access both broad and targeted audiences.  We believe
that our planned interactive information delivery,  personalization capabilities
and  e-mail  delivery  methods  will  have an  important  impact on the level of
revenues derived by our  customers/partners.  We believe that these capabilities
and  relationships  will provide us with a distinct  advantage over  competitors
while minimizing our own sales infrastructure investment.  However, there can be
no assurance that we will be able to implement our domestic  market  strategy in
whole or in part, or that our strategy will be successful.


                                       11
<PAGE>

The International Public Communications Industry

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

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

Our International Business Strategy

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

      We are implementing our Grapevine  Internet  terminal  strategy on a North
American  basis and  targeted  the  Canadian  market  for the  first  commercial
deployments  of our  Grapevine  terminals.  We intend to  capitalize  on what we
perceive to be  significant  opportunities  for our Grapevine  strategy in other
international  markets if our North  American  marketing and sales efforts prove
successful or if significant international  opportunities arise through our core
business  marketing  efforts.  We  expect  to  reduce  the  costs  and  risks of
international  expansion by entering into strategic alliances with partners able
to provide local directory, content, information, e-mail and electronic commerce
capability.  The expansion of our Grapevine strategy into international  markets
involves a number of risks as further  described  herein.  Also, there can be no
assurance that we will be able to implement our international market strategy in
whole or in part.

Products and Services of Our Payphone Business

      We design, develop,  manufacture and market a comprehensive line of public
communications products,  including payphone electronics and management software
systems,  payphone  terminals,  and  payphone  components  and  assemblies.  Our
microprocessor-based  payphone  electronics,  with embedded operating  software,
serve as the engine of payphone  terminals  known in the  industry as "smart" or
"intelligent"  payphones.  Networks  of  payphone  terminals  equipped  with our
microprocessor-based  electronics are  programmed,  monitored and controlled via
telemetry  using our back office  management  software  systems.  Our electronic
modules  provide the capability to communicate  with a caller by digitized human
voice  messages  and  prompts  activated  by the  microprocessor,  and  have the
capability to


                                       12
<PAGE>

internally  process the functions  associated with call processing,  call rating
and collecting data for accounting,  coin and route management  functions.  Call
timing and rating functions are performed via proprietary "answer detection" and
"answer  supervision"  designs.  Our  microprocessor-based   electronic  modules
include the XG6000(TM)  module,  Series 5(TM) module,  the 5501(TM) module,  the
5502(TM) module and the Gemini System III(TM) module.  The low electric  current
available  from the  telephone  line,  which  eliminates  the cost of electrical
installation,  generally  powers  these  electronic  modules  and  our  payphone
terminals.

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

      o     Monitor and report coin box status;

      o     Monitor  and  report  the  service  condition  of the  payphone  via
            maintenance and diagnostic alarms;

      o     Report,  in real time,  any critical  conditions  to the  management
            system;

      o     Record and store call records,  including called numbers,  types and
            length of calls and call revenue;

      o     Retrieve programming information, call records, cash box status, and
            maintenance and diagnostic data remotely;

      o     Program and monitor various  options,  rates,  alarms and free phone
            numbers on-site or remotely;

      o     Download voice prompts;

      o     Calculate  time-of-day  discounts and control other timed  functions
            via clock and calendar features; and

      o     Download revisions to the software operating system.

      In addition,  we provide software options  including custom voice prompts,
multilingual  voice  prompts,  customized  maintenance  alarms and call  routing
features,  programmable  initial rates and timed local calls. Also, our products
support multiple payment options, including coin, credit cards and smart cards.

      The XG6000 module is a derivative of our Grapevine  telephony  module that
is presently  used in our digital  wireless  payphone  applications  targeted at
international  markets. The XG6000 module has two primary elements,  the Digital
Signal Processor  ("DSP") and the Applications  Processor.  The DSP provides all
telephone line and voice  interfaces in the phone including voice  decompression
from stored  compressed  voice  files;  high-speed  modem;  call  progress  tone
detection and  generation;  DTMF detection and  generation;  management of audio
functions;  and  provides  interfaces  for  the  handset  and  phone  line.  The
Application  Processor  provides  extensive I/O interfaces for the coin scanner,
coin escrow,  keypad,  speed-dial buttons, hook switch, alarm switches,  and the
card reader.

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


                                       13
<PAGE>

module also supports a data port interface for access to the Internet via laptop
computers and multiple payment options.

      Our network management software systems are designed to manage and control
both  small  and  large  networks  of  payphone   terminals  equipped  with  our
microprocessor-based  electronic  modules.  Other than our server-based  e-Prism
Management  System  (discussed  below)  presently  used to  manage  and  control
payphone  terminals using our XG6000 module,  our payphone  management  software
systems operate on personal computers (PCs) in a multi-tasking environment,  and
provide  PSPs with the  ability  to manage  and  control  all  aspects  of their
installed payphone network  interactively from a single location.  The Company's
management  software systems provide PSPs with the ability to remotely configure
product features,  control the download of software changes, program rate files,
monitor operating status, and to download coin box, call record, maintenance and
diagnostic  data  for  accounting,  coin and  route  management  functions.  The
Company's  PC-based network  management systems include the PNM Plus(TM) System,
the PollQuest(TM)  System and the CoinNet(TM)  System.  The PNM Plus system is a
user-friendly  Windows-based management system that is used to remotely program,
manage,  and monitor payphone terminals equipped with our Series 5, 5501 or 5502
electronic  modules.  This  software  system has a built-in  24-hour  monitoring
function  that  reports all  pertinent  phone  activity,  including  call detail
records,  maintenance  reports and alarm  reports.  The monitoring and reporting
function can be configured to be  completely  hands-free  and to perform late at
night,  optimizing  the  busy-hour  performance.   The  PollQuest  system  is  a
Windows-based management system designed to remotely program, manage and monitor
our international payphone terminals generally equipped with our 5502 electronic
module.  PollQuest  has the  ability to  generate  call  detail and  maintenance
reports,   manage  the   communications   with  the   payphones   and   generate
performance-based  reports. The CoinNet system is a Unix or DOS-based management
system that is used to remotely program,  manage, and monitor payphone terminals
equipped  with our Gemini  System III  electronic  modules.  The CoinNet  system
provides call detail reports,  maintenance and alarm reports, and the customized
operating characteristics of each Gemini System III module.

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

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

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


                                       14
<PAGE>

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

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

      Solarus II(TM) Payphone  Terminal.  The Solarus II payphone  terminal is a
      wireless  Western style network access  terminal  offered in GSM, TDMA and
      CDMA wireless  configurations.  The Solarus II terminal  serves as a fixed
      portal for prepaid, emergency and free voice services.

      Solarus  Digital(TM)  Payphone  Terminal.  The  Solarus  Digital  payphone
      terminal is a Western style network  access  terminal that  integrates our
      XG6000  digital  technology  with GSM, TDMA and CDMA wireless  technology.
      This  terminal  provides  a flexible  platform  to enable the use of smart
      cards  and   implementation  of  e-purse,   loyalty  and   personalization
      applications managed via our e-Prism Management System.

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

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

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

Products and Services of Our Grapevine Internet Appliance Business

      We have developed what we believe to be the first non-PC Internet terminal
appliance,  the  Grapevine(TM)  terminal,  for  use in a  public  communications
environment,  which was designed to enable the on-the-go  user to gain access to
Internet-based content through our client-server network supported by our


                                       15
<PAGE>

e-Prism(TM) back office software system.  Our Grapevine  terminal,  supported by
our e-Prism  system,  was designed to provide the features of traditional  smart
payphone  terminals,  to provide  connectivity  to  Internet-based  content,  to
support e-mail and e-commerce  services,  and to generate  revenues from display
advertising,  sponsored  content and other  services in addition to  traditional
revenues from public payphone terminals.  The e-Prism service bureau network was
designed  to manage and  deliver  display  advertising  content,  Internet-based
information and specialized and personalized services to Grapevine terminals.

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

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

                               [GRAPHIC OMITTED]

Grapevine Internet Appliance Terminal (wall-mount version)
----------------------------------------------------------

      Each  Grapevine  terminal has three major modules - the Windows CE Content
Delivery Module, the Telephone Module and the Card Reader Module. The wall-mount
version also has a coin path,


                                       16
<PAGE>

including a coin scanner,  escrow,  chutes, and an anti-stuffing  device, a coin
return bucket, a cashbox and a security package.

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

      We have  designed  the soft keys for  navigation  through  directories  to
Internet-based content. These context-sensitive soft keys provide the ability to
offer  flexible  applications  and  information  delivery.  They have  different
instructions  on each key for each screen  that is  displayed  on the  Grapevine
terminal.  The soft keys support  scrolling of directories,  navigation  through
different levels of an information tree, and the delivery of specific  functions
associated with other modules in the Grapevine terminal.

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

      The Card Reader Module was designed to provide the card reader  functions,
the IrDA port  functions  and the PC data  port  functions.  The card  reader is
designed to support  magnetic stripe cards,  memory IC cards and  microprocessor
smart  cards,   two  (2)  Security   Access   Modules  (SAMs)  in  the  standard
configuration and an additional four (4) SAMs for advanced  electronic  commerce
and loyalty  programs in which  multiple  purses are required.  The IrDA Port is
mounted on the Card  Reader  Module and is  connected  to the  Content  Delivery
Processor. The IrDA port was included to provide a high-speed data interface for
hand-held  devices,  such as PDAs,  wireless  phones  and laptop  computers,  to
transfer data between these devices and the Grapevine terminal. The PC data port
is an  industry  standard  connector  mounted on the Card  Reader  Module and is
connected  to the  Telephone  Module.  The PC data  port is  used to  provide  a
standard phone connection for  higher-powered  portable devices,  such as laptop
PCs, to enable the  consumer to access a  high-speed  persistent  connection  to
Internet services and other networks.


                                       17
<PAGE>

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

      The e-Prism system is currently comprised of the e-Prism Phone Server, the
e-Prism  Content Server and the Report  Generator  Server located at our Service
Bureau Data Center.  The e-Prism  Phone Server  manages  phone data such as coin
collections,  maintenance and diagnostic alarms and performance of the telephone
functions of the terminals. The e-Prism Content Server manages content data, the
delivery of advertising and sponsored  information  content to the terminals and
reports  content display  performance.  The Report  Generator  Server is used to
report information to PSPs and advertisers.

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

      We will be  required  to expand  our  e-Prism  service  bureau  network of
servers as the installed base of terminals  increases,  although there can be no
assurance  in that  regard.  We will also be  required  to expand the network to
include  regional  servers  throughout  the United States and Canada to serve as
local polling engines, to provide local download management functions associated
with the Phone  Server,  and to provide our  customers/partners  with the direct
ability  to  provision  terminals  and  obtain  call  detail  records  and  coin
collection, cash box and maintenance and alarm reports.

      Advertising   Services.  We  have  engaged  Clear  Blue  Media,  Inc.,  an
ad-network  electronic  media  firm (see  "Sales,  Revenues  and  Distribution,"
below), to market Grapevine as an advertising media and generate advertisers for
the installed  base of terminals.  We are also  presently  attempting to develop
relationships  with  traditional   advertising   agencies  to  market  and  sell
advertisements  on Grapevine  terminals.  In  addition,  we have  dedicated  our
marketing staff of two persons to develop the Grapevine  advertising  medium and
generate advertising revenues that would validate the return on investment model
required to successfully market Grapevine terminals to our customers. Although a
limited number of advertisers  have placed ads on the terminals,  no significant
advertising  revenues  have been  generated  through our efforts or those of our
customers (see "Sales, Revenues and Distribution, below").

      In addition  to our  efforts to  establish  the  Grapevine  terminal as an
advertising  medium,  we manage the delivery of  advertisements to the installed
base of terminals.  These services  include the  reformatting  of  advertisement
content for delivery to the Grapevine terminals from our network service bureau,
the loading of content into the Content Server and the downloading of content to
Grapevine


                                       18
<PAGE>

terminals.  To monitor  quality of service  and report to the  advertisers,  our
customers/partners  have access to reports for  retrieval  of details  regarding
content delivery and reporting.  Presently,  we are capable of providing static,
passive JPEG/GIF advertising and content images.  Capability to provide animated
advertising images and MPEG images is still under development.

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

      e-Prism  Terminal  Management   Services.   We  provide  e-Prism  terminal
management  services,  consisting of a variety of necessary support functions to
successfully manage and maintain installed Grapevine  terminals.  These services
consist of: Content  Management  Services,  Phone Management  Services,  Network
Server  Management  Services,   Application  Development  Services  and  Content
Creation Services, including all of the necessary support functions.

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

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

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

      e-Prism Application  Development Services focus on developing  interactive
consumer applications and information services that maximize value to the paying
sponsor and  increase  terminal  traffic.  These new  applications  and services
include development of enhanced functions, such as animated advertising and MPEG
video files and  development of information  services and  interactive  features
that  attract and bring value to  end-users.  We plan to develop and release new
applications  such as e-commerce,  wireless  phone docking  station and advanced
e-mail  services  as new  technologies  present  additional  service and revenue
opportunities.


                                       19
<PAGE>

      Content Creation Services focus on creating,  adding,  moving and changing
interactive  local consumer  advertising  and  information  display  screens for
Grapevine  terminals  in  different  geographical  deployments.  These  services
include  reformatting  Internet-based  content and coordination with advertisers
and advertising agencies on finished products before they are released.

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

Sales, Revenues and Distribution

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

      We have historically  earned the majority of our revenues from the sale of
our microprocessor-based payphone electronics, payphone terminals and components
and from repair and refurbishment  services.  In the future, we believe that the
majority of our  revenues may be earned from sales of  Grapevine  terminals  and
recurring  revenues from advertising and e-Prism terminal  management  services,
and depending upon the customer relationship,  a portion of advertising revenues
generated by the terminals.  However,  there can be no assurance in that regard.
We believe that a majority of out-of-home  media  expenditures  are concentrated
among  only a few  types of  advertiser  segments  that lend  themselves  to the
Grapevine  media. We also believe that companies within these segments will find
the  unique  features  of  the  Grapevine  media   attractive  with  high  value
demographics,  changeable  advertisements,  and the ability for the  consumer to
place an order. However, there can be no assurance in that regard.

      Our Grapevine  Terminal Revenue Strategy.  During the year ended March 31,
2001, we entered into technology  field-testing and market trial agreements with
one of the RBOCs and with a major inter-exchange  carrier, and have been engaged
in such  field-testing  and market  trials of Grapevine  terminals  and services
throughout  the fiscal year. In addition,  we recently  entered into a new sales
and purchase agreement with Canada Payphone Corporation ("CPC"),  which modified
the terms of a former  agreement  dated November 15, 1999, for the deployment of
Grapevine terminals in Canada. See "Our Grapevine Internet Appliance  Business,"
below for a discussion of such agreements. The success of our Grapevine business
is dependent upon the successful  conclusion of field-testing and market trials,
which are


                                       20
<PAGE>

structured  to  test  the  operational  and  functional  characteristics  of the
Grapevine terminals and e-Prism services, and more importantly,  to evaluate our
ability to generate sufficient revenues from advertising and additional consumer
services that would support large scale deployment programs.

      We believe,  but cannot  assure,  that we can emerge from field and market
trials during the next year and enter into a strategic  alliance for  deployment
of Grapevine  terminals with at least one of our customers and possibly  certain
other PSPs that  control the  majority  of the  installed  payphone  base in the
United States.  However, it is uncertain whether the Grapevine terminals will be
accepted in the market and there can be no assurance  in that regard.  Our sales
and marketing efforts are focused on establishing the Grapevine brand, educating
consumers  about the  features  and  benefits  of our  Grapevine  terminals  and
developing  awareness  of the  Grapevine  advertising  medium.  We believe  that
regional and local advertising  represents an attractive and underserved  market
opportunity. In the Internet world today, spending by local businesses is a very
small  percentage of their overall  advertising  expenditures.  We believe,  but
cannot assure,  that our  directory-based  integrated  content,  information and
commerce  services  provide a platform  for targeted  and  differentiated  local
advertising  solutions that may be of substantial  appeal and generate  tangible
economic benefits to local businesses.

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

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

      The Grapevine  terminals are also designed to accommodate loyalty programs
and promotions for individual customers, such as a national fast-food chain or a
consumer  products  firm,  using smart chip card purses  issued to consumers and
used for an array of applications that can be managed by our e-Prism back-office
systems.  Our sales strategy is to focus on national accounts that could benefit
from   such   loyalty   or   promotional   programs.   We   believe   that   our
customers/partners  will  assist  our  efforts  to secure  banner  and  rotating
advertisements  and  sponsorships.  Pricing  policies  are  expected  to  remain
consistent with existing advertising industry rates.

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


                                       21
<PAGE>

and airline lounges;  shopping malls;  and other high traffic  locations such as
fast-food chains, factories and gas stations.

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

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

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

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


                                       22
<PAGE>

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

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

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

      We generally enter into non-exclusive sales agreements with our customers,
that include,  when  applicable,  non-exclusive  licenses to use our proprietary
operating systems and payphone management software systems.  Our agreements with
the RBOCs generally have terms ranging from one to five years,  are renewable at
the option of the  customers,  and  contain  fixed  sales  prices  with  limited
provisions  for price  increases,  but do not  generally  specify  or commit the
customers to purchase a specific  volume of  products.  Also,  these  agreements
generally  contain  clauses that require us to provide prices and other terms at
least as favorable as those extended to other customers and indemnify  customers
against expenses,  liabilities,  claims and demands resulting from our products,
including those related to patent  infringement.  These agreements may generally
be terminated at the option of the customer upon notice,  or if we default under
any material provision of an agreement. Our agreements with other PSPs generally
set forth product pricing and terms for specified purchase volumes,  and include
provisions  that enable us to change prices upon thirty (30) to ninety (90) days
notice.  Agreements  with our  international  customers  generally set forth the
pricing and terms for specified purchase volumes, and sales prices are generally
fixed with respect to volume stipulated in the agreements. Our customers are not
prohibited  from using or reselling  competing  products and are  generally  not
required to purchase a minimum  quantity of  products,  although our price lists
and  agreements  offer  discounts  based on volume.  All  purchase  orders  from
customers  are  subject to  acceptance  by us. Our policy is to grant  credit to
customers that we deem creditworthy.  In addition,  we have previously  provided
limited  secured  financing  with terms  generally  not  exceeding 24 months and
interest charged at competitive rates.


                                       23
<PAGE>

      Information  with  respect  to net  sales  and  revenues  of our  payphone
business for the years ended March 31, 2001, 2000 and 1999 is set forth below:

                                                       2001     2000      1999
                                                     -------   -------   -------
                                                           ($ In Thousands)

Payphone terminals                                   $ 7,364   $12,896   $23,758
Printed circuit board control modules and kits         8,970    15,056    18,790
Components, assemblies and other products              3,285     5,804    12,200
Repair, refurbishment and upgrade services             6,977    12,363     9,895
Other services                                           361     1,098       620
                                                     -------   -------   -------
                                                     $26,957   $47,217   $65,263
                                                     =======   =======   =======

      Net sales and revenues of our payphone  business by geographic  region for
the years ended March 31, 2001, 2000 and 1999 were as follows:

                                                 2001        2000          1999
                                               -------      -------      -------
                                                       ($ In Thousands)

United States                                  $24,374      $40,935      $57,583
Canada                                             246        2,773        3,197
Latin America                                    1,983        3,023        3,943
Europe, Middle East and Africa                    --            410           41
Asia Pacific                                       354           76          499
                                               -------      -------      -------
                                               $26,957      $47,217      $65,263
                                               =======      =======      =======

      Our Grapevine Internet Appliance Business.  We are marketing our Grapevine
terminals  and  services to the RBOCs,  major  inter-exchange  carriers,  Canada
Payphone Corporation and other public communication  providers through our sales
and marketing executives and the direct sales force of our payphone business. We
started the development of the Grapevine  technology and our service business in
October  1998 and  deployed the first  Grapevine  terminal in a controlled  test
location  in  December  1999.  Since  that  date,  one of  the  RBOCs,  a  major
inter-exchange  carrier  and CPC have  installed,  or have  agreed  to  install,
approximately  1,000 Grapevine  units in  high-profile  locations under purchase
and/or trial agreements.

      One of the RBOCs agreed to deploy  approximately  300 units pursuant to an
equipment trial agreement, as amended on November 15, 2000. As of June 15, 2001,
approximately  139  units  were  actually  installed.  Under  the  terms  of the
equipment trial agreement, we are responsible for the procurement and management
of  advertising  content  displayed  on  the  terminals,  and we  agreed  to pay
specified  commissions  to the RBOC based on  advertising  (and  other  service)
revenues  generated by us during the term of the  agreement.  The RBOC agreed to
pay specified  terminal and network management fees and software license fees to
us during the term of the agreement.  The equipment trial  agreement  expires 60
days after the installation of the terminals unless extended by mutual agreement
for another 60 days.  As of the date  hereof,  the 60-day  trial  period had not
expired.  Under the  terms of the  agreement,  if the  market  trial  acceptance
criteria,  including  the number and  pricing  of  advertisements  placed on the
terminals,  are met,  the RBOC  agreed to  purchase  the  terminals  and pay any
remaining  amounts  related  thereto.  The  Company has not yet  recognized  any
terminal  sales revenue  related to the  agreement  since such criteria have not
been met.  Accordingly,  partially  invoiced  amounts under the equipment  trial
agreement of  approximately  $449,000  have been  deferred.  If the market trial
acceptance  criteria are not met, the RBOC may return the  terminals and receive
credit  towards  future  purchases of our products  and


                                       24
<PAGE>

services.  Although the terminals  installed by the RBOC are operating to agreed
upon  specifications,  we were  informed in June 2001 that the RBOC  intended to
terminate the market trial because of site owners'  restrictions on advertising.
As the market  success of our  Grapevine  terminals is heavily  dependent on the
ability to generate  sufficient  advertising  revenues,  the  termination of the
market trial could be a significant setback with regard to our market strategy.

      In addition,  a major  inter-exchange  carrier deployed  approximately 150
units  pursuant to an  equipment  trial  agreement  dated July 5, 2000,  and has
agreed to deploy  another 500 units under a sales and  service  agreement  dated
April  19,  2001.  Under  the  terms  of  the  equipment  trial  agreement,  all
advertising  revenue  generated by the  terminals  accrues to the  carrier.  The
carrier  agreed  to pay  specified  terminal  and  network  management  fees and
software  license fees to us during the term of the  agreement.  The term of the
equipment  trial  agreement was 90 days after the  installation of the terminals
unless  extended  by the carrier  for  another 90 days.  The  carrier  agreed to
purchase  the  terminals  upon  acceptance  of the  product  based upon  defined
criteria  including  the number  and  pricing  of  advertisements  placed on the
terminals.  Otherwise,  the  carrier  has the right to return the  terminals  in
exchange for a like number of our Eclipse or Komet  payphone  terminals.  During
the year ended March 31, 2001, we recognized  sales  revenues of $150,000  under
the terms of the  agreement.  Under the  terms of the April 19,  2001  sales and
service agreement,  the carrier accepted the Grapevine  terminals deployed under
the trial  agreement,  agreed to pay remaining  amounts  related to the purchase
thereof,  and agreed to deploy  another 500 units  concentrated  in the New York
City airports.  The carrier may purchase the additional  units any time prior to
June 1,  2002.  Under  the  terms of the sales  and  service  agreement,  we are
responsible for the procurement and management of advertising  content displayed
on the  terminals,  and we  agreed  to pay  the  carrier  specified  amounts  of
advertising (and other service) revenues generated by the terminals. The carrier
agreed to pay  specified  terminal  and  network  management  fees and  software
license  fees to us  during  the  term of the  agreement.  If the  market  trial
acceptance criteria related to advertising  revenues from the terminals are met,
the carrier  agreed to purchase  the  terminals  and pay any  remaining  amounts
related to the purchase thereof. If the market trial acceptance criteria are not
met, the carrier may purchase the terminals,  return the terminals for credit or
continue operating the terminals as mutually agreed upon. As of the date hereof,
the  additional  500  units  are  still  being  deployed.  In  addition,  we are
attempting to sell advertising for display on the terminals. However, as of this
date, a significant number of advertisements has not been achieved.

      On April 30, 2001,  we entered into a revised  supply  agreement  with CPC
that  provides for the sale and  purchase of 8,000  Grapevine  terminals  over a
period ending September 30, 2005. The supply  agreement  specifies sales prices,
which are subject to change  annually  based on inflation.  The  agreement  also
stipulates  the  per-terminal  license  and  management  services  fees  and the
percentages of advertising,  e-commerce and other new revenue sources to be paid
to us. The initial  deployment  of our  Grapevine  terminals by CPC began during
fiscal  2001  pursuant  to a  former  supply  agreement,  and CPC  has  acquired
approximately 450 units. CPC has not yet acquired additional terminals, and such
purchases  are  heavily  dependent  upon  CPC's  success  regarding  advertising
initiatives and the amount of capital available therefore. Accordingly, there is
no assurance  that CPC will actually  purchase the number of terminals set forth
in the agreement.

      We have  entered  into a strategic  alliance  with Clear Blue Media,  Inc.
("CBM") to sell display and banner  advertisements on Grapevine  terminals.  The
agreement,   as  amended,   provides  CBM  with  non-exclusive  rights  to  sell
advertising on the Grapevine  network for a period of 5 years provided CBM meets
defined  performance  criteria,  which shall be waived so long as the Company is
below  50% of its  performance  standards  regarding  the  number  of  Grapevine
terminal  installations.   Presently,  the  Company  has  not  met  the  minimum
performance  standards set forth in the agreement.  The agreement  automatically
renews at the end of the initial  five-year term unless terminated by one of the
parties.  In  addition,   the  agreement  includes   provisions   regarding  the
distribution  of  advertising  revenues  among our  customers,


                                       25
<PAGE>

CBM and us. The  agreement  may be  terminated  by either  party upon a material
breach of its terms with  written  notice and  provided  the breach is not cured
within 45 days from the date of notice.  We may also  terminate the agreement at
any time  subject  to the  payment  of  termination  fees equal to six times net
advertising  revenue  generated  by CBM  for  the  three  months  preceding  the
termination date (the "termination  fees"). CMB may also terminate the agreement
at any time upon 12 months written notice subject to payment of the  termination
fees or  generation  of net  advertising  revenues over the notice period of not
less than the net  revenues  generated  in the  immediately  preceding  12-month
period.  Because of the recent  downturn in the electronic  advertising  market,
there  is no  assurance  that  CBM's  business  or  efforts,  if  any,  to  sell
advertising will be successful.

      In addition,  our marketing  organization  consisting of two employees and
our customers are attempting to develop  awareness of the Grapevine  advertising
medium,   and  are  directing  their  selling  and  marketing   efforts  towards
advertisers and sponsors in order to begin to develop  meaningful  revenues from
display and banner advertising.

      Presently,  it is  uncertain  whether we will be able to meet  performance
criteria,  particularly  with respect to  advertising  criteria,  and enter into
supply  contracts for the  commercial  deployment of Grapevine  terminals by the
firms engaged in market trials, or with any other customer.  We intend to pursue
strategic alliances with the other PSPs that control the rest of the majority of
the installed base of payphone terminals in the United States. However, there is
no assurance  that our efforts will be  successful.  We are  attempting to begin
full  deployment of our Grapevine  terminals with major  customers in the United
States during the next year. However, there can be no assurance in that regard.

      As  referred  to above,  the  market  success  of the  Grapevine  terminal
appliance is heavily dependent on our ability,  or the ability of our customers,
to  generate  sufficient   advertising  revenues.  If  advertising  efforts  are
successful,  we believe that we can install 300,000 to 500,000 of our wall-mount
Grapevine   terminals  over  the  next  five  years,  in  cooperation  with  our
customers/partners.  A similar  opportunity  exists  with our  desktop  terminal
appliance, which will be targeted for installation in airline and hotel lounges,
and up-market  hotel rooms.  However,  there is no assurance  that our Grapevine
terminals  will be  accepted  in the market or that they will be deployed in the
quantities we expect.

      The critical factors  necessary for the success of our Grapevine  Internet
terminal appliance business include, but are not limited to, our ability to:

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

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

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

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

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

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

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


                                       26
<PAGE>

      Information  with  respect  to net sales  and  revenues  of our  Grapevine
business for the years ended March 31, 2001, 2000 and 1999 is set forth below:

                                                    2001         2000      1999
                                                   ------       ------    ------
                                                         ($ In Thousands)

Grapevine terminals                                $1,156       $   78    $   --
Grapevine terminal components                          57           --        --
Service revenues                                       98           --        --
Advertising revenues                                   28           --        --
                                                   ------       ------    ------
                                                   $1,339       $   78    $   --
                                                   ======       ======    ======

         Net sales and revenues of our Grapevine  business by geographic  region
for the years ended March 31, 2001, 2000 and 1999 were as follows:

                                                    2001         2000      1999
                                                   ------       ------    ------
                                                         ($ In Thousands)

United States                                      $  288       $   --    $   --
Canada                                              1,051           78        --
                                                   ------       ------    ------
                                                   $1,339       $   78    $   --
                                                   ======       ======    ======

      Dependence on Customers.  During the years ended March 31, 2001,  2000 and
1999, one customer (Verizon,  Inc., formerly Bell Atlantic,  Inc.) accounted for
approximately  53%, 39% and 20%,  respectively,  of our  consolidated  sales and
revenues.  Our domestic distributors  accounted for approximately 11%, 7% and 7%
of our  consolidated  sales and revenues  during the years ended March 31, 2001,
2000 and 1999, respectively.

      Telephone  companies  (primarily RBOCs) accounted for approximately  $19.3
million,  $27.2 million and $32.5 million of our consolidated sales and revenues
during the years ended March 31,  2001,  2000 and 1999,  respectively.  Sales to
distributors  and  other  PSPs,  including  foreign  customers,   accounted  for
approximately $9.0 million,  $20.1 million and $32.8 million of our consolidated
sales and  revenues  during  the years  ended  March  31,  2001,  2000 and 1999,
respectively.

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

Engineering, Research and Development

      Our engineering, research and development activities during the last three
years were focused on the  development  of our  Grapevine  terminal  appliances,
related embedded operating software and e-Prism management software systems. Our
research and development  efforts in the payphone  business have been focused on
wireless applications and expansion of software product features.  During fiscal
2001,  we  expended  approximately  $3.9  million in  research  and  development
activities,  including  approximately  $667,000 million in capitalized  software
development costs.  During fiscal 2000, we expended  approximately $10.1 million
in research and development activities,  including approximately $3.6 million in
capitalized   software  development  costs.  During  fiscal  1999,  we  expended
approximately  $6.8 million in research and  development  activities,  including
approximately $639,000 in capitalized software development costs.


                                       27
<PAGE>

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

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

      Our present research and development activities are focused on development
of the  content  features  of our  Grapevine  terminals,  application  services,
specialized   service  offerings  oriented  to  the  public  consumer,   content
personalization and derivative applications in vertical markets.

Licenses, Patents and Trademarks

      We  own  seventeen  United  States  patents  relating  to  smart  payphone
electronics,  the Grapevine  design,  payphone  components and other technology,
which expire between 2010 and 2021. We have fourteen active United States patent
applications  on file related to various  aspects of our  Grapevine  technology,
designs and  implementations  in an operational  environment.  Additional patent
applications  are in preparation on other features of our Grapevine  technology.
Patents with respect to our  Grapevine  technology  may not be granted,  and, if
granted,  they may be challenged  or  invalidated.  If we are not  successful in
obtaining  the  patent  protection  we  seek,  our  competitors  may be  able to
replicate  our  technology  and more  effectively  compete with us. In addition,
issued  patents may not provide us with any  competitive  advantages  and may be
challenged by third parties.

      We also own several  service marks and trademarks used in the operation of
our  business  and have  applied for  registration  of other  service  marks and
trademarks.  However,  there  is no  assurance  that we will  be  successful  in
obtaining the service marks and  trademarks  that we apply for or that they will
be valuable.

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

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


                                       28
<PAGE>

agreements  and  provisions  in our sales  agreements,  and the  agreements  and
provisions  are  designed to prevent  duplication  and  unauthorized  use of our
software.

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

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

      We license certain  technologies,  patents and other intellectual property
rights  from  third  parties  under  agreements  providing  for the  payment  of
royalties.  Royalty expense during the years ended March 31, 2001, 2000 and 1999
approximated $239,000, $319,000 and $220,000, respectively.

Assembly and Sources of Supply

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

      A foreign supplier manufactures and/or assembles products that we acquired
in  connection  with the  acquisition  of the public  terminal  assets of Lucent
Technologies Inc. The arrangement includes provisions regarding prices,  changes
in prices  based on the cost of  materials,  orders and  delivery,  quality


                                       29
<PAGE>

and payment. We are not committed to any minimum purchase  commitment;  however,
we are  committed to purchase  inventory  purchased  by the foreign  supplier to
fulfill our orders.

      The local contract manufacturer selected for the assembly of our Grapevine
terminals  has exited  the  business  and we plan to  transition  such  assembly
operations into our facility in Orange, Virginia. Pursuant to the agreement with
the contract  manufacturer,  we are committed to purchase inventory purchased by
the supplier to fulfill our orders.

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

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

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

      We have  retained the majority of our supplier  relationships  despite the
commencement of the Chapter 11 Proceedings. However, few suppliers are extending
credit to the Company,  and we have  experienced and will continue to experience
certain  delays  in the  supply  of  materials  as a result  of the  Chapter  11
Proceedings.  We do not  believe  that such  delays  have  materially  adversely
affected our business or will  materially  adversely  affect our business in the
future,  although  there can be no  assurance in that  regard.  We believe,  but
cannot assure,  that our capital is adequate to fund planned  operations for the
next year,  subject to the outcome of the Chapter 11 Proceedings.  However,  the
level of our sales and  revenues has a material  impact on capital  available to
operate the business,  and a continued  deterioration  of our sales and revenues
would  adversely  affect our cash flow,  our ability to fund  operations  of the
business and our ability to maintain sources of supply.

Warranty and Service

      We provide product  warranties ranging from one to three years on products
we  manufacture  and a warranty  ranging  from  ninety  (90) days to one year on
terminal  equipment  that we repair,  refurbish  or upgrade.  Under our warranty
program, we repair or replace defective parts and components at no charge


                                       30
<PAGE>

to our customers.  After warranties expire, we provide  non-warranty repairs and
services for a fee. Our distributors are also authorized to repair our products.

Backlog

      Our backlog is subject to  fluctuation  based on the timing of the receipt
and completion of orders.  The Company  calculates its backlog by including only
items for which there are purchase orders with firm delivery  schedules.  On May
29, 2001,  the backlog of all  products and services on order was  approximately
$5,369,000 compared with a backlog of approximately  $5,328,000 on May 31, 2000.
Our backlog at any given date is not necessarily indicative of future revenues.

Competition

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

      Traditional  payphones  are losing  market  share and  profits  due to the
growth of  cellular  phone  usage and the  growth in  dial-around  programs.  We
believe,  but cannot assure, that our Grapevine terminals offer PSPs the ability
to generate  revenues  that are two to four times  greater than those  available
from a  traditional  payphone.  Although  traditional  payphones are expected to
compete  effectively  in low  traffic  and  outdoor  locations,  we believe  our
Grapevine  terminals will  outperform  traditional  payphones in high use indoor
locations.

      We believe our Grapevine  terminals are positioned to effectively  compete
against cellular competitors. We believe that we have a twelve to eighteen month
lead over cellular  competitors on the delivery of location-based  services.  We
believe that location-based services will require cellular operators to make new
infrastructure  investments.  Today, cellular operators have adopted a flat-rate
pricing methodology to sell excess capacity available on their network. Once the
minutes are gone they are gone forever. So the cellular operators are willing to
sell minutes at a flat rate to induce  higher usage to increase  total  revenues
and increase customer loyalty.  However with increased  infrastructure purchases
to offer location-based  services at higher transmission speeds, we believe that
the  cellular  community  will charge  premium  prices for these  location-based
value-added  services.  In  addition,  we believe  the  quality of the audio and
visual  content will be superior  with a fixed based line feed than what will be
available from the cellular  community.  Our Grapevine  terminals  offer a value
proposition  for


                                       31
<PAGE>

cellular  users  because  we  believe  many if not all of  these  location-based
services  will be provided  throughout  the  Grapevine  terminal  network at "No
Charge" to the consumer.

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

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

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

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

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

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

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

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

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

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

      We believe that our principal  competitors  domestically  include  Protel,
Inc. (a subsidiary of  Inductotherm  Industries,  Inc.),  Intellicall,  Inc. and
QuorTech, which recently acquired the payphone business of Nortel Networks, Inc.
It is  also  possible  that  new  competitors  with  financial,  management


                                       32
<PAGE>

and technical resources  substantially  greater than ours may emerge and acquire
significant  market  share.  Possible  new  competitors  include  large  foreign
corporations,  the RBOCs and other  entities with  substantial  resources.  Some
telecommunications companies, already established in the telephone industry with
substantial engineering,  manufacturing and capital resources, are positioned to
enter the payphone market. The  Telecommunications Act lifted the restriction on
the manufacturing of  telecommunications  equipment by the RBOCs.  After the FCC
finds that an RBOC has  opened its local  exchange  market to  competition,  the
RBOC,   through   a   separate   affiliate,    may   manufacture   and   provide
telecommunications  equipment and may manufacture  customer premises  equipment,
such  as  payphone  terminals.  As a  result  of the  Act,  we  could  face  new
competitors in the manufacture of payphones and payphone  components from one or
more of the RBOCs or their affiliates.

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

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

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

Governmental Regulation

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

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

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

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


                                       33
<PAGE>

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

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

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

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

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

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


                                       34
<PAGE>

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

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

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

      On  January  28,  1999,  the FCC  adopted a Third  Report and Order in its
proceeding   implementing   the   payphone   compensation   provisions   of  the
Telecommunications  Act.  This Order  established a  compensation  rate for dial
around and toll free calls of $.24 per  completed  call.  In  addition,  the FCC
applied the new rate  retroactively  to all  compensation  owed since October 7,
1997. This Order and rate were upheld in American Public Communications  Council
v. FCC, 215 F.3d 51 (D.C. Cir.2000). On April 15, 2001, the FCC adopted an Order
to make it easier for payphone  service  providers to collect  compensation  for
originating   toll-free   and   dial-around   access  calls  from   switch-based
telecommunications  resellers.  This Order  requires  that the first  underlying
facilities-based  inter-exchange  carrier  to whom the  local  exchange  carrier
delivers  such  calls  to  compensate  the  payphone  service  provider  for the
completed  call,  to track or  arrange  for  tracking  of the call to  determine
whether it is completed  and therefore  compensable  and to provide the payphone
service  provider a statement of the number of coinless  calls it receives  from
each of a specific  payphone  service  provider's  payphones.  The amount of and
rules with respect to dial around compensation will have a significant impact on
the business and  operations of payphone  service  providers and thus the demand
for payphones. There can be no assurance with respect to such matters.

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


                                       35
<PAGE>

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

Environmental Matters

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

      We are also a potentially  responsible party with respect to a recent fuel
spill on our leased property in Orange Virginia. The remediation activities with
respect to the spill have been  completed  at a cost of  approximately  $35,000,
which is being funded by the landlord and from  reimbursements from the Virginia
Department of  Environmental  Quality.  Although the Company has not accrued any
costs  related to the site,  it is  possible  that the  Company  may incur costs
related to this site in the future.  However,  we cannot  estimate  the range of
costs,  if any,  that we could  incur in the future  since  such costs  would be
dependent upon the scope of additional  actions, if any, that may be required by
the State of Virginia.


                                       36
<PAGE>

Employees

      As of June 1, 2001,  the Company  employed 124  full-time  employees.  The
Company is not a party to any collective  bargaining agreement and believes that
its relations with its employees are good.

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

Seasonality

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

Risk Factors

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

      We Have  Incurred  Recent  Operating  Losses.  We have incurred net losses
since December 1998.  During the quarter ended March 31, 1999, we incurred a net
loss of  $1,520,000  and  during the years  ended  March 31,  2000 and 2001,  we
incurred net losses of $11,188,000 and $43,630,000  (including impairment losses
of  $33,220,000  in fiscal  2001),  respectively.  We expect to incur  operating
losses on a  quarterly  basis in the  foreseeable  future  until  our  Grapevine
Internet appliance business begins to generate  sufficient sales and revenues to
achieve  profitability.  However,  there can be no assurance  that this business
will become profitable.  Our prospects must be considered in light of the risks,
expenses  and  difficulties  frequently  encountered  by  companies in the early
development  stage of a  business,  particularly  companies  in new and  rapidly
evolving markets such as non PC Internet  appliances and Internet  services.  To
address  these  risks and to achieve and  sustain  profitability,  if at all, we
must, among others things:

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

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

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

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

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

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

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


                                       37
<PAGE>

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

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

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

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


                                       38
<PAGE>

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

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

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

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

      Our Common  Stock  Price Has Been and May  Continue  to be  Volatile.  Our
common stock has experienced  substantial  price  volatility,  particularly as a
result of variations between our actual or anticipated  financial  results,  our
Chapter  11  Proceedings   and  the  published   expectations  of  analysts  and
announcements by our competitors and us. Because our common stock is traded over
the counter the stock  price's  volatility  may be increased.  In addition,  the
stock market has  experienced  extreme price and volume  fluctuations  that have
affected the market price of many  technology  companies in particular  and that
have often been unrelated to the operating performance of these companies. These
factors,  as well as general  economic and political  conditions,  may adversely
affect the market price of our common stock in the future.  In addition,  a plan
of  reorganization  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.


                                       39
<PAGE>

      Our  Internet  Terminal  Appliance  Business  Model  Is  Evolving  and  Is
Unproven.  Our  Grapevine  terminal  appliance  business  model is evolving  and
unproven.  We plan to develop  content  internally  and  aggregate  content from
third-party  content  providers,  distribute  this content to users of Grapevine
terminals nationally and internationally and share in the revenues from national
and local  advertisements,  sponsorships and promotions generated from Grapevine
terminals with our  customers/partners.  Our business model is new to the public
communications  market both nationally and  internationally,  is unproven and is
likely to  continue  to  evolve.  Moreover,  we may not be aware of all of risks
entailed by this new business  model.  Accordingly our business model may not be
successful,  and we may need to change it. Our  ability  and the  ability of our
customer/partners to generate advertising,  sponsorship and promotional revenues
by distributing  content services to the general public depends, in part, on our
success in persuading advertisers of the effectiveness of Grapevine terminals as
a new  advertising  medium.  There can be no  assurance  that we will be able to
generate  sufficient  advertising  revenues to validate the  Grapevine  business
model.  We intend to continue to develop  our  business  model as we explore our
opportunities  in this new electronic  interactive  advertising  and information
delivery  channel to the public.  Our  business  and future  prospects  would be
adversely affected if our plans and business model do not prove successful or if
our customers/partners or we are unable to execute as anticipated.

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

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

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


                                       40
<PAGE>

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

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

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

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

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

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


                                       41
<PAGE>

medium as a  significant  advertising  medium.  We  believe  that the  Grapevine
advertising  rates will be based on a combination of  impressions  and clicks to
content,  but there is no assurance in that regard.  Also,  advertisers  may not
accept our measurements or our measurements could contain errors.

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

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

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

      We Are Subject to Pending and Potential Legal Proceedings.  We are subject
to legal proceedings, including the Chapter 11 Proceedings, and claims from time
to time,  and expect to continue to be in the ordinary  course of our  business,
including  claims of  alleged  infringement  of  patents,  trademarks  and other
intellectual  property  rights  owned by others.  Such  claims,  even if without
merit,  could require the  expenditure of  significant  financial and managerial
resources, which could harm our business. In addition, any judgments against us,
particularly  for  infringement of intellectual  property  rights,  could have a
material  adverse  effect on our business,  results of operations  and financial
position. Pending the submission of a Plan of Reorganization and its approval by
the Bankruptcy Court and the outcome of certain legal proceedings, the business,
financial  condition  and results of operations  could be  materially  adversely
affected.


                                       42
<PAGE>

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

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

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

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

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


                                       43
<PAGE>

litigation could harm our financial  results and impact our delivery of services
in a timely and cost-effective manner.

      We May be  Unable  to  Reorganize  and  Continue  Operations.  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 is dependent upon, among other things,  the ability of the Company
to secure satisfactory financing arrangements, the terms of the ultimate plan or
plans 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;   continued  use  of  cash  collateral  or,
alternatively,  arrange DIP financing,  if necessary;  and obtain  adequate post
reorganization   financing.   There  can  be  no  assurance  that  any  plan  of
reorganization will be approved by the Bankruptcy Court or that such a plan will
allow the Company to operate  profitably.  Any plan of reorganization  and other
actions 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 a proposed plan
of reorganization is approved 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 consolidated  financial  statements included herein 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
consolidated  financial  statements.  The amounts  reported in the  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.

Item 2.   PROPERTIES

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

      The Company leases the following properties:

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

      o     A 53,400  square foot  manufacturing  facility  located at 315 Waugh
            Boulevard,  Orange, Virginia under a lease agreement that expires on
            July 31, 2002; and

      o     A 24,000  square  foot  warehouse  facility  located at 13180  James
            Madison  Highway,  Orange,  Virginia  under a  month-to-month  lease
            agreement.


                                       44
<PAGE>

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

Item 3.   LEGAL PROCEEDINGS

      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.

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

      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 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      No  matter  was  submitted  to a vote  of  security  holders  through  the
solicitation  of proxies or  otherwise  during the fourth  quarter of the fiscal
year ended March 31, 2001.


                                       45
<PAGE>

                                     PART II

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

      Our common stock was traded on the Nasdaq  National  Market  System of The
Nasdaq Market under the symbol "ECTL" through  January 22, 2001 when the trading
of our common  stock was halted as a result of the  Chapter 11  Proceedings.  On
February 13, 2001, our common stock began trading on the Over-the-Counter market
under the symbol  "EWTLQ." The following  table sets forth the range of high and
low sales prices or high and low bid  quotations of our common stock for each of
the quarterly periods during the years ended March 31, 2001 and 2000 as reported
by the Nasdaq National Market System or Over-the-Counter  market (as reported in
the Pink Sheets),  as applicable.  Bid quotations  reflect  interdealer  prices,
without retail markup,  markdown or commission and may not necessarily represent
actual transactions.

                                                     High          Low
                                                     ----          ---
 Year Ended March 31, 2001:
      Quarter Ended June 30, 2000                   $3.500        $1.453
      Quarter Ended September 30, 2000               2.375         1.094
      Quarter Ended December 31, 2000                1.313          .094
      Quarter Ended March 31, 2001                    .406          .010

 Year Ended March 31, 2000:
      Quarter Ended June 30, 1999                    3.875         1.438
      Quarter Ended September 30, 1999               2.094         1.219
      Quarter Ended December 31, 1999                4.000         1.250
      Quarter Ended March 31, 2000                   8.000         1.813

      At June 22, 2001, we had 374 holders of record of our common stock.

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

      The filing of a plan of  reorganization  pursuant to the Company's Chapter
11 Proceedings  could result in holders of the Company's  common stock receiving
no value for their  interests.  Because  of such  possibility,  the value of the
Company's common stock is highly  speculative,  and the common stock may have no
value.


                                       46
<PAGE>

Item 6.   SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>

                                                       Year Ended March 31,
                                       -------------------------------------------------------
                                         2001        2000         1999       1998       1997
<S>                                    <C>         <C>         <C>        <C>         <C>
Results of Operations (1)
Net sales and revenue                  $ 28,296    $ 47,295    $ 65,263   $ 46,250    $ 26,832
Gross profit                              3,075      11,906      21,439     17,602      10,949
Selling, general and administrative
  expenses                                6,664      10,061      10,631      9,983       6,328
Engineering, research and
  development expenses                    3,380       6,479       6,121      4,514       2,623
Amortization of goodwill and
  identified intangible assets            1,791       1,814       1,785        561          --
Reorganization costs                        151          --          --         --          --
Other charges (credits) -- including
  impairment losses of $33,220
   in 2001 (2)                           32,964         733       1,772         --        (331)
Interest expense (income), net            1,755         721         556        (66)       (175)
Income tax expense                           --       3,286         213        853         876
Net income (loss)                      $(43,630)   $(11,188)   $    361   $  1,757    $  1,628
Earnings (loss) per common and
  common equivalent share (3):
    Basic                              $  (3.17)   $  (0.83)   $   0.03   $   0.18    $   0.20
    Diluted                            $  (3.17)   $  (0.83)   $   0.03   $   0.18    $   0.20
Financial Position
Current assets                         $ 12,914    $ 19,073    $ 31,327   $ 28,124    $ 10,982
Current liabilities                       4,037      19,602      10,634      7,887       3,085
Total assets                             16,940      59,709      71,295     67,438      15,944
Liabilities subject to compromise        16,797          --          --         --          --
Long--term obligations                       --         208      10,355      9,891         232
Retained earnings (deficit)             (51,138)     (7,508)      3,680      3,319       1,562
Stockholders' equity (deficiency)      $ (3,894)   $ 39,899    $ 50,306   $ 49,660    $ 12,627
</TABLE>

(1)   On December 18, 1997, we acquired  Technology  Service Group, Inc. ("TSG")
      pursuant to a merger and on  September  30,  1997 we acquired  from Lucent
      Technologies Inc.  ("Lucent")  certain assets related to Lucent's payphone
      manufacturing  and component  parts  business (the "Lucent  Assets").  Our
      consolidated  statements  of  operations  and other  comprehensive  income
      (loss) for the years  ended  March 31,  2001,  2000 and 1999  include  the
      operating results of TSG and the operating results from the Lucent Assets.
      Our consolidated  statement of operations and other  comprehensive  income
      (loss) for the year ended March 31, 1998 includes the operating results of
      TSG and the operating  results from the Lucent Assets from the  respective
      dates of acquisition.
(2)   Other charges (credits) include restructuring and reorganization  charges,
      fiscal  2001  impairment  losses  and  expenses  of  an  aborted  business
      combination  in fiscal 1999 and credits from changes in estimates  related
      thereto.   See  "Item  8  -   "Consolidated   Financial   Statements   and
      Supplementary Data."
(3)   Earnings per share have been restated for the year ended March 31, 1997 to
      comply with Statement of Financial  Accounting Standards No. 128, Earnings
      Per Share.


                                       47
<PAGE>

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

      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

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

      During the three years ended March 31, 2001,  we  experienced  substantial
declines in net sales and  revenues  and in related  gross profit as a result of
industry  conditions  beyond  our  control,  including  the  contraction  of the
installed base of public access terminals,  the consolidation of domestic public
communications   providers,  and  declining  industry  revenues  resulting  from
increasing  usage of wireless  services and the increased  volume of dial-around
(toll free and access code) calls. Because of these adverse industry conditions,
we adopted a strategy to develop and supply public access  terminals  that would
enable public communications  providers to offer consumers access to information
and  personalized  services  in  addition  to voice  communications,  create the
opportunity for the Company to generate  recurring revenues from application and
management services and create the opportunity for the public telecommunications
providers,  our customers,  to generate  additional  revenues from  advertising,
sponsored content and new consumer services.  As a result, during the last three
years, we expended substantial funds to develop our new public access terminals,
referred to as "Grapevine(TM)" Internet terminal appliances, and the back-office
software,  referred  to as  "e-Prism(TM)"  to  manage  the  terminals  and their
applications, including telephony applications, advertising and content delivery
applications,  and applications to deliver personalized  services and meaningful
content to traveling consumers. The combination of declining sales and revenues,
along with  continuing  investment  in research  and  development  resulted in a
deterioration of our financial  performance  during the last three years despite
internal  reorganizations  and  restructurings  during fiscal 2000 and 2001, and
imposed a severe  strain on our  capital  resources.  We  incurred a net loss of
$43,630 (which includes  impairment  losses of $33,220),  or ($3.17) per diluted
share, for the year ended March 31, 2001 (fiscal 2001) as compared to a net loss
of  $11,188,  or $.83 per  diluted  share,  for the year  ended  March 31,  2000
("fiscal 2000") versus net income


                                       48
<PAGE>

of $361, or $.03 per diluted  share,  for the year ended March 31, 1999 ("fiscal
1999"). In addition, the Company defaulted on certain financial covenants in its
loan  agreements  during fiscal 2000, and has been unable to draw any additional
advances under its loan agreements since November 1999.

      Upon the default on the covenants of our loan agreements, we began efforts
to  restructure  the debt  obligations  payable to our senior secured lender 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.  In  connection  therewith,  we entered into a
forbearance  agreement  with the  lender on April 12,  2000,  which was  amended
pursuant to a second  forbearance  agreement dated July 31, 2000 that expired on
September 30, 2000.  Although  certain of our domestic  customers have installed
Grapevine   terminals  under  market  trial  agreements,   some  of  which  were
subsequently  terminated,  we have not generated  material revenues from the new
technology.  In  addition,  we have been  unable to obtain  commitments  for new
capital  or  financing.   Furthermore,   after  the  expiration  of  the  second
forbearance  agreement  on  September  30,  2000,  we were  unable  to  effect a
restructuring  of our  debt  obligations  with  our  senior  secured  lender  or
negotiate a third  forbearance  agreement with acceptable  terms,  and we ceased
making  principal  and  interest  payments  to the  lender  in order  to  retain
sufficient  working capital to operate our business.  Further,  on September 30,
2000,  we  defaulted on the payment of the debt  obligations  to the lender when
they became due.

      On January 12, 2001, the Company's  secured lender commenced a foreclosure
action in the Circuit Court of the Twelfth  Judicial  Circuit in and for Manatee
County,  Florida Civil Division (the "Court") to foreclose on substantially  all
assets of the  Company  securing  the  obligations  payable to the lender and to
appoint a receiver to take  possession and control over the collateral  securing
the obligations payable to the lender.

      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 while it  formulates a plan or plans of  reorganization.  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.

      Because of the Chapter 11 Proceedings,  our liquidity,  capital  resources
and  results  of  operations  are  subject  to  a  number  of  other  risks  and
uncertainties  including, but not limited to, the following: the approval of our
Chapter  11 plan  and  oversight  of our  operations  by the  Bankruptcy  Court,
including the use of cash collateral and any proposed DIP financing; our ability
to sell the real estate housing our corporate offices and lease-back the portion
thereof required for the operation of the business;  risks associated with third
parties seeking and obtaining  approval of the Bankruptcy  Court to terminate or
shorten the exclusivity  periods to file, and solicit  acceptance,  of a plan or
plans of  reorganization  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;  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; our ability
to operate successfully under Chapter 11 Proceedings,  achieve planned sales and
margins, and create and obtain approval of a reorganization plan or plans in the
Chapter 11  Proceedings;  potential  adverse  developments  with  respect to our
liquidity  or results of  operations;  our  ability to  purchase  materials  and
negotiate and maintain terms with suppliers; our ability to achieve further cost
savings;  our ability to  attract,  retain and  compensate  key  executives  and
employees;  trends  in the  economy  as a whole  and in  particular  the  public
communication  industry;  the seasonal nature of our business and our ability to
predict  customer  demand for our payphone and Internet


                                       49
<PAGE>

appliance  products and services;  our ability to attract and retain  customers;
uncertainties  with respect to the trading of our common stock;  and our ability
to develop,  confirm and  consummate  one or more plans of  reorganization  with
respect to the Chapter 11 Proceedings.

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 a Chapter
11  proceeding,  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 a plan or plans of  reorganization  to be voted upon by creditors,  equity
holders and other  affected  parties and approved by the Bankruptcy  Court.  Our
consolidated balance sheet at March 31, 2001 includes  approximately  $16,797 of
liabilities  subject to  compromise  or  settlement  pursuant  to the Chapter 11
Proceedings as follows:

        Accounts payable                                       $ 2,895
        Accrued expenses and other current liabilities           1,940
        Customer advances                                          482
        Notes, debt and capital lease obligations               11,480
                                                               -------
                                                               $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
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 a  confirmed  plan of
reorganization,  the ultimate distribution with respect to allowed claims in not
presently ascertainable.

      Although we plan to file a reorganization  plan or plans that will address
the  resolution of  liabilities  subject to compromise and provide for emergence
from  bankruptcy  during  the  next  year,  there  can  be no


                                       50
<PAGE>

assurance  that  a  reorganization  plan  or  plans  will  be  confirmed  by the
Bankruptcy  Court, or that such plan(s) will be consummated.  As provided in the
Bankruptcy  Code,  we have  the  exclusive  right  to  submit a plan or plans of
reorganization  for 120 days from the Petition  Date. We received  approval from
the Bankruptcy  Court on June 14, 2001 to extend the time period within which we
have the exclusive  rights to file plans of  reorganization  to July 16, 2001. 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 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 any Chapter 11 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,  most  likely,   under  collateralized  and  will  be  impaired  under  our
reorganization  plan(s).  However,  because of the uncertainty regarding whether
the  Bank's  claim  is  under  collateralized  or will  be  impaired  under  our
reorganization  plan(s),  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
consolidated balance sheet at March 31, 2001.


                                       51
<PAGE>

      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
has  been  offset  against  accounts  and  notes  receivable  in  the  Company's
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.

      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,  one of  which  is also  involved  in a  chapter  11
proceeding.  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 March 31, 2001. The Company believes that
its purchase  commitments under these agreements may range from $2,000 to $2,500
at 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


                                       52
<PAGE>

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.  The Company has recorded
professional fees and related expenses  aggregating  approximately  $151 between
the Petition Date and March 31, 2001.

      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 pre-petition obligations. Management cannot predict at this time when
or  whether  any  financial  restructuring  plan(s)  will  be  approved  or what
provisions  such  plan(s),  if any,  would contain as related to debt service or
other  payments  of  pre-petition  obligations.  Provisions  of our  plan(s)  of
reorganization  cannot yet be  determined.  Provisions of such  plan(s),  or our
inability to obtain approval of the plan(s) could have a material adverse effect
on the Company and on the rights of its creditors and stockholders.

Going Concern

      The Company's  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  or  plans  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 use cash  collateral,  or  alternatively,  arrange DIP
financing,  if necessary;  and obtain  adequate post  reorganization  financing.
There can be no assurance that these conditions can be met.

      The  Company's  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
consolidated  financial  statements.  Further, a plan or plans of reorganization
could  materially  change the  amounts  reported in the  Company's  consolidated
financial  statements.  The  amounts  reported  in  the  Company's  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 plan of reorganization.

      At this time,  it is not possible to predict the outcome of the Chapter 11
Proceedings or their effect on the Company's business.  If it is determined that
the liabilities  subject to compromise in the Chapter 11 Proceedings  exceed the
fair  value  of the  Company's  assets,  secured  and  unsecured  claims  may be
satisfied at less than 100% of their face value and the equity  interests of the
Company's  stockholders  may have no value.  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  prepares  a
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,  including those set forth above and
elsewhere in this  report.  Therefore,  there can be no assurance  that our


                                       53
<PAGE>

cash balances and projected  cash flows from  operations  will provide  adequate
liquidity to conduct our business for an extended period of time.

Results of Operations

      Our net loss for the years ended March 31, 2001 and 2000 reflect  declines
in net sales and revenues  and in related  gross  profit and the  incurrence  of
substantial   expenditures  to  develop  our  public  access  Internet  terminal
appliances and related service operations.  In addition, during fiscal 2001, the
Company  recorded  impairment  losses  of  $27,656  and  $5,564  reflecting  its
evaluation of the recoverability of the assets of its core payphone business and
Internet appliance  business,  respectively.  These impairments are based on the
estimated  future cash flows of the  businesses,  considering the uncertainty of
the public communications market and the uncertainty of the market acceptance of
our Grapevine terminals and services. The Company also recorded a loss provision
of $2,193 resulting from the estimate of the net realizable value of inventories
of its Internet appliance  business.  Further,  our fiscal 2001 results reflect:
(i) a reduction in selling, general and administrative expenses and engineering,
research  and  development  expenses  of $3,397 and $3,099,  respectively,  as a
result of restructurings and reorganizations to reduce costs; (ii) restructuring
credits  of $256  related to a change in the  estimate  of  restructuring  costs
recognized  in  fiscal  2000 of $733;  and  (iii)  reorganization  costs of $151
related to the Chapter 11  Proceedings.  Also, in addition to the  restructuring
charges  recognized in fiscal 2000,  our fiscal 2000 results  reflect income tax
charges of $3,286 related to a full valuation allowance against net deferred tax
assets  because of the  uncertainty  of  realization  thereof.  Our fiscal  1999
operations  were also  adversely  affected by declines in net sales and revenues
and in related gross profit during the latter part of the year, the write-off of
deferred  charges  of $1,240  related  to an aborted  business  combination  and
charges  of $490  related  to the  reorganization  of our  sales  and  marketing
organization.

      As a result  of the  prolonged  continuance  of the  conditions  adversely
affecting the public  communications  industry,  we do not believe that revenues
and net sales from our core  payphone  products and services will improve in the
foreseeable  future.  In fact,  revenues  and net  sales  of our  core  payphone
business are expected to continue to decline in the foreseeable future unless we
are able to improve our market penetration internationally. In addition, we have
been  undergoing  technology  field-testing  and market  trials of our Grapevine
Internet appliance  terminals and e-Prism services throughout fiscal 2001, which
have  not yet  generated  material  revenues  from  advertising  and  additional
services,  which in turn has adversely affected our ability to enter into supply
contracts  for the  commercial  deployment  of the  products  with our  domestic
customers.  Although  we  believe  that  there  is  a  possibility  to  generate
increasing sales and revenues from our Internet appliance business, there can be
no assurance in that regard because of the present economic conditions affecting
the public  communications,  Internet and electronic  advertising industries and
the difficulties experienced by the Company in selling advertising.

      During fiscal 2001, we downsized and restructured our businesses to reduce
costs and  expenses  and  achieve  positive  cash flow  from  operations  before
interest, taxes,  depreciation and amortization,  and to position the Company to
raise additional  capital and/or financing or to work out its financial problems
through a restructuring of its debt obligations. However, our ability to achieve
positive  cash flow from  operations  is highly  dependent  upon our  ability to
maintain or grow our net sales and  revenues,  the terms of the ultimate plan or
plans of reorganization  and confirmation  thereof under the Bankruptcy Code and
our ability to arrange DIP  financing,  if necessary,  and obtain  adequate post
reorganization financing. There can be no assurance that these conditions can be
met.

      Our Grapevine terminal  appliances are designed to provide,  among others,
advertising,  sponsored  information and content and e-commerce  capabilities in
addition to traditional  payphone  capabilities.  We believe, but cannot assure,
that the revenues that may be generated from these capabilities could be greater
than  the  revenues  generated  from  traditional  payphone  services.   We  are
developing the services


                                       54
<PAGE>

to implement  these  capabilities  through a server network  environment  with a
strategy for us to share in the new revenue streams  generated by our customers.
We believe,  but cannot  assure,  that at least one of our target  customers may
begin to deploy our new  products and  services  during the next year.  However,
there  is  no  assurance  that  our  Grapevine   terminal   appliances  will  be
successfully  introduced  or accepted by the  marketplace,  or if they are, that
revenues  from such  products and related  services  and  revenues  derived from
advertising, sponsored content and other sources would have a material favorable
impact on the  revenues  of our  customers  or on our sales and  revenues in the
foreseeable  future,  or at all.  Our ability to  implement  this  strategy  and
develop  revenues and profits from the  relatively  new and evolving  market for
Internet   appliances,   content  and  services  is  uncertain  and  subject  to
substantial  risks.  See "The Company's  Business - Risk  Factors."  These risks
include,  but are not limited to the  following:

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

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

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

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

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

      o     an evolving and unpredictable business model;

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

      o     seasonal trends in advertising placements;

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

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

      o     our ability to attract and retain qualified personnel;

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

      o     technical difficulties, system downtime and system failures;

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

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

Fiscal 2001 compared to Fiscal 2000

      The  following  table  shows  certain  line  items  in  our   consolidated
statements of  operations  and other  comprehensive  income (loss) for the years
ended March 31, 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               $ 28,296      100%     $ 47,295      100%
Cost of revenues and sales             25,221       89        35,389       75
Gross profit                            3,075       11        11,906       25
Selling, general and administrative
  expenses                              6,664       24        10,061       21
Engineering, research and
  development expenses                  3,380       12         6,479       14
Other charges                          32,964      116           733        2
Reorganization costs                      151        1
Interest, net                           1,755        6           721        2
Income tax expense                          -        -         3,286        7


                                       55
<PAGE>

      Net sales and  revenues by business  segment  and  customer  group for the
years ended March 31, 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            $ 19,003   $ 27,209    $ (8,206)         (30%)
  Private operators and
    distributors                    5,371     13,726      (8,355)         (61)
  International operators           2,583      6,282      (3,699)         (59)
Internet Appliance Business:
  Telephone companies                 288         --         288           --
  International operators           1,051         78         973        1,247
                                 --------   --------    --------        -----
                                 $ 28,296   $ 47,295    $(18,999)         (40%)
                                 ========   ========    ========        =====

      Net sales and revenues of our payphone  business declined by 43% primarily
due to a decrease in the volume of products  sold and services  rendered to both
domestic and  international  customers.  Domestically,  the decline in volume is
primarily   attributable  to  adverse  industry   conditions   discussed  above,
particularly  the decrease in industry  revenues  caused by  declining  payphone
usage.  As compared to fiscal 2000,  our domestic sales of products and revenues
from repair,  refurbishment  and upgrade services declined at rates ranging from
40% to 44%.  However,  the  decline  in net  sales  and  revenues  from  private
operators and distributors  serving the private  operators  outpaced the decline
from telephone  companies  primarily due to shifts in sales between lower priced
circuit boards and higher priced payphone  terminals to both customer groups. In
addition,  during fiscal 2001, we  discontinued  our  activities  related to the
resale of  operator  services,  and our  revenues  from such  resale  activities
declined by $704. The decline in our export sales to international  customers is
primarily attributable to financial difficulties experienced by our customers in
most  geographic  regions in which we compete  and the  increase in sales of our
Grapevine terminals to Canada Payphone Corporation, which displaced sales of our
payphone terminals.

      The increase in net sales and revenues of our Internet  appliance business
is  primarily  related  to  the  initial  commercial  deployments  of  Grapevine
terminals by Canada Payphone  Corporation and net sales  recognized  pursuant to
certain domestic market trial  agreements.  In addition,  during fiscal 2001, we
generated revenues of $126 from e-Prism  management  services and advertisements
placed on  Grapevine  terminals.  However,  we believe  our fiscal 2001 sales of
Grapevine  terminals were adversely  affected by extended domestic market trials
in an attempt to prove the advertising business model and financial difficulties
experienced by Canada Payphone Corporation  subsequent to the initial commercial
shipments.  The future success of our Internet  appliance  business is dependent
upon our ability  and/or the ability of our customers to generate  revenues from
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  advertising  revenues in the foreseeable  future. In that event, the
market trials presently underway domestically may not be successful, which would
adversely affect the prospects of this business segment.


                                       56
<PAGE>

      Net sales of products and revenues from services for the years ended March
31, 2001 and 2000  together  with the increase or decrease and with the increase
or decrease expressed as a percentage change is set forth below:

<TABLE>
<CAPTION>
                                                                           Increase     Percentage
                                                      2001       2000     (Decrease)      Change
                                                    --------   --------   ----------    ----------
<S>                                                 <C>        <C>         <C>               <C>
Products:
   Payphone terminals                               $  7,364   $ 12,896    $ (5,532)         (43%)
   Grapevine terminals                                 1,156         78       1,078        1,382
   Printed circuit board control modules and kits      8,970     15,056      (6,086)         (40)
   Components, assemblies and other products           3,342      5,804      (2,462)         (42)
Services:
   Repair, refurbishment and upgrade services          6,977     12,363      (5,386)         (44)
   Other payphone services                               361      1,098        (737)         (67)
   e-Prism management services and advertising           126         --         126           --
                                                    --------   --------    --------        -----
                                                    $ 28,296   $ 47,295    $(18,999)         (40%)
                                                    ========   ========    ========        =====
</TABLE>

      Cost of sales and gross profit as a percentage  of net sales  approximated
89% and 11%, respectively,  for the year ended March 31, 2001 as compared to 75%
and 25%,  respectively,  for the year ended March 31,  2000.  The decline in our
gross profit percentage between such periods is principally attributable to: (i)
the  start-up of our e-Prism  management  services and related  amortization  of
capitalized  software of $497 and  depreciation  of $320;  (ii) the  decrease in
volume of our payphone  business;  (iii) the increase in the percentage of sales
and revenues from telephone  companies at margins lower than those achieved from
other customer groups; and (iv) an increase in provisions for obsolescence, slow
moving  inventories and warranty expense of $1,557,  which included a write-down
of  inventories of our Internet  appliance  business of $2,193 in fiscal 2001 to
reflect such inventories at estimated net realizable value,  partially offset by
a  decrease  in costs  from  restructurings.  The gross  profit of our  payphone
business  increased  from 25% of sales in fiscal  2000 to 26% of sales in fiscal
2001 primarily due to cost reductions from restructurings  discussed below and a
decrease of $636 in provisions for  obsolescence,  slow moving  inventories  and
warranty  expense of this  business  segment.  Our Internet  appliance  business
generated  a  negative  gross  profit of $3,970  during  fiscal  2001 due to the
write-down of  inventories  and the start-up of our e-Prism  service  operations
referred to above.

      Selling,  general and  administrative  expenses decreased by approximately
34% in fiscal 2001 as compared to fiscal 2000  primarily due to cost  reductions
from  restructurings  and  reorganizations  discussed  below, the decline in net
sales and revenues,  a reduction in the estimated provision for credit losses of
$376 and a decrease in retirement compensation to our former president and chief
executive officer of $160.

      During fiscal 2001, we continued to make  significant  investments  in the
development  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 fiscal 2001
decreased by 48% as compared to fiscal 2000. In addition,  capitalized  software
development  costs decreased to $667 in fiscal 2001 as compared to $3,618 during
fiscal  2000.  Also,  during  fiscal 2000,  we abandoned a software  development
project related to certain activities discontinued as part of the restructurings
discussed  below,  and recognized an impairment loss of $140, which was included
in engineering, research and development expenses.


                                       57
<PAGE>

      As further  described  below,  other  charges  during  fiscal 2001 include
impairment  losses  of  $33,220  related  to the  write-down  of  the  Company's
long-lived assets,  consisting of property and equipment,  goodwill,  identified
intangible  assets,  capitalized  software  and other  assets and  restructuring
credits of $256  related to changes in estimates  of  restructuring  liabilities
recognized   in  fiscal  2000.   Other   charges   during  fiscal  2000  reflect
restructuring  charges of $733 related to the closure of our  Sarasota,  Florida
manufacturing facility, the consolidation of our manufacturing operations, and a
downsizing of our core payphone business operations as further described below.

      During fiscal 2001, we continued to experience significant declines in net
sales  and  revenues  of our  payphone  business  as a result  of the  continued
deterioration  of industry  revenues caused  primarily by the growth in wireless
communications.  Accordingly,  at March 31, 2001,  we performed an evaluation of
the recoverability of the assets of our payphone business,  and concluded that a
significant  impairment of the  long-lived  assets of our payphone  business had
occurred  since the  estimated  future  cash  flows  (undiscounted  and  without
interest)  of the  business  are not  expected to be  sufficient  to recover the
carrying  value of the assets.  In addition,  because of: (i)  prolonged  market
trials of our Grapevine terminals domestically; (ii) adverse economic conditions
presently affecting the Internet and electronic  advertising  industries;  (iii)
our  inability  and the  inability of our  customers to generate any  meaningful
advertising revenues from advertisements placed on Grapevine terminals; (iv) the
uncertainties as to the market  acceptance of our Grapevine  terminals;  and (v)
lack of adequate  liquidity  or funding  sources,  as a result of the Chapter 11
filings,  that are needed by the Company to enhance  and market the  products of
its Internet  appliance  business,  the Company  performed an  evaluation of the
recoverability  of the assets of its Internet  appliance  business.  The Company
concluded  that a  significant  impairment  of the  long-lived  assets  of  this
business  segment had also occurred.  The impairment was identified  because the
estimated  future  cash  flows  (undiscounted  and  without  interest)  are  not
presently expected to be sufficient to recover the carrying value of the assets.
Accordingly,  the carrying  values of impaired assets were written down to their
estimated  fair value,  which were  determined  by recent  appraisals  and other
estimates of fair value based on discounted  estimated cash flows. We recognized
impairment  losses of $27,656 and $5,564  related to our  payphone  business and
Internet appliance business,  respectively.  Considerable management judgment is
necessary  to  estimate  fair  value;  accordingly,  actual  results  could vary
significantly from such estimates. The impairment losses included the write-down
of property  and  equipment by  approximately  $721,  goodwill by  approximately
$21,654,  identified  intangible  assets by  approximately  $5,504,  capitalized
software by approximately $4,783, and other assets by approximately $558.

      During  fiscal 2000,  we  implemented  a  restructuring  plan to close our
Sarasota, Florida manufacturing facility,  consolidate manufacturing operations,
downsize our core payphone  business  operations,  implement a new  distribution
strategy  and  begin to build  support  operations  for our  Internet  appliance
business and provide the  services  related  thereto.  In  connection  with this
restructuring,  we  recognized  other  charges of $733  consisting  of estimated
employee  termination  benefits under severance and benefit arrangements of $608
and future lease  payments of $125 related to the closure of leased  facilities.
These charges do not include the recognition of impairment  losses of $8 related
to closed facilities charged to selling, general and administrative expenses and
$140  related  to  an  abandoned   software   development   project  charged  to
engineering,   research  and  development  expenses.  During  fiscal  2001,  the
remaining  unpaid estimated  restructuring  obligations of $256 were credited to
income.

      Reorganization  costs represent expenses incurred by the Company resulting
from the  Chapter 11  Proceedings  specific  to the  reorganization  process and
consist primarily of legal and other professional fees.

      Interest  expense  increased by $1,034  during  fiscal 2001 as compared to
fiscal 2000.  The variable  and fixed  interest  rates under our Bank Notes were
increased  pursuant  to the  terms of the  forbearance


                                       58
<PAGE>

agreements  between  the  Company and the Bank dated April 12, 2000 and July 31,
2000. In addition,  we ceased making principal and interest payments to the Bank
in  September  2000 and  defaulted  on the  payment of the  obligations  payable
pursuant  to the Bank Notes on  September  30, 2000 upon the  expiration  of the
forbearance agreement dated July 31, 2000.  Accordingly,  we accrued interest on
the Bank Notes from the date of default to the  Petition  Date at a default rate
of 25% per annum,  which had the impact of increasing  interest expense by $554.
As a result of the Chapter 11 Proceedings,  we ceased  accruing  interest on the
Bank Notes as of the Petition Date. Interest from the Petition Date to March 31,
2001 at the default rate approximated $529.

      The Company has  recorded a full  valuation  allowance on net deferred tax
assets  because  realization  of such  assets is  uncertain.  An increase in the
valuation  allowance of $6,163  during fiscal 2000 resulted in a net tax expense
of $3,286 on a pre-tax  loss of $7,902.  No income tax  expense  was  recognized
during fiscal 2001.

Fiscal 2000 compared to Fiscal 1999

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

                                                 Percent                 Percent
                                       2000     of Sales      1999      of Sales
                                     --------   --------    --------    --------

Revenues and net sales               $ 47,295      100%     $ 65,263        100%
Cost of revenues and sales             35,389       75        43,824         67
Gross profit                           11,906       25        21,439         33
Selling, general and administrative
  expenses                             10,061       21        10,631         16
Engineering, research and
  development expenses                  6,479       14         6,121          9
Other charges                             733        2         1,772          3
Income tax expense                      3,286        7           213         --

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

<TABLE>
<CAPTION>
                                                                 Increase    Percentage
                                          2000        1999      (Decrease)     Change
                                        --------    --------    ----------   ----------

<S>                                     <C>         <C>          <C>            <C>
Payphone Business:
  Telephone companies                   $ 27,209    $ 32,507     $ (5,298)      (16%)
  Private operators and distributors      13,726      25,076      (11,350)       (45)
  International operators                  6,282       7,680       (1,398)       (18)
Internet Appliance Business:
  International operators                     78           -           78          -
                                        --------    --------    ---------      -----
                                        $ 47,295    $ 65,263    $ (17,968)       (28%)
                                        ========    ========    =========      =====
</TABLE>


                                       59
<PAGE>

      The  decrease  in net sales  and  revenues  of our  payphone  business  is
primarily attributable to a decrease in volume of products sold to both domestic
and  international  customers  partially  offset by an increase in revenues from
operator  services and from repair,  refurbishment and upgrade services provided
to telephone companies.

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

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


      Domestically,  the  decline in the volume of  product  sales is  primarily
attributable to the  contraction of the installed base of payphone  terminals in
the domestic  market and to  declining  revenues of payphone  service  providers
caused by increasing  usage of wireless  services and the volume of  dial-around
calls.  Also, the 48% decline in net sales to private operators and distributors
reflect a  significant  shift in volume  towards  printed  circuit board modules
versus higher priced  payphone  terminals.  The decline in the volume of product
sales to  international  operators  is primarily  attributable  to a decrease in
export volume of payphone  terminals to customers in Latin America and Asia. The
increase  in  revenues  from  repair,  refurbishment  and  upgrade  services  is
attributable to an increase in repair volume  reflecting what we believe to be a
trend towards  maintaining the installed base rather than acquiring  replacement
products.  In addition,  continued  downward  pricing  pressures  also  affected
domestic sales and revenues.  An increase in revenues from operator  services of
approximately  $707 due to an increase in the number of PSPs using the Company's
resale services offset a decline in revenues from other services  offered by the
Company.

      We made our first  commercial  shipment of our Grapevine  terminals at the
end of the year under a contract with Canada Payphone Corporation.  Shipments of
our Grapevine  terminals to domestic customers were made under trial agreements,
and did not generate any revenues during fiscal 2000.

      Cost of sales and gross profit as a percentage  of net sales  approximated
75% and 25%, respectively,  for the year ended March 31, 2000 as compared to 67%
and 33%,  respectively,  for the year ended March 31,  1999.  The decline in the
gross profit percentage between such periods is principally attributable to: (i)
the decrease in sales volume of products; (ii) the increase in the percentage of
sales and revenues from telephone companies at margins lower than those achieved
from other customer groups;  (iii) downward pricing pressures;  (iv) an increase
in the provision for obsolescence  and slow moving  inventories of $995; and (v)
the increase in revenues from  lower-margin  repair,  refurbishment  and upgrade
services.


                                       60
<PAGE>

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

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

      During  fiscal 2000,  we  implemented  a  restructuring  plan to close our
Sarasota, Florida manufacturing facility,  consolidate manufacturing operations,
downsize our core payphone  business  operations,  implement a new  distribution
strategy  and  begin to build  support  operations  for our  Internet  appliance
business and provide the  services  related  thereto.  In  connection  with this
restructuring,  we recognized  other  charges of $733 during fiscal 2000.  These
other  charges  consisted  of  estimated  employee  termination  benefits  under
severance  and benefit  arrangements  of $608 and future lease  payments of $125
related to the closure of leased  facilities.  Other  charges for the year ended
March 31, 1999 related  primarily to expenses of  approximately  $1,200 incurred
with respect to an aborted business  combination and reorganization  expenses of
approximately  $490  related to the  reorganization  of our sales and  marketing
activities.

      During fiscal 2000, the Company recorded a full valuation allowance on net
deferred  tax  assets  because  realization  of such  assets is  uncertain.  The
increase in the valuation  allowance  during fiscal 2000 of $6,163 resulted in a
net tax expense of $3,286 on a pre-tax loss of $7,902  versus an  effective  tax
rate of 37% on pre-tax income of $574 for fiscal 1999.

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.
See Item 1.  "Business  - Chapter 11  Proceedings"  and  "Reorganization  Plan."
Presently,  we are  operating our business as a  debtor-in-possession  under the
jurisdiction  and supervision of the Bankruptcy  Court while we formulate a plan
or plans of  reorganization,  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")  during  fiscal  2001.  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 March 31, 2001 aggregate $3,637.

      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.


                                       61
<PAGE>

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 ultimate
plan or plans 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 use cash collateral,  or
alternatively,  arrange DIP financing,  if necessary;  and obtain  adequate post
reorganization financing. There can be no assurance that these conditions can be
met.  The  Company's  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
consolidated  financial  statements.  Further, a plan or plans of reorganization
could  materially  change the  amounts  reported in the  Company's  consolidated
financial  statements.  The  amounts  reported  in  the  Company's  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 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 effect 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 prepares a
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 prepares a  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 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


                                       62
<PAGE>

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.   In  accordance  with  the  terms  of  the  Forbearance
Agreement, outstanding bank debt in the aggregate amount of $11,460 at March 31,
2000 is classified as a current liability.

      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  fiscal 2001, we used $3,711 of cash (as compared to $7,700 of cash
in fiscal 2000) to fund operating  losses,  net of non-cash charges and credits,
and investing  activities related primarily to our Internet appliance  business.
These cash  requirements  were  financed  from cash flows and  reductions in net
operating  assets of our  payphone  business.  We  believe  that the  operating,
working capital and capital  expenditure  requirements of our Internet appliance
business  will  continue to be  significant  during the next year,  but that our
payphone business will not be able to support the anticipated requirements.

      Accordingly,  as  part of our  efforts  to  develop  a plan  or  plans  of
reorganization,  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 formulate a plan 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 plan(s)
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  efforts,  slow down
the launch,  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


                                       63
<PAGE>

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  a
reorganization  plan  or  plans  will  be  proposed  by us or  confirmed  by the
Bankruptcy Court, or that such plan(s) 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 March 31, 2001, we are unable to borrow any additional  funds under the terms
of our credit lines and have accumulated approximately $3,637 of cash.

      At March 31, 2001 and 2000,  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  and  $3,322,  respectively.  Outstanding
indebtedness  under our mortgage  note  amounted  $1,750 and $1,762 at March 31,
2001 and 2000, respectively.  We also had outstanding indebtedness of $281 under
our capital  equipment  credit line at March 31, 2001 and 2000.  During the year
ended March 31, 2001,  we were unable to borrow any  additional  funds under our
Loan  Agreements.  During the year ended March 31, 2000,  net proceeds under our
bank lines  aggregated  $1,191  before our  default and the  curtailment  of our
ability to borrow funds under the Loan Agreements.

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

      Aggregate  principal  payments  under  notes  payable  and  capital  lease
obligations during the years ended March 31, 2001, 2000 and 1999 were $444, $829
and $66, 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.

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

      During the years ended March 31,  2001,  2000 and 1999,  the net  proceeds
from the  exercise  of common  stock  options  amounted  to $63,  $642 and $285,
respectively.


                                       64
<PAGE>

      Operating   Activities.   Cash  flows  provided  by  (used  in)  operating
activities  for the years ended March 31, 2001,  2000 and 1999 are summarized as
follows:

                                                 2001        2000        1999
                                               --------    --------    --------
Net income (loss)                              $(43,630)   $(11,188)   $    361
Non-cash charges and credits, net                40,693       8,937       4,876
                                               --------    --------    --------
                                                 (2,937)     (2,251)      5,237
                                               --------    --------    --------
Changes in operating assets and liabilities:
  Accounts and notes receivable                     788       3,807      (1,471)
  Inventories                                     2,559       3,809      (5,296)
  Accounts payable, accrued expenses and
    other current liabilities                     3,589        (282)         33
  Refundable taxes and other operating assets      (360)      1,927      (1,189)
                                               --------    --------    --------
                                                  6,576       9,261      (7,923)
                                               --------    --------    --------
                                               $  3,639    $  7,010    $ (2,686)
                                               ========    ========    ========

      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 years  ended  March 31,  2001 and 2000,  we used $2,937 and $2,251 of
cash to fund operating  losses net of non-cash  charges and credits.  During the
year ended  March 31,  1999,  we  generated  $5,237 in cash from  earnings  plus
non-cash charges and credits. In addition, during the years ended March 31, 2001
and 2000,  we  generated  $6,576  and $9,261 of cash from  changes in  operating
assets and  liabilities  as compared to the year ended March 31,  1999,  when we
used $7,923 of cash to fund net increases in operating assets and liabilities.

      Our operating assets and liabilities are comprised principally of accounts
and notes receivable,  inventories, accounts payable, accrued expenses and other
current liabilities. During the year ended March 31, 2001, we generated $788 and
$2,559  of  cash  through  reductions  in  accounts  and  notes  receivable  and
inventories,  respectively.  We also  generated  $3,229 of cash from  changes in
other operating assets and liabilities  during the year ended March 31, 2001. In
comparison, during the year ended March 31, 2000, we generated $3,807 and $3,809
of cash through  reductions in accounts and notes  receivable  and  inventories,
respectively,  and  $1,645 of cash from  changes in other  operating  assets and
liabilities, and during the year ended March 31, 1999, we used $1,471 and $5,296
of cash to fund  increases in accounts  and notes  receivable  and  inventories,
respectively,  and $1,156 of cash to fund changes in other operating  assets and
liabilities.  Cash  used to pay  restructuring  and  reorganization  obligations
accrued and acquired  during the years ended March 31,  2001,  2000 and 1999 was
$121, $782


                                       65
<PAGE>

and  $923,   respectively.   There   are  no   outstanding   restructuring   and
reorganization  obligations that may affect future operating cash flows at March
31, 2001.

      Substantially  all of our  liabilities as of the Petition Date are subject
to compromise or settlement under a plan or plans of  reorganization to be voted
upon by creditors, equity holders and other affected parties and approved by the
Bankruptcy  Court.  Our  consolidated  balance  sheet at March 31, 2001 includes
approximately  $16,797  of  liabilities  subject  to  compromise  or  settlement
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
executory contracts or leases; and (7) other events.

      Cash flow from  operating  activities  during  fiscal  2001 was  favorably
impacted by reduced  disbursements as a result of our Chapter 11 filings and the
reclassification   of  pre-petition   liabilities  to  liabilities   subject  to
compromise.  In addition,  the  reclassification of pre-petition  liabilities to
liabilities  subject to compromise  favorably  impacted our current ratio, which
increased  to 3.20 to 1 at March 31,  2001 as  compared to .97 to 1 at March 31,
2000.  During the year ended March 31,  2001,  our current  assets  decreased by
$6,159  (32%) and current  liabilities  decreased  by $15,565.  Working  capital
increased to $8,877 at March 31, 2001 versus a  deficiency  of $529 at March 31,
2000. The change in working capital is primarily due to the  reclassification of
pre-petition  liabilities  offset by our net loss (net of non-cash  charges) and
cash used for investing activities and financing activities.

      Extension of credit to customers  and  inventory  purchases  represent our
principal working capital  requirements,  and material increases in accounts and
notes  receivable  and/or  inventories  could have a  significant  effect on our
liquidity.  Accounts and notes  receivable  and  inventories  represented in the
aggregate  65% and 88% of our  current  assets  at  March  31,  2001  and  2000,
respectively.  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.  Net cash used for investing  activities during the
years ended March 31, 2001,  2000 and 1999 amounted to $774,  $5,449 and $2,140,
respectively.   The  Company's   capital   expenditures   consist  primarily  of
manufacturing   tooling  and   equipment,   computer   equipment   and  building
improvements  required for the support of operations and  capitalized  software,
including  new  product  software  development  costs.  Cash  used  for  capital
expenditures aggregated $108, $1,831 and $1,468 during the years ended March 31,
2001, 2000 and 1999,  respectively.  During the years ended March 31, 2001, 2000
and 1999,  cash used to acquire  software and capitalized  software  development
costs aggregated $667, $3,618 and $680,  respectively.  As of March 31, 2001, we
have not entered into any  significant  commitments  for the purchase of capital
assets.

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.


                                       66
<PAGE>

Selected Quarterly Data

         The following sets forth a summary of selected unaudited  statements of
operations  and other  comprehensive  income (loss) data for the quarters  ended
June 30, 2000, September 30, 2000, December 31, 2000 and March 31, 2001:

<TABLE>
<CAPTION>
                                                             Quarter Ended
                                     ---------------------------------------------------------------
                                     June 30,      September 30,       December 31,       March 31,
                                      2000            2000                2000            2001(1)
                                     --------      -------------       ------------       ---------
                                                              (Unaudited)
<S>                                  <C>               <C>               <C>              <C>
Net sales and revenues               $ 9,271           $ 7,092           $ 5,830          $  6,103
Gross profit                         $ 2,050           $ 1,246           $ 1,137          $ (1,358)
Net income (loss)                    $(2,134)          $(2,029)          $(2,070)         $(37,397)
Comprehensive income (loss)          $(2,303)          $(2,041)          $(2,164)         $(37,427)
Earnings (loss) per common and
  common equivalent share:
    Basic                            $ (0.16)          $ (0.15)          $ (0.15)         $  (2.71)
    Diluted                          $ (0.16)          $ (0.15)          $ (0.15)         $  (2.71)
</TABLE>

(1)   During the  quarter  ended March 31,  2001,  the  Company  recorded  other
      charges of $32,964 consisting of impairment losses on long-lived assets of
      $33,220 and  restructuring  credits of $256 related to a restructuring  of
      the Company's  payphone  business in fiscal 2000. In addition,  during the
      quarter ended March 31, 2001, the Company recorded  additional  impairment
      reserves  related to the estimated net realizable  value of inventories of
      its Internet appliance business of approximately $2,193.

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

<TABLE>
<CAPTION>
                                                              Quarter Ended
                                     ---------------------------------------------------------------
                                     June 30,       September 30,      December 31,        March 31,
                                       1999            1999 (1)          1999 (2)          2000 (3)
                                     --------       -------------      ------------        ---------
                                                                (Unaudited)

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

(1)   During  the  quarter  ended  September  30,  1999,  the  Company  recorded
      additional  impairment  reserves  related to slow  moving  inventories  of
      approximately  $821 as a result of the continued  contraction  of revenues
      and net sales of its payphone business.
(2)   During the  quarters  ended  December  31,  1999 and March 31,  2000,  the
      Company recorded restructuring charges of $700 and $33,  respectively,  in
      connection with the planned closure of its Sarasota, Florida manufacturing
      facility and other restructuring plans.
(3)   During the quarter ended March 31, 2000, the Company  recorded  income tax
      expense of $5,154 as a result of recording a valuation allowance amounting
      to the entire  deferred tax asset balance  because of an uncertainty as to
      whether the deferred tax asset is realizable.


                                       67
<PAGE>

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.  Management has completed its evaluation of the various issues related
to SFAS 133 for the year ended March 31, 2001, and no derivative instruments, as
defined by SFAS 133, were  identified by the Company.  When the Company  adopted
SFAS 133, as  amended,  on April 1, 2001,  there was no effect on the  Company's
consolidated financial position or operations.

Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

      We are  exposed  to market  risk,  including  changes in  interest  rates,
foreign  currency  exchange  rate  risks and  market  risk with  respect  to our
investment in the marketable  securities of Canada Payphone  Corporation.  Other
than our investment in marketable securities of Canada Payphone Corporation with
a market value of $21 and $325 at March 31, 2001 and 2000,  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  interest rates of 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.  Additional  information  relating to the
fair value of certain of our  financial  assets and  liabilities  is included in
Note  1  to  our  consolidated   financial  statements  included  in  Item  8  -
"Consolidated Financial Statements and Supplementary Data."

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


                                       68
<PAGE>

Item 8.   CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            Page
                                                                            ----
Independent Auditors' Report                                                  70

Consolidated Balance Sheets at March 31, 2001 and 2000                        71

Consolidated Statements of Operations and Other
  Comprehensive Income (Loss) for the years ended
  March 31, 2001, 2000 and 1999                                               72

Consolidated Statements of Cash Flows for the years ended
  March 31, 2001, 2000 and 1999                                               73

Consolidated Statements of Changes in Stockholders' Equity
  (Deficiency) for the years ended March 31, 2001, 2000 and 1999              74

Notes to Consolidated Financial Statements                                    75

Financial Statement Schedules:

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


                                   ----------


                                       69
<PAGE>

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying  consolidated  balance sheets of Elcotel,  Inc.
and subsidiaries (the "Company"), Debtor-in-Possession, as of March 31, 2001 and
2000,  and  the  related   consolidated   statements  of  operations  and  other
comprehensive income (loss),  changes in stockholders' equity (deficiency),  and
cash flows for each of the three years in the period ended March 31, 2001. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial  position of the Company as of March 31, 2001
and 2000,  and the results of its  operations and its cash flows for each of the
three years in the period  ended March 31, 2001 in  conformity  with  accounting
principles generally accepted in the United States of America.

As  discussed in Notes 1 and 2, the Company has filed for  reorganization  under
Chapter 11 of the United States  Bankruptcy Code. The accompanying  consolidated
financial  statements do not purport to reflect or provide for the  consequences
of the bankruptcy proceedings.  In particular,  such financial statements do not
purport to show (a) as to assets,  their realizable value on a liquidation basis
or their availability to satisfy liabilities; (b) as to prepetition liabilities,
the amounts that may be allowed for claims or  contingencies,  or the status and
priority thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Company;  or (d) as to operations,  the
effect of any changes that may be made in its business.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going  concern.  As discussed in Note 1, the
events  resulting in the  Company's  filing for relief  under the United  States
Bankruptcy  code,  including the Company's  recurring losses from operations and
its inability to meet its debt service  requirements,  raise  substantial  doubt
about its ability to continue as a going concern.  Management's plans concerning
these  matters  are  also  discussed  in  Note  1.  The  consolidated  financial
statements do not include adjustments that might result from the outcome of this
uncertainty.


Deloitte & Touche LLP
Certified Public Accountants

Tampa, Florida
July 3, 2001


                                       70
<PAGE>

                         ELCOTEL, INC. AND SUBSIDIARIES
                             (Debtor-in-Possession)
                           CONSOLIDATED BALANCE SHEETS
                 (Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>

                                                                      March 31,     March 31,
                                                                         2001         2000
                                                                      ---------     ---------
<S>                                                                   <C>           <C>
ASSETS
Current assets:
     Cash                                                             $  3,637      $  1,153
     Accounts and notes receivable, less allowances for credit
        losses of $2,092 and $1,593, respectively                        4,948         8,073
     Inventories                                                         3,477         8,768
     Refundable income taxes                                                22            82
     Prepaid expenses and other current assets                             830           997
                                                                      --------      --------
        Total current assets                                            12,914        19,073
Property, plant and equipment, net                                       4,026         5,867
Notes receivable, less allowances for credit losses
     of $0 and $272, respectively                                           --           395
Identified intangible assets, net of accumulated amortization
     of $2,665 at March 31, 2000                                            --         6,610
Capitalized software, net of accumulated amortization of
     $505 at March 31, 2000                                                 --         4,786
Goodwill, net of accumulated amortization of
     $1,568 at March 31, 2000                                               --        22,403
Other assets                                                                --           575
                                                                      --------      --------
                                                                      $ 16,940      $ 59,709
                                                                      ========      ========
LIABILITIES AND  STOCKHOLDERS'  EQUITY  (DEFICIENCY)
Liabilities Not Subject to Compromise:
     Current liabilities:-
       Accounts payable                                               $  2,017      $  4,868
       Customer advances                                                    41           329
       Deferred revenue                                                    756            --
       Accrued expenses and other current liabilities                    1,188         2,794
       Notes, debt and capital lease obligations payable - current          35        11,611
                                                                      --------      --------
        Total current liablilities                                       4,037        19,602
     Notes, debt and capital lease obligations payable - noncurrent         --           208
Liabilities subject to compromise                                       16,797            --
                                                                      --------      --------
          Total liabilities                                             20,834        19,810
                                                                      --------      --------
Commitments and contingencies
Stockholders' equity (deficiency):
     Common stock, $0.01 par value,
        40,000,000 shares authorized, 13,831,991 and
        13,794,391 shares issued, respectively                             138           138
     Additional paid-in capital                                         47,565        47,423
     Accumulated deficit                                               (51,138)       (7,508)
     Accumulated other comprehensive (loss) income                        (282)           23
     Less - cost of 52,000 shares of common stock in treasury             (177)         (177)
                                                                      --------      --------
        Total stockholders' equity (deficiency)                         (3,894)       39,899
                                                                      --------      --------
                                                                      $ 16,940      $ 59,709
                                                                      ========      ========
</TABLE>

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


                                       71
<PAGE>

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

                                                    Year Ended March 31,
                                               --------------------------------
                                                 2001         2000       1999
                                               --------    --------    --------
Revenues and net sales:
  Product sales                                $ 20,835    $ 33,834    $ 54,748
  Services                                        7,461      13,461      10,515
                                               --------    --------    --------
                                                 28,296      47,295      65,263
                                               --------    --------    --------
Cost of revenues and sales:
  Cost of products sold                          18,390      25,139      34,944
  Cost of services                                6,831      10,250       8,880
                                               --------    --------    --------
                                                 25,221      35,389      43,824
                                               --------    --------    --------
Gross profit                                      3,075      11,906      21,439
                                               --------    --------    --------
Other costs and expenses:
  Selling, general and administrative             6,664      10,061      10,631
  Engineering, research and development           3,380       6,479       6,121
  Amortization of goodwill and indentified
    intangible assets                             1,791       1,814       1,785
  Other charges - including impairment losses
    of $33,220 in 2001                           32,964         733       1,772
  Reorganization costs                              151          --          --
  Interest expense, net (contractual interest
    $2,256 for the year ended March 31, 2001)     1,755         721         556
                                               --------    --------    --------
                                                 46,705      19,808      20,865
                                               --------    --------    --------
(Loss) income before income tax expense         (43,630)     (7,902)        574
Income tax expense                                   --      (3,286)       (213)
                                               --------    --------    --------
Net (loss) income                               (43,630)    (11,188)        361
Other comprehensive income, net of tax:
Holding (loss) gain on marketable securities       (305)         23          --
                                               --------    --------    --------
Comprehensive (loss) income                    $(43,935)   $(11,165)   $    361
                                               ========    ========    ========
(Loss) earnings per common and common
   equivalent share:
  Basic                                        $  (3.17)   $  (0.83)   $   0.03
                                               ========    ========    ========
  Diluted                                      $  (3.17)   $  (0.83)   $   0.03
                                               ========    ========    ========
Weighted average number of common and common
   equivalent shares outstanding:
  Basic                                          13,761      13,532      13,456
                                               ========    ========    ========
  Diluted                                        13,761      13,532      13,777
                                               ========    ========    ========

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


                                       72
<PAGE>

                         ELCOTEL, INC. AND SUBSIDIARIES
                             (Debtor-in-Possession)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
<TABLE>
<CAPTION>

                                                                      Year Ended March 31,
                                                                --------------------------------
                                                                  2001        2000        1999
                                                                --------    --------    --------
<S>                                                             <C>         <C>         <C>
Cash flows from operating activities
     Net (loss) income                                          $(43,630)   $(11,188)   $    361
     Adjustments to reconcile net (loss) income to net cash
       provided by (used in) operating activities:
        Depreciation and amortization                              4,127       3,558       3,247
        Provisions for obsolescence and warranty expense           3,011       1,454         825
        Provision for credit losses                                  169         545         117
        Loss on impairment of assets                              33,220         148          --
        Loss on disposal of equipment                                  2           4          12
        Deferred tax expense                                          --       3,247         563
        Stock option compensation expense (credit)                    95         (19)        112
        Issuance of common stock purchase warrants
          in return for services                                      69          --          --
        Changes in operating assets and liabilities:
           Accounts and notes receivable                             788       3,807      (1,471)
           Inventories                                             2,559       3,809      (5,296)
           Refundable income taxes                                    61       1,915      (1,188)
           Prepaid expenses and other current assets                (137)        239         112
           Other assets                                             (284)       (227)       (113)
           Accounts payable                                        1,607         682         976
           Customer advances                                       1,193        (128)        203
           Deferred revenue                                          756          --          --
           Accrued expenses and other current liabilities             33        (836)     (1,146)
                                                                --------    --------    --------
     Net cash flow provided by (used in) operating activities      3,639       7,010      (2,686)
                                                                --------    --------    --------
Cash flows from investing activities
     Capital expenditures                                           (108)     (1,831)     (1,468)
     Capitalized software                                           (667)     (3,618)       (680)
     Proceeds from disposal of equipment                               1          --           8
                                                                --------    --------    --------
     Net cash flow used in investing activities                     (774)     (5,449)     (2,140)
                                                                --------    --------    --------
Cash flows from financing activities
     Proceeds from exercise of common stock options                   63         642         285
     Net proceeds (payments) under revolving credit lines             --       1,191      (2,460)
     (Decrease) increase in bank overdraft                            --      (1,428)      1,428
     Proceeds from notes payable                                      --          --       4,000
     Principal payments on notes payable and
        and capital lease obligations                               (444)       (829)        (66)
                                                                --------    --------    --------
     Net cash flow (used in) provided by financing activities       (381)       (424)      3,187
                                                                --------    --------    --------
     Net increase (decrease) in cash                               2,484       1,137      (1,639)
     Cash at beginning of year                                     1,153          16       1,655
                                                                --------    --------    --------
     Cash at end of year                                        $  3,637    $  1,153    $     16
                                                                ========    ========    ========
</TABLE>

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


                                       73
<PAGE>

                         ELCOTEL, INC. AND SUBSIDIARIES
                             (Debtor-in-Possession)
     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
                    YEARS ENDED MARCH 31, 2001, 2000 AND 1999
                             (Dollars in thousands)
<TABLE>
<CAPTION>

                                      Common Stock                                        Accumulated
                                 ------------------------   Additional     Retained          Other
                                   Shares                    Paid-in       Earnings      Comprehensive     Treasury
                                   Issued       Amount       Capital      (Deficit)      (Loss) Income      Stock         Total
                                 -----------  -----------  ------------  -------------  ----------------  -----------  -------------
<S>                                <C>           <C>        <C>             <C>            <C>             <C>          <C>
Balance, March 31, 1998            13,417        $ 134      $ 46,384        $ 3,319        $    --         $ (177)      $ 49,660
Exercise of stock options             135            2           283             --             --             --            285
Net income                             --           --            --            361             --             --            361
                                  -------       ------     ---------     ----------        -------        -------      ---------
Balance, March 31, 1999            13,552          136        46,667          3,680             --           (177)        50,306
Exercise of stock options             242            2           658             --             --             --            660
Tax benefit from exercise of
     stock options                     --           --            98             --             --             --             98
Holding gain on marketable
     securities, net of tax            --           --            --             --             23             --             23
Net loss                               --           --            --        (11,188)            --             --        (11,188)
                                  -------       ------     ---------     ----------        -------        -------      ---------
Balance, March 31, 2000            13,794          138        47,423         (7,508)            23           (177)        39,899
Exercise of stock options              38           --            73             --             --             --             73
Issuance of common stock
     purchase warrants                 --           --            69             --             --             --             69
Holding loss on marketable
     securities, net of tax            --           --            --             --           (305)            --           (305)
Net loss                               --           --            --        (43,630)            --             --        (43,630)
                                  -------       ------     ---------     ----------        -------        -------      ---------
Balance, March 31, 2001            13,832        $ 138      $ 47,565      $ (51,138)       $  (282)       $ (177)      $  (3,894)
                                   ======        =====      ========      =========        =======        =======      =========
</TABLE>

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


                                       74
<PAGE>

                         ELCOTEL, INC. AND SUBSIDIARIES
                             (Debtor-in-Possession)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED MARCH 31, 2001, 2000 AND 1999
                  (Dollars in thousands, except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

      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 cases 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.

Financial Statement Presentation and Going Concern Matters

      The accompanying 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  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.


                                       75
<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  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 or plans 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;  continued use of cash
collateral,  or alternatively,  arrange DIP financing, if necessary;  and obtain
adequate post reorganization financing.  There can be no assurance that any plan
of  reorganization  will be approved by the Bankruptcy Court or that such a plan
will allow the Company to operate  profitably.  Any plan of  reorganization  and
other actions  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 a
proposed  plan  of  reorganization  is  approved  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  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
consolidated  financial  statements.  The amounts  reported in the  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.

Principles of Consolidation

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

Revenue Recognition

      Sales of products  and related  costs are recorded  upon  shipment or when
customers  accept  title to such goods.  The Company  recognizes  revenues  from
software   licenses  upon  delivery  of  the  software.   Revenue  from  repair,
refurbishment and upgrade of customer-owned  equipment is recorded upon shipment
of the  equipment.  Revenues from other  services are recognized as the services
are rendered.  Amounts  received from customers as advances against future sales
are reflected as customer  advances in the accompanying  consolidated  financial
statements.  Sales of  products  that are  subject  to the right of  return  are
reflected  as  deferred  revenue  in  the  accompanying  consolidated  financial
statements.

Inventories

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

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


                                       76
<PAGE>

Marketable Securities

      All marketable securities,  classified as other current assets, are deemed
by  management  to be available for sale and are reported at fair value with net
unrealized gains or losses reported within  stockholders'  equity  (deficiency).
Realized  gains and losses are  recorded  based on the  specific  identification
method.  There were no  realized  gains or losses for the years  ended March 31,
2001, 2000 and 1999. The carrying amount of the Company's marketable securities,
consisting of equity securities, approximated $21 and $326 at March 31, 2001 and
2000, respectively. The cost basis of marketable securities approximated $289 at
March 31, 2001 and 2000.

Property, Plant and Equipment

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

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

Engineering, Research and Development Costs

      Costs and expenses  incurred for the purpose of product  research,  design
and development are charged to operations as incurred. Engineering, research and
development  costs consist primarily of costs associated with development of new
products and manufacturing processes.  Software development costs incurred prior
to achieving  technological  feasibility are charged to research and development
expense as incurred.  The Company  capitalizes  software  development costs once
technological  feasibility  has been achieved.  Upon market release of developed
software,  the  capitalized  costs  are  amortized  to  operations  based on the
straight-line method over the estimated useful life of the product, which ranges
from five to ten years.  Capitalized  software development costs are reported at
the lower of cost, net of  accumulated  amortization,  or net realizable  value.
Software  development costs  capitalized  during the years ended March 31, 2001,
2000 and 1999  approximated  $667,  $3,618  and $639,  respectively.  See Note 3
regarding impairment of long-lived assets.

Amortization of Goodwill and Identified Intangible Assets

      The  excess  of the  purchase  price  over the fair  value of  assets  and
liabilities  of  acquired  businesses  is being  amortized  to  operations  on a
straight-line basis over a period of 35 years.  Identified intangible assets are
being  amortized  over the following  estimated  useful  lives:  trade names and
workforce - 35 years;  customer  contracts - 3.45 years;  license agreements - 5
years; patented technology - 4 years; and customer relationships - 15 years. See
Note 3 regarding impairment of long-lived assets.

Income Taxes

      The Company uses the liability  method of  accounting  for income taxes in
accordance  with  Statement of  Financial  Accounting  Standards  No. 109 ("SFAS
109"), "Accounting for Income Taxes." Income tax benefit (expense) is based upon
income  (loss)  recognized  for  financial  statement  purposes and includes the
effects of temporary  differences between such income (loss) and that recognized
for tax purposes. Deferred income taxes reflect the net tax effects of temporary
differences between the


                                       77
<PAGE>

carrying amounts of assets and liabilities for financial  reporting purposes and
the amounts used for income tax purposes, and are measured using the enacted tax
rates  and laws  that are  expected  to be in effect  when the  differences  are
expected to reverse.  A valuation  allowance  is recorded  against  deferred tax
assets when, on the basis of available evidence, it is more likely than not that
all or a portion of the deferred tax assets will not be realized.

Earnings (Loss) Per Common Share

      Earnings  (loss) per common share is computed in accordance with Statement
of Financial  Accounting  Standards No. 128 ("SFAS 128"),  "Earnings Per Share,"
which requires  disclosure of basic earnings per share and diluted  earnings per
share. Basic earnings (loss) per share is computed by dividing net income by the
weighted average number of shares of common stock  outstanding  during the year.
Diluted  earnings  (loss) per share is computed  by  dividing  net income by the
weighted  average  number of shares of common  stock  outstanding  and  dilutive
potential common shares outstanding during the year. The weighted average number
of shares  outstanding  during the years ended March 31, 2001, 2000 and 1999 for
purposes of computing basic earnings per share were  13,761,191,  13,531,587 and
13,456,255,  respectively.  During  the years  ended  March  31,  2001 and 2000,
potential common shares  outstanding were  anti-dilutive.  During the year ended
March 31, 1999, dilutive stock options had the effect of increasing the weighted
average number of shares outstanding used in the computation of diluted earnings
per share by 321,144 shares.

Financial Instruments

      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.  Management has completed its evaluation of the various issues related
to SFAS 133 for the year ended March 31, 2001, and no derivative instruments, as
defined by SFAS 133, were  identified by the Company.  When the Company  adopted
SFAS 133, as  amended,  on April 1, 2001,  there was no effect on the  Company's
consolidated financial position or operations.

      The fair  values  of  cash,  accounts  receivable,  accounts  payable  and
short-term  debt  obligations  approximate  their  carrying  values  due  to the
short-term nature of these financial instruments. Investments are stated at fair
value based upon quoted market prices and are  classified as  available-for-sale
securities.  The carrying value of notes  receivable is estimated to approximate
their fair  values  based on current  rates  offered by the  Company for similar
transactions.  The fair value of the  Company's  debt  obligations  is estimated
based on interest  rates  available  to the Company  and  approximates  carrying
value.


                                       78
<PAGE>

Credit Policy and Concentration of Credit Risks

      Financial  instruments that potentially subject the Company to significant
concentrations  of credit risk  consist  primarily  of trade  accounts and notes
receivable.  Credit,  including limited secured note financing, is granted under
various terms to customers that the Company deems creditworthy.  As discussed in
Note 13, the Company does a significant amount of business with two domestic and
two international  payphone operators.  These significant  customers represent a
concentration  of credit  risk and expose  the  Company to risk of loss of those
amounts.  In order to minimize this risk,  the Company  performs  ongoing credit
evaluations of its customers, and with respect to notes receivable,  the Company
generally requires collateral consisting primarily of the payphone terminals and
related equipment.

      Allowances  for  credit  losses  on  accounts  and  notes  receivable  are
estimated based upon expected collectibility. Allowances for impairment of notes
receivable are measured based upon the fair value of collateral or the Company's
estimate of the present value of future  expected cash flows in accordance  with
Statement of Financial Accounting Standards No. 114 ("SFAS 114"), "Accounting by
Creditors for Impairment of a Loan."

Warranty Reserves

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

Stock Based Compensation Plans

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

Impairment of Long-Lived Assets

      The Company  evaluates the carrying value of property plant and equipment,
goodwill and other intangible  assets when indicators of impairment are present,
and  recognizes  impairment  losses if the carrying  value of the assets is less
than the expected future  undiscounted cash flows of the underlying  business in
accordance  with  Statement of  Financial  Accounting  Standards  No. 121 ("SFAS
121"),  "Accounting  for the Impairment of Long-Lived  Assets and for Long-Lived
Assets to be Disposed Of."  Impairment  losses are measured by the amount of the
asset  carrying  values  in  excess  of fair  market  value.  Impairment  losses
recognized during the years ended March 31, 2001, 2000 and 1999 are discussed in
Notes 3 and 9.

Comprehensive Income (Loss)

      The Company  adopted the  provisions of Statement of Financial  Accounting
Standards No. 130 ("SFAS 130"),  "Reporting  Comprehensive  Income,"  during the
year ended March 31, 1999.  SFAS 130  establishes  standards  for  reporting and
display  of  comprehensive  income  (loss) and its  components  in a


                                       79
<PAGE>

full set of general-purpose  financial  statements,  and requires that all items
that are required to be recognized under  accounting  standards as components of
comprehensive  income  or loss be  reported  in a  financial  statement  that is
displayed with the same prominence as other financial  statements.  In addition,
SFAS 130 requires enterprises to classify items of other comprehensive income or
loss by their nature and display the accumulated  balance of other comprehensive
income or loss  separately  from  retained  earnings  (deficit)  and  additional
paid-in  capital in the equity  section of a statement  of  financial  position.
During the years  ended  March 31,  2001 and 2000,  the  Company had one item of
other comprehensive income (loss) relating to marketable equity securities.  The
Company had no items of other comprehensive  income (loss) during the year ended
March 31, 1999.

Disclosure about Segments of an Enterprise and Related Information

      During the year ended March 31,  1999,  the Company  adopted  Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related  Information."  SFAS 131 establishes  standards for
the way that public  business  enterprises  report  information  about operating
segments in annual and interim financial statements. See Note 13.

Computer Software Developed or Obtained for Internal Use

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

Use of Estimates

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

Reclassification of Prior Years

      The Company's consolidated financial statements at March 31, 2000 and 1999
and  for  the  years  then  ended  have  been  reclassified  to  conform  to the
presentation at and for the year ended March 31, 2001.

NOTE 2 - REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

      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  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


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<PAGE>

allowable  against  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  a plan  or  plans  of
reorganization to be voted upon by creditors,  equity holders and other affected
parties and approved by the  Bankruptcy  Court.  The  accompanying  consolidated
balance sheet at March 31, 2001 includes  approximately  $16,797 of  liabilities
subject to compromise or settlement  pursuant to the Chapter 11  Proceedings  as
follows:

   Accounts payable                                                 $ 2,895
   Accrued expenses and other current liabilities                     1,940
   Customer advances                                                    482
   Notes, debt and capital lease obligations                         11,480
                                                                    -------
                                                                    $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.

      Although the debtors plan to file a reorganization plan or plans that will
address the  resolution of  liabilities  subject to  compromise  and provide for
emergence from bankruptcy during the next year, there can be no assurance that a
reorganization  plan or plans will be confirmed by the Bankruptcy Court, or that
such  plan(s)  will be  consummated.  As provided in the  Bankruptcy  Code,  the
debtors have the exclusive right to submit a plan or plans of reorganization for
120 days from the Petition  Date.  The debtors have  received  approval from the
Bankruptcy  Court to extend to July 16, 2001 the time period  within  which they
have  the  exclusive  rights  to  file  plans  of  reorganization.   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 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.


                                       81
<PAGE>

      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 (see Note 8). The amounts  outstanding  pursuant to the terms of the
Bank Notes are, most likely, under collateralized and will be impaired under the
debtors' reorganization plan(s).  However,  because of the uncertainty regarding
whether the Bank's claim is under  collateralized  or will be impaired under the
debtors'  reorganization  plan(s),  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 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  accompanying
consolidated balance sheet at March 31, 2001.

      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
has been  offset  against  accounts  and notes  receivable  in the  accompanying
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


                                       82
<PAGE>

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.

      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,  one of  which  is also  involved  in a  chapter  11
proceeding.  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  consolidated  financial statements.  The Company believes that its
purchase  commitments  under these agreements may range from $2,000 to $2,500 at
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 the  resolution of
any intercompany receivables and payables.

      The  estimated  fair  value of the  assets  and  liabilities  acquired  by
Technology  Service  Group,  Inc.  and Elcotel  Direct,  Inc. as of the dates of
acquisition  pursuant  to  business  combinations  that  have  been  used in the
operations of Elcotel's business were as follows:

                                                        Technology      Elcotel
                                                         Service        Direct,
                                                       Group, Inc.        Inc.
                                                       -----------     ---------

Cash and temporary investments                          $    239       $     --
Accounts receivable                                        3,703             --
Inventories                                                6,490          2,991
Refundable income taxes                                      604             --
Deferred tax asset, current                                3,719             --
Prepaid expenses and other current assets                     12             --
Property, plant and equipment                                782            500
Capitalized software                                         846             --
Identified intangible assets                               6,684          2,591
Goodwill                                                  24,096             --
Other assets                                                  29             --
Accounts payable                                          (3,634)            --
Accrued expenses                                          (2,719)          (125)
Borrowings under lines of credit                          (3,970)            --
Deferred tax liability, non-current                       (1,276)            --
                                                        --------       --------
Net assets acquired                                     $ 35,605       $  5,957
                                                        ========       ========


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<PAGE>

      Management  believes  that the matters  discussed in 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  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.  The
Company  has  recorded   professional  fees  and  related  expenses  aggregating
approximately $151 between the Petition Date and March 31, 2001.

      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 when
or  whether  any  financial  restructuring  plan(s)  will  be  approved  or what
provisions  such  plan(s),  if any,  would contain as related to debt service or
other payments of pre-petition  obligations.  Provisions of the debtors' plan(s)
of reorganization  cannot yet be determined.  Provisions of such plan(s), or the
inability of the debtors to obtain approval of the plan(s) 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.

NOTE 3 - IMPAIRMENT LOSSES

      During the year ended March 31, 2001, the Company  continued to experience
significant  declines in net sales and  revenues of its  payphone  business as a
result of the continued  deterioration of industry  revenues caused primarily by
the growth in  wireless  communications.  Accordingly,  at March 31,  2001,  the
Company  performed  an  evaluation  of the  recoverability  of the assets of its
payphone business, and concluded that a significant impairment of the long-lived
assets of its payphone  business had occurred  since the  estimated  future cash
flows (undiscounted and without interest) of the business are not expected to be
sufficient to recover the carrying value of the assets. In addition, because of:
(i) prolonged market trials of the Company's Grapevine  terminals  domestically;
(ii) adverse economic conditions presently affecting the Internet and electronic
advertising  industries;  (iii) the Company's inability and the inability of its
customers to generate any meaningful  advertising  revenues from  advertisements
placed on Grapevine terminals; (iv) uncertainties as to the market acceptance of
the Company's Grapevine terminals; and (v) lack of adequate liquidity or funding
sources, as a result of the Chapter 11 filings,  that are needed for the Company
to  continue  to enhance  and  market the  products  of its  Internet  appliance
business,  the Company  performed an  evaluation  of the  recoverability  of the
assets  of  its  Internet  appliance  business.  The  Company  concluded  that a
significant  impairment of the  long-lived  assets of this business  segment had
also occurred.  The impairment was identified  because the estimated future cash
flows  (undiscounted  and without  interest)  are not  presently  expected to be
sufficient  to  recover  the  carrying  value of the  assets.  Accordingly,  the
carrying  values of impaired  assets were written down to their  estimated  fair
value,  which were  determined by recent  appraisals and other estimates of fair
value  based  on  discounted   estimated  cash  flows.  The  Company  recognized
impairment  losses of $27,656 and $5,564  related to its  payphone  business and
Internet appliance business,  respectively.  Considerable management judgment is
necessary  to  estimate  fair  value;  accordingly,  actual  results  could vary
significantly from such estimates. The impairment losses included the write-down
of property  and  equipment by  approximately  $721,  goodwill by  approximately
$21,654,  identified  intangible  assets by  approximately  $5,504,  capitalized
software by approximately $4,783, and other assets by approximately $558.


                                       84
<PAGE>

      The  impairment  losses,  net of a credit of $256  related  to  previously
recorded  restructuring  charges  discussed in Note 9, are  classified  as other
charges in the  accompanying  consolidated  statement  of  operations  and other
comprehensive income (loss) for the year ended March 31, 2001.

NOTE 4 - ACCOUNTS AND NOTES RECEIVABLE

      Current  accounts and notes  receivable at March 31, 2001 and 2000 include
notes  receivable  due  within  one year of $66 and $487,  respectively,  net of
credit and  impairment  allowances  of $1,552 and  $1,080,  respectively.  Notes
receivable  consist of trade notes  receivable  from  customers  with  remaining
maturities  of less  than one  year,  and are  generally  collateralized  by the
payphone equipment sold and giving rise to the asset. The notes bear interest at
rates ranging from 12% to 16%.  Interest  income on impaired notes is recognized
as the  interest  is  collected.  The  Company  recognizes  interest  income  on
performing notes as earned.

      Substantially   all   accounts  and  notes   receivable   are  pledged  to
collateralize bank indebtedness (See Note 8).

      Changes in allowances  for credit losses on accounts and notes  receivable
for the years ended March 31, 2001, 2000 and 1999 are summarized as follows:

                                               2001        2000           1999
                                             -------      -------       -------
Balance, beginning of year                   $ 1,865      $ 2,282       $ 2,410
Provision for credit losses                      169          545           117
Net recoveries (write-offs)                       58         (962)         (245)
                                             -------      -------       -------
Balance, end of year                           2,092        1,865         2,282
Long-term allowances                              --         (272)         (312)
                                             -------      -------       -------
Current allowances                           $ 2,092      $ 1,593       $ 1,970
                                             =======      =======       =======

NOTE 5 - INVENTORIES

         Inventories at March 31, 2001 and 2000 consisted of the following:

                                                         2001            2000
                                                       --------        --------
Finished products                                      $    621        $  1,679
Work-in-process                                             642           1,068
Purchased components                                      4,572           7,835
                                                       --------        --------
                                                          5,835          10,582
Reserve for obsolescence and slow
  moving inventories                                     (2,358)         (1,814)
                                                       --------        --------
                                                       $  3,477        $  8,768
                                                       ========        ========

      Due to the  uncertainty  of market  acceptance of the Company's  Grapevine
terminals,  among other factors, the Company wrote down the value of inventories
of its  Internet  appliance  business by $2,193 to reflect such  inventories  at
estimated  net  realizable  value.  The cost of such  inventories,  before  such
write-down,  at March  31,  2001  includes  approximately  $1,163  of  Grapevine
terminals  and  components  in field and market tests by  customers  pursuant to
trial/purchase agreements. Deferred


                                       85
<PAGE>

revenue related to sales that are subject to the right of return pursuant to the
terms of the trial/purchase agreements aggregated $756 at March 31, 2001.

      Substantially   all   inventories  are  pledged  to   collateralize   bank
indebtedness (See Note 8).

      Changes in reserves  for  potential  losses due to  obsolescence  and slow
moving  inventories  for the  years  ended  March  31,  2001,  2000 and 1999 are
summarized as follows:

                                               2001        2000          1999
                                             -------      -------       -------
Balance, beginning of year                   $ 1,814      $   451       $   100
Provision for losses                             538        1,401           406
Recoveries (write-offs)                            6          (38)          (55)
                                             -------      -------       -------
Balance, end of year                         $ 2,358      $ 1,814       $   451
                                             =======      =======       =======

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

      Property,  plant and  equipment at March 31, 2001 and 2000 is comprised of
the following:

                                                          2001           2000
                                                        --------       --------
Land                                                    $    372       $    372
Buildings                                                  3,070          3,067
Engineering and manufacturing equipment                    5,006          5,671
Furniture, fixtures and office equipment                   2,244          2,250
                                                        --------       --------
                                                          10,692         11,360
Less accumulated depreciation                             (6,666)        (5,493)
                                                        --------       --------
                                                        $  4,026       $  5,867
                                                        ========       ========

      During the year ended March 31, 2001,  the Company wrote down the carrying
value of certain  engineering and manufacturing  equipment by approximately $721
to reflect its impairment evaluations discussed in Note 3.

      Depreciation expense for the years ended March 31, 2001, 2000 and 1999 was
$1,365, $1,295 and $1,163,  respectively.  Substantially all property, plant and
equipment are pledged to collateralize bank indebtedness (see Note 8).

      Assets  under  capital  leases  are   capitalized   using  interest  rates
appropriate at the inception of the lease. The cost and accumulated depreciation
of engineering  and  manufacturing  equipment  under capital leases  included in
property and  equipment  was $419 and $168 at March 31, 2001 and $279 and $28 at
March 31, 2000. No assets under capital leases were held at March 31, 1999.


                                       86
<PAGE>

NOTE 7 - GOODWILL AND IDENTIFIED INTANGIBLE ASSETS

      Identified intangible assets recorded in connection with acquisitions, net
of  accumulated  amortization,  at March  31,  2001 and  2000  consisted  of the
following:

                                                              2001         2000
                                                             ------       ------
Trade names, net of accumulated
    amortization of $187 at March 31, 2000                   $   --       $2,682
Customer contracts, net of accumulated
    amortization of $1,341 at March 31, 2000                     --          683
Workforce, net of accumulated
    amortization of $90 at March 31, 2000                        --        1,282
License agreements, net of accumulated
    amortization of $469 at March 31, 2000                       --          469
Patented technology, net of accumulated
     amortization of $239 at March 31, 2000                      --          180
Customer relationships, net of accumulated
     amortization of $262 at March 31, 2000                      --        1,314
                                                             ------       ------
                                                             $   --       $6,610
                                                             ======       ======

      During the year ended March 31, 2001,  the Company wrote down the carrying
value of goodwill by $21,654 and the  carrying  value of  identified  intangible
assets by $5,504,  consisting of a write-down of trade names of $2,600, customer
contracts of $96,  workforce of $1,243,  license  agreements  of $281,  patented
technology of $75 and customer relationships of $1,209 to reflect its impairment
evaluations discussed in Note 3.

NOTE 8 - NOTES, DEBT AND CAPITAL LEASE OBLIGATIONS PAYABLE

      Notes,  debt and capital lease  obligations  payable at March 31, 2001 and
2000 are summarized as follows:

                                                             2001        2000
                                                           --------    --------
Secured Promissory Notes Payable to Bank,
  due September 30, 2000:
   Revolving credit lines                                  $  6,376    $  6,376
   Installment/term note                                      3,072       3,322
   Mortgage note                                              1,750       1,762
Capital lease obligations                                       282         263
Unsecured promissory note, payable in thirty equal
   monthly installments of $6 including interest                 35          96
                                                           --------    --------
                                                             11,515      11,819
 Less - Amount not subject to compromise
     classified as noncurrent                                    --        (208)
 Less - Amount not subject to compromise
     classified as current                                      (35)    (11,611)
                                                           --------    --------
 Notes, debt and capital lease obligations classified
     as liabilities subject to compromise                  $ 11,480    $     --
                                                           ========    ========


                                       87
<PAGE>

      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 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,  but  cannot  assure,  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 that the Bank's claim will be impaired  under the


                                       88
<PAGE>

reorganization plan(s). Because of this uncertainty, 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 Company
accrued  interest  on the debt  outstanding  under  the Loan  Agreements  at the
default rate (25% per annum) from the default date to the Petition Date.

      Pursuant to the terms and covenants of the Loan Agreements, as modified by
the Forbearance  Agreements,  the Company is restricted from engaging in certain
transactions   without   the   consent  of  the  Bank,   including   mergers  or
consolidations  and  disposition  of assets,  among  others,  and is required to
maintain a working  capital ratio of 1 to 1 and a ratio of total  liabilities to
net worth of 1.5 to 1. The Company is in default of these requirements.

      Scheduled  maturities of notes, debt and capital lease obligations payable
(which are  subject to being  restructured  in  connection  with the  Chapter 11
Proceedings) for the next five years are as follows:

    Fiscal 2002                                                 $ 11,373
    Fiscal 2003                                                      134
    Fiscal 2004                                                        8
                                                                --------
                                                                $ 11,515
                                                                ========

      The Company leases certain equipment under capital lease obligations.  The
present  value of future  minimum  lease  payments for the assets under  capital
leases at March 31, 2001 is as follows:

    Fiscal 2002                                                 $    164
    Fiscal 2003                                                      141
    Fiscal 2004                                                        8
                                                                --------
    Total minimum capital lease obligation                           313
    Less portion representing interest                               (31)
                                                                --------
    Present value of minimum lease payments                     $    282
                                                                ========


                                       89
<PAGE>

NOTE 9 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

      Accrued  expenses and other current  liabilities  as of March 31, 2001 and
2000 consist of the following:

                                                              2001        2000
                                                            -------      -------
 Payroll, commissions and payroll taxes                     $   535      $ 1,237
 Warranty expense                                               397          561
 Relocation, severance and reorganization charges               158          440
 Professional fees                                              116           48
 Royalities and technology transfer fees                        465          249
 Interest                                                     1,127           --
 Other                                                          330          259
                                                            -------      -------
                                                              3,128        2,794
Less accrued expenses and other current
  liabilities subject to compromise                          (1,940)          --
                                                            -------      -------
Accrued expenses and other current liabilities
  not subject to compromise                                 $ 1,188      $ 2,794
                                                            =======      =======

      Accrued expenses and other current liabilities subject to compromise as of
March 31, 2001 consist of the following:

Payroll, commissions and payroll taxes                       $   67
Relocation, severance and reorganization charges                158
Professional fees                                                10
Royalities and technology transfer fees                         438
Interest                                                      1,127
Other                                                           140
                                                             ------
                                                             $1,940
                                                             ======

      In November  1999,  the Company  announced a  restructuring/reorganization
plan to consolidate manufacturing operations,  resize its core payphone business
operations,  reorient its  distribution  strategy and begin to build  operations
required to introduce its new public access Internet appliance products and back
office  management   systems  to  the  marketplace.   In  connection  with  this
restructuring/reorganization,  the  Company  recognized  other  charges  of $733
during the year ended March 31, 2000. These other charges consisted of estimated
employee  termination  benefits under severance and benefit arrangements of $608
and future lease  payments of $125 related to the closure of leased  facilities.
These  charges do not  include  the  recognition  of  impairment  losses of $148
related to closed  facilities  and the Company's  decision to abandon a software
development  project  related to  certain  discontinued  activities.  Impairment
losses of $140 and $8 are classified as  engineering,  research and  development
expenses and selling, general and administrative expenses, respectively,  during
the year ended March 31, 2000.

      Under the November  1999  restructuring/reorganization  plan,  the Company
planned to  terminate  the  employment  of 56  employees  by December  31, 2000,
including 28 employees in connection  with the  consolidation  of  manufacturing
operations and the closure of its  manufacturing  facility in Sarasota,  Florida
and 28 corporate  employees in all major  functions.  As of March 31, 2000,  the
Company had terminated the employment of 54 employees  under the plan. The other
two  employees  were either  terminated  during the year ended March 31, 2001 or
retained as  employees of the Company,  and the Company  credited the  remaining
estimated  and unpaid  severance  and benefit  liability  of $196 to income


                                       90
<PAGE>

as a credit  against  other  charges.  During the years ended March 31, 2001 and
2000,  the Company  charged $87 and $320,  respectively,  of severance  benefits
payments against the reorganization liability.

      Under the  restructuring/reorganization  plan, the Company closed a leased
office  facility  in  Alpharetta,  Georgia  and  leased  a  larger  facility  to
accommodate  service  operations  related  to its  new  public  access  Internet
appliance    products    and    back    office    management    systems.     The
restructuring/reorganization  charges related to future lease payments include a
termination  settlement of $27 under a lease termination  agreement with respect
to the closed  office  facility and  remaining  lease  payments of $98 under the
lease agreement related to the Company's manufacturing facility. During the year
ended March 31, 2001,  the Company  entered into a lease  termination  agreement
with respect to the closed  manufacturing  facility  and credited the  remaining
estimated and unpaid lease obligation of $60 to income as a credit against other
charges. During the years ended March 31, 2001 and 2000, net payments of $23 and
$47,  respectively,  related to the lease  termination  agreement and the closed
facility were charged against the reorganization liability.

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

      The  aggregate  reduction  in  the  estimated  liability  related  to  the
restructuring/reorganizations  referred  to above of $256  during the year ended
March 31,  2001  credited to income,  and the  related  charges of $733 and $490
during the years ended March 31, 2000 and 1999,  respectively,  are  included in
other charges in the  accompanying  consolidated  statements  of operations  and
other comprehensive income (loss).

      In  connection  with  a  fiscal  1998  acquisition,  the  Company  assumed
estimated liabilities of $1,200 pursuant to a plan to exit certain activities of
the  acquired  entity  and  to  terminate  and  relocate  its  employees.  These
liabilities  included the estimated  costs of severance and salary  continuation
arrangements  and related  employee  benefits of $730 and the estimated costs to
relocate  employees  and property of $470.  The plan provided for the closure of
the  entity's   corporate   facility  and  the   integration   of  its  general,
administrative  and  engineering  activities  into  those  of the  Company,  and
identified  the  employees  to be  relocated  or  terminated  as a result of the
acquisition.  During the years ended March 31, 2001,  2000 and 1999, the Company
charged  payments of $11, $42 and $806,  respectively,  against the  liabilities
accrued  pursuant  to the plan.  During the years ended March 31, 2001 and 2000,
the  Company  charged $63 and $126,  respectively,  of the  liabilities  accrued
pursuant to plan against  goodwill  recorded in connection with the acquisition,
such amount  representing a change in estimate related to remaining  liabilities
to be paid.


                                       91
<PAGE>

      Changes in accrued  relocation,  severance and reorganization  charges for
the years ended March 31, 2001, 2000 and 1999 are summarized as follows:

                                                   2001        2000       1999
                                                  -------    -------    -------
Balance, beginning of year                        $   440    $   615    $ 1,048
Restructuring and reorganization (credits)
  charges                                            (256)       733        490
Payments                                             (121)      (782)      (923)
Adjustment to goodwill                                (63)      (126)        --
                                                  -------    -------    -------
Balance, end of year                              $    --    $   440    $   615
                                                  =======    =======    =======

      Changes in accrued  warranty  expense for the years ended March 31,  2001,
2000 and 1999 are summarized as follows:

                                                   2001        2000       1999
                                                  -------    -------    -------
Balance, beginning of year                        $   561    $ 1,101    $ 1,170
Expense provision                                     280         53        419
Charges incurred                                     (444)      (593)      (488)
                                                  -------    -------    -------
Balance, end of year                              $   397    $   561    $ 1,101
                                                  =======    =======    =======


                                       92
<PAGE>

NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION

      A summary of the  Company's  supplemental  cash flow  information  for the
years ended March 31, 2001, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>
                                                               2001       2000       1999
                                                             -------    -------    -------
<S>                                                          <C>        <C>        <C>
Cash paid (received) during the year for
      Interest                                               $   599    $   950    $   861
      Income taxes                                               (61)    (1,876)       845

Non-cash investing and financing activities
     Offset of accounts payable against
       accounts receivable                                     1,562         --         --
     Offset of customer advances against
       accounts receivable                                     1,000         --         --
     Receipt of marketable securities to satisfy
       accounts receivable resulting in an increase
       in other current assets and a reduction in
       accounts receivable                                        --        287         --
     Unrealized loss (gain) on marketable securities
       resulting in a (decrease) increase in stockholders'
       equity and other current  assets                          305        (23)        --
     Equipment acquired under capital lease
       obligations                                               140        279         --
     Tax benefit from exercise of options resulting in
       an increase in stockholders' equity and
       an increase in non-current deferred tax assets             --         98         --
     Write-off of acquired accrued restructuring
       liabilities resulting in a decrease in accrued
       expenses and goodwill                                      63        126         --
     Compensation related to exercised stock options
       resulting in an increase in stockholders' equity
       and a decrease in accrued expenses                         10         18         --
     Increase in prepaid expenses and stockholders'
       equity upon issuance of common stock
       purchase warrants                                          49         --         --
     Other assets acquired by issuance
       of note payable                                            --         --        160
</TABLE>

NOTE 11 - STOCKHOLDERS' EQUITY

Common Stock

      On November 2, 1999, the stockholders of the Company approved an amendment
to the Company's  Certificate of  Incorporation to increase the number of shares
of common stock,  $.01 par value,  authorized for issuance to 40,000,000  shares
from 30,000,000 shares.  Holders of voting common stock are entitled to one vote
per share on all matters to be voted on by the  stockholders.  No dividends have
been declared or paid on the Company's common stock during the years ended March
31, 2001, 2000 and 1999.


                                       93
<PAGE>

Common Stock Warrants

      During the year ended  March 31,  2001,  the  Company  issued  warrants to
purchase 53,827 shares of common stock (as a retainer for services valued at $49
to be rendered to the Company  over a two-year  period  ending May 1, 2002) that
are  exercisable,  in whole or in part,  through their  expiration  date, May 1,
2002, at an exercise  price of $2.40 per share.  During the year ended March 31,
2001, the Company also issued warrants to purchase 18,938 shares of common stock
(in  return for  services  valued at $20) that are  exercisable,  in whole or in
part, through their expiration date, May 22, 2005, at an exercise price of $2.48
per share. In addition, at March 31, 2001, 2000 and 1999, the Company had issued
and  outstanding  warrants to purchase  105,000  shares of common stock that are
exercisable, in whole or in part, through their expiration date, May 9, 2001, at
an exercise  price of $10.29 per share.  The fair value of the  warrants  issued
during the year ended  March 31,  2001 was  determined  using the  Black-Scholes
Option pricing method.

      The   agreements   related  to  the   above-described   warrants   contain
anti-dilution provisions,  which generally provide for adjustments under certain
circumstances to the per-share  exercise price and the number of shares that may
be acquired. The holders of the warrants that expired on May 9, 2001 had certain
rights of registration of the securities issued upon exercise of the warrants.

Stock Option Plans

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

      Pursuant to the terms of an employment  agreement  between the Company and
its President and Chief  Executive  Officer dated October 15, 1999,  the Company
granted options under the 1999 Plan to purchase  539,988 shares of the Company's
common stock at an exercise  price of $1.67 per share.  Initially,  such options
were to vest and  become  exercisable  ratably at the end of each month over the
term of the employment  agreement,  which expires on October 11, 2002.  However,
during the year ended March 31,  2001,  the Board of Directors  accelerated  the
vesting of such options to permit exercise  thereof as of July 13, 2000, and the
Company recognized the remaining  compensation expense determined at the date of
grant.  During the year ended March 31, 2001,  options to purchase 37,600 shares
were  exercised at an exercise  price of $1.67 per share.  At March 31, 2001 and
2000,  options to  purchase  502,388  and  539,988  shares,  respectively,  were
outstanding  at an  exercise  price of $1.67 per share,  and options to purchase
502,388 and 90,000 shares, respectively,  were exercisable. As of March 31, 2001
and 2000,  no options  were  available  for grant  under the 1999 Plan,  and the
weighted average


                                       94
<PAGE>

remaining  contractual lives of options  outstanding under the 1999 Plan was 3.5
years and 4.5 years, respectively.

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

      As of March 31, 2001,  options to purchase  236,309 shares of common stock
were  available  for grant under the 1991 Plan.  The weighted  average  exercise
price of options  outstanding  under the 1991 Plan at March 31,  2001,  2000 and
1999 was $2.47, $4.77 and $5.09, respectively. At March 31, 2001, 2000 and 1999,
options   outstanding  under  the  1991  Plan  had  weighted  average  remaining
contractual lives of 3.9 years, 3.7 years and 3.0 years, respectively.

      The  following  table  summarizes  information  regarding  the  status and
changes in  outstanding  stock options under the 1991 Plan for each of the years
in the three-year period ended March 31, 2001:

                                                Number of        Option Price
                                                  Shares       Range Per Share
                                                ---------      ---------------
Outstanding at March 31, 1998                     545,275       $1.81 - $7.38
     Granted                                      561,000       $4.56 - $5.88
     Exercised                                    (22,600)      $1.81 - $3.50
     Cancelled                                    (57,675)      $3.50 - $6.94
                                                ---------
Outstanding at March 31, 1999                   1,026,000       $3.50 - $7.38
     Granted                                      806,250       $1.88 - $6.19
     Exercised                                   (140,250)      $4.56 - $6.19
     Cancelled                                   (535,825)      $1.88 - $7.38
                                                ---------
Outstanding at March 31, 2000                   1,156,175       $1.88 - $6.81
     Granted                                      989,100       $ .75 - $2.31
     Cancelled                                   (683,875)      $ .75 - $6.81
                                                ---------
Outstanding at March 31, 2001                   1,461,400       $ .75 - $6.00
                                                =========
Options exercisable at March 31, 2001             460,506       $ .75 - $6.00
                                                =========
Options exercisable at March 31, 2000             258,899       $4.56 - $6.81
                                                =========
Options exercisable at March 31, 1999             291,255       $3.50 - $7.38
                                                =========

                                       95
<PAGE>

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

      As of March 31, 2001,  options to purchase  102,000 shares of common stock
were available for grant under the Directors Plan. The weighted average exercise
price of options  outstanding  under the Directors Plan at March 31, 2001,  2000
and 1999 was $3.82, $4.71 and $4.75,  respectively.  At March 31, 2001, 2000 and
1999,  options  outstanding  under  the  Directors  Plan  had  weighted  average
remaining contractual lives of 3.2 years, 3.3 years and 3.9 years.


                                       96
<PAGE>

         The following  table  summarizes  information  regarding the status and
changes in  outstanding  stock options under the Directors  Plan for each of the
years in the three-year period ended March 31, 2001:

                                                 Number of     Option Price
                                                  Shares      Range Per Share
                                                 ---------    ---------------
Outstanding at March 31, 1998                     93,000       $3.81 - $6.31
     Granted                                      51,000       $3.59 - $4.56
     Exercised                                   (22,000)      $3.81 - $5.25
     Cancelled                                   (28,000)      $3.81 - $6.31
                                                 -------
Outstanding at March 31, 1999                     94,000       $3.59 - $6.31
     Granted                                      12,000           $3.16
     Exercised                                    (2,000)          $3.94
     Cancelled                                   (13,000)      $3.59 - $3.94
                                                 -------
Outstanding at March 31, 2000                     91,000       $3.16 - $6.31
     Granted                                      35,000           $2.00
     Cancelled                                   (20,000)      $3.16 - $5.56
                                                 -------
Outstanding at March 31, 2001                    106,000       $2.00 - $6.31
                                                 =======
Options exercisable at March 31, 2001             71,000       $3.16 - $6.31
                                                 =======
Options exercisable at March 31, 2000             79,000       $3.59 - $6.31
                                                 =======
Options exercisable at March 31, 1999             43,000       $3.94 - $6.31
                                                 =======

      In  addition,  in  connection  with an  acquisition,  options to  purchase
531,125  shares of common stock  outstanding  under the acquired  entity's  1994
Omnibus Stock Plan (the "Omnibus  Plan") were converted into options to purchase
557,682  shares of common stock of the  Company.  No  additional  options may be
granted under the Omnibus Plan  subsequent to the  acquisition.  The options are
exercisable  in four equal annual  installments  beginning on the date of grant,
and expire ten years from the date of grant. The weighted average exercise price
of options  outstanding  under the Omnibus Plan at March 31, 2001, 2000 and 1999
was $3.04,  $4.23 and $3.10,  respectively.  At March 31,  2001,  2000 and 1999,
options  outstanding  under the  Omnibus  Plan had  weighted  average  remaining
contractual lives of 4.0 years, 4.4 years and 5.2 years, respectively.


                                       97
<PAGE>

         The following  table  summarizes  information  regarding the status and
changes in  outstanding  stock  options  under the Omnibus  Plan for each of the
years in the three-year period ended March 31, 2001:

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

Outstanding at March 31, 1998                     448,906       $.95 - $10.26
     Exercised                                    (90,244)      $.95 - $4.76
     Cancelled                                    (23,887)      $.95 - $10.26
                                                 --------
Outstanding at March 31, 1999                     334,775       $.95 - $9.05
     Exercised                                   (146,300)      $.95 - $4.76
     Cancelled                                     (4,200)          $9.05
                                                 --------
Outstanding at March 31, 2000                     184,275       $.95 - $9.05
     Cancelled                                    (37,275)      $.95 - $9.05
                                                 --------
Outstanding at March 31, 2001                     147,000       $.95 - $9.05
                                                 ========
Options exercisable at March 31, 2001             147,000       $.95 - $9.05
                                                 ========
Options exercisable at March 31, 2000             184,275       $.95 - $9.05
                                                 ========
Options exercisable at March 31, 1999             320,662       $.95 - $9.05
                                                 ========

      In addition, at March 31, 1998 options to purchase 43,050 shares of common
stock were outstanding and exercisable under a 1995 Non-Employee  Director Stock
Plan (the "1995  Directors  Plan") of the  acquired  entity at  exercise  prices
ranging  from $4.76 to $10.30 per share.  During the year ended March 31,  1999,
all options outstanding under the 1995 Directors Plan expired unexercised.

Accounting for Stock-Based Compensation

      During  the  years  ended  March 31,  2001,  2000 and  1999,  the  Company
recognized stock-based compensation expense of $109, $64 and $112, respectively,
with respect to  compensatory  options issued under the 1991 Plan and 1999 Plan.
Previously recognized stock-based  compensation expense related to cancelled and
expired  options  credited  to income  during the years ended March 31, 2001 and
2000 approximated $14 and $83, respectively.


                                       98
<PAGE>

      A comparison of the  Company's  net income (loss) and earnings  (loss) per
share as reported  and on a pro forma basis for the years ended March 31,  2001,
2000 and 1999  assuming  the Company had adopted the fair value based  method of
accounting  for  compensation  cost related to stock  options and other forms of
stock-based compensation set forth in SFAS 123 is as follows:

                                              2001         2000           1999
                                           ----------    ---------      --------

 Net income (loss)          As reported    $ (43,630)    $ (11,188)     $   361
                            Pro forma      $ (44,884)    $ (11,928)     $  (173)

 Basic earnings (loss)      As reported    $   (3.17)    $   (0.83)     $  0.03
   per share                Pro forma      $   (3.26)    $   (0.88)     $ (0.01)

 Diluted earnings (loss)    As reported    $   (3.17)    $   (0.83)     $  0.03
   per share                Pro forma      $   (3.26)    $   (0.88)     $ (0.01)

      The fair value of each option  granted  under the  Company's  stock option
plans is estimated on the date of grant using the  Black-Scholes  Option pricing
model. The significant  weighted-average assumptions used during the years ended
March 31,  2001,  2000 and 1999 to estimate  the fair values of options  granted
under the Company's stock option plans are summarized below:

                                          2001            2000           1999
                                       ----------      ----------     ----------

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

 1991 Plan
     Expected dividend yield                   --              --             --
     Expected volatility                  150.04%          77.66%         47.07%
     Risk free interest rate                6.00%           6.20%          6.20%
     Expected life                     2.64 years      4.13 years      4.7 years

 Directors Plan
     Expected dividend yield                   --              --             --
     Expected volatility                  131.01%          78.52%         45.33%
     Risk free interest rate                6.00%           6.20%          6.20%
     Expected life                     3.88 years       4.0 years      4.0 years

      Based on these assumptions, the weighted average fair value of each option
granted under the  Company's  1999 Plan during the year ended March 31, 2000 was
$1.01.  The weighted  average fair value of each option  granted  under the 1991
Plan during the years ended March 31,  2001,  2000 and 1999 was $.68,  $2.52 and
$2.25,  respectively.  The weighted  average  fair value of each option  granted
under the  Directors  Plan during the years ended March 31, 2001,  2000 and 1999
was $1.30, $0 and $1.80, respectively.


                                       99
<PAGE>

Common Stock Reserved for Issuance

      The number of shares of common stock reserved for issuance pursuant to the
Company's stock option plans and outstanding  common stock warrants at March 31,
2001 and 2000 is summarized as follows:

                                                       2001            2000
                                                   ----------      ----------
Stock  Option Plans                                 2,555,097       2,636,972
Common Stock Purchase Warrants                        177,765         105,000

Stockholder Rights Plan

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

NOTE 12 - INCOME TAXES

      Income tax expense  (benefit) for the years ended March 31, 2001, 2000 and
1999 is comprised of the following:

                                      2001              2000             1999
                                    ---------         -------            -----
Current tax expense (benefit):
Federal                             $      --            $ 67            $(422)
State                                      --             (28)              72
                                    ---------         -------            -----
                                           --              39             (350)
                                    ---------         -------            -----
Deferred tax expense:
Federal                                    --           2,894              550
State                                      --             353               13
                                    ---------         -------            -----
                                           --           3,247              563
                                    ---------         -------            -----
Net tax expense                     $      --         $ 3,286            $ 213
                                    =========         =======            =====


                                      100
<PAGE>

      The Company has  recorded a full  valuation  allowance on net deferred tax
assets as realization of such assets in future years is uncertain.  The increase
in the  valuation  allowance  during the years ended March 31, 2001 and 2000 was
$8,446 and $6,193, respectively.  The increase in the valuation allowance during
the year ended March 31, 2000  included an  allowance  of $3,163  related to net
deferred tax assets at March 31, 1999.  There was no increase or decrease to the
valuation allowance for the year ended March 31, 1999.

      Deferred  tax assets and  liabilities  as of March 31,  2001 and March 31,
2000 are comprised of the following:

                                                         2001            2000
                                                       --------        --------
Deferred tax assets:
Accounts and notes receivable reserves                 $    825        $    691
Inventory and inventory reserves                            891             760
Property, plant and equipment                               245              --
Warranty and other accruals                               1,027             621
Intangible and other assets                               3,022              --
Deferred revenue                                            298              --
Other assets and liabilities                                 --             (14)
State taxes                                                  --             187
Tax credit carryforwards                                  1,442           1,442
Net operating loss carryforwards                          9,218           6,236
                                                       --------        --------
                                                         16,968           9,923
                                                       --------        --------
Deferred tax liabilities:
Property, plant and equipment                                --               6
Intangible and other assets                                  --           1,395
                                                       --------        --------
                                                             --           1,401
                                                       --------        --------
Excess of deferred tax assets over
  deferred tax liabilities                               16,968           8,522
Less valuation allowance                                (16,968)         (8,522)
                                                       --------        --------
Net deferred tax asset                                 $     --        $     --
                                                       ========        ========

      At  March  31,  2001,   the  Company  has  available  net  operating  loss
carryforwards  for federal and state tax purposes of  approximately  $24,332 and
$23,248  respectively,  which expire from 2002 through  2021.  In addition,  the
Company has  available  approximately  $1,442 in  research  and other tax credit
carryforwards, which expire from 2002 through 2021.

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


                                      101
<PAGE>

      The  reconciliation  of income tax attributable to income before taxes for
the years ended March 31, 2001, 2000 and 1999 computed at the U.S. statutory tax
rate to the Company's effective tax rate is as follows:

                                               2001        2000         1999
                                             -------      ------        ----

U.S. statutory rate                          (34.0)%      (34.0)%       34.0%
Increases (decreases) resulting from:
      State taxes, net of federal benefit       --           --         10.5
      Business credits                          --          2.9        (71.6)
      Amortization of goodwill                16.9         (8.7)        40.8
      Stock option compensation                 --           --          6.6
      Expired net operating losses              --           --          7.8
      Change in valuation allowance           17.1         84.5           --
      Other                                     --         (3.1)         8.9
                                             -----        -----        -----
 Effective rate                                 --%        41.6%        37.0%
                                             =====        =====        =====

NOTE 13 - DISCLOSURES ABOUT SEGMENTS AND RELATED INFORMATION

      The Company has two business segments,  the public payphone market segment
and the public Internet  appliance  market segment,  which is in the development
stage. The Company's  customers include private payphone operators and telephone
companies  in  the  United  States  and  certain   foreign   countries  and  its
distributors. During the year ended March 31, 2000, the Company modified the way
it analyzes its business. Previously, the Company analyzed its business based on
three  customer  groups  consisting of domestic  telephone  companies,  domestic
private  payphone  operators  and  international   customers.   Because  of  the
development  of its  Internet  business,  the Company now  analyzes its business
based on two segments,  the payphone  market segment and the Internet  appliance
market segment.

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

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


                                      102
<PAGE>

      The sales  revenue  and gross  profit of each  reportable  segment for the
years ended March 31, 2001, 2000 and 1999 is set forth below:

<TABLE>
<CAPTION>
                             2001                   2000                 1999
                     -------------------    -------------------   -------------------
                                   Gross                 Gross                 Gross
                       Sales      Profit     Sales      Profit     Sales      Profit
                     --------   --------    --------   --------   --------   --------
<S>                  <C>        <C>         <C>        <C>        <C>        <C>
Payphone segment     $ 26,957   $  7,045    $ 47,217   $ 11,887   $ 65,263   $ 21,439
Internet appliance
  segment               1,339     (3,970)         78         19         --         --
                     --------   --------    --------   --------   --------   --------
                     $ 28,296   $  3,075    $ 47,295   $ 11,906   $ 65,263   $ 21,439
                     ========   ========    ========   ========   ========   ========
</TABLE>

      The sales  revenue of each  reportable  segment by customer  group for the
years ended March 31, 2001, 2000 and 1999 is summarized as follows:

                                                   2001        2000        1999
                                                 -------     -------     -------
Payphone segment:
  Private operators and distributors             $ 5,371     $13,726     $25,076
  Telephone companies                             19,003      27,209      32,507
  International operators                          2,583       6,282       7,680
Internet appliance segment:
  Telephone companies                                288          --          --
  International operators                          1,051          78          --
                                                 -------     -------     -------
                                                 $28,296     $47,295     $65,263
                                                 =======     =======     =======

      The  Company  does not  allocate  assets or other  corporate  expenses  to
reportable segments. Set forth below is a reconciliation of segment gross profit
information to the Company's financial statements.

                                                 2001        2000        1999
                                               --------    --------    --------
Total gross profit of  reportable segments     $  3,075    $ 11,906    $ 21,439
Unallocated corporate expenses                  (46,705)    (19,808)    (20,865)
                                               --------    --------    --------
(Loss) income before income taxes              $(43,630)   $ (7,902)   $    574
                                               ========    ========    ========


                                      103
<PAGE>

      Information  with  respect  to  sales  of  products  and  services  of the
Company's  reportable  segments  during the years ended March 31, 2001, 2000 and
1999 is set forth below:

                                                       2001     2000      1999
                                                     -------   -------   -------
Payphone segment:
  Payphone terminals                                 $ 7,364   $12,896   $23,758
  Printed circuit board control modules and kits       8,970    15,056    18,790
  Components, assemblies and other products            3,285     5,804    12,200
  Repair, refurbishment and upgrade services           6,977    12,363     9,895
  Other services                                         361     1,098       620
Internet appliance segment:
  Internet appliance terminals                         1,156        78        --
  Components, assemblies and other products               57        --        --
  Services and advertising                               126        --        --
                                                     -------   -------   -------
                                                     $28,296   $47,295   $65,263
                                                     =======   =======   =======

      The Company  markets its products and services in the United States and in
certain  foreign  countries.   The  Company's  international  payphone  business
consists of export  sales and the Company  does not  presently  have any foreign
operations.  Sales by geographic region for the years ended March 31, 2001, 2000
and 1999 were as follows:

                                                       2001     2000      1999
                                                     -------   -------   -------
United States                                        $24,662   $40,935   $57,583
Canada                                                 1,297     2,851     3,197
Latin America                                          1,983     3,023     3,943
Europe, Middle East and Africa                            --       410        41
Asia Pacific                                             354        76       499
                                                     -------   -------   -------
                                                     $28,296   $47,295   $65,263
                                                     =======   =======   =======

      During  the years  ended  March 31,  2001,  2000 and  1999,  one  customer
accounted  for 53%,  39% and 20%,  respectively,  of the  Company's  sales.  Two
domestic  telephone  companies and two international  private payphone operators
account for $3,494 (71%) and $390 (8%), respectively,  of the Company's accounts
and notes receivable at March 31, 2001.

NOTE 14 - SAVINGS PLAN

      The Company has a savings plan pursuant to Section  401(k) of the Internal
Revenue Code, whereby eligible employees may voluntarily contribute a percentage
of their compensation,  but not in excess of the maximum allowed under the Code.
The 401(k)  retirement and profit sharing plan of an acquired  entity was merged
into the Company's  savings plan on January 1, 1999,  and the Company's plan was
amended to include provisions at least as favorable as those of the merged plan.
The  Company  matches  up to 50% of the  participants'  contributions,  up to an
additional 2% of the  participants'  compensation.  Participants are 100% vested
with respect to their  contributions  to the plan.  Vesting in Company  matching
contributions  begins at 20%  after one year of  service  with the  Company  and
increases  annually  each year  thereafter  until full (100%)  vesting upon five
years of service.  The plan pays retirement  benefits based on the participant's
vested account balance.  Benefit  distributions  are generally  available upon a
participant's death, disability or retirement. Participants generally qualify to
receive  retirement  benefits  upon  reaching  the  age  of 65.  Early  retirees
generally  qualify  for  benefits  provided


                                      104
<PAGE>

they have reached age 55 and have completed 5 years of service with the Company.
Benefits  are  payable in lump sums equal to 100% of the  participant's  account
balance.  Plan expense approximated $108, $189 and $151,  respectively,  for the
years ended March 31, 2001, 2000 and 1999.

NOTE 15 - OTHER CHARGES

      Other  charges for the years ended March 31, 2001 and 2000  consist of the
impairment  losses  discussed  in  Note 3 and  the  restructuring/reorganization
charges and credits discussed in Note 9.

      During  the year  ended  March 31,  1999,  the  Company  was  involved  in
negotiations  concerning a possible  business  combination with an international
telecommunications  equipment  manufacturer.  During  April  1999,  the  Company
decided  that the terms  and  conditions  of the  business  combination  as then
proposed  would not be, at that time,  in the best  long-term  interests  of the
Company's   stockholders,   and  terminated  the  negotiations.   In  connection
therewith,  the Company  charged to  operations  approximately  $1.2  million of
expenses,  consisting  primarily of legal,  accounting and  consulting  fees and
expenses  incurred by the Company during the negotiations and in connection with
due diligence investigations. This charge, together with charges of $490 related
to the  reorganization  discussed in Note 9 and other  miscellaneous  charges of
$42, are reflected as other charges in the accompanying  consolidated  statement
of operations and other comprehensive income (loss) for the year ended March 31,
1999.

NOTE 16 - SELECTED QUARTERLY DATA (UNAUDITED)

      A  summary  of  selected  unaudited  statements  of  operations  and other
comprehensive income (loss) data for the quarters ended June 30, 2000, September
30, 2000, December 31, 2000 and March 31, 2001 is set forth below:

                                                  Quarter Ended
                                  ----------------------------------------------
                                  June 30,  September 30, December 31, March 31,
                                    2000         2000        2000        2001
                                  --------  ------------- ------------ ---------
                                                   (Unaudited)

Net sales and revenues            $  9,271    $  7,092    $  5,830     $  6,103
Gross profit                      $  2,050    $  1,246    $  1,137     $ (1,358)
Net income (loss)                 $ (2,134)   $ (2,029)   $ (2,070)    $(37,397)
Comprehensive income (loss)       $ (2,303)   $ (2,041)   $ (2,164)    $(37,427)
Earnings (loss) per common and
  common equivalent share:
    Basic                         $  (0.16)   $  (0.15)   $  (0.15)    $  (2.71)
    Diluted                       $  (0.16)   $  (0.15)   $  (0.15)    $  (2.71)

      During the  quarter  ended March 31,  2001,  the  Company  recorded  other
charges of $32,964  consisting  of  impairment  losses on  long-lived  assets of
$33,220 and  restructuring  credits of $256  related to a  restructuring  of the
Company's  payphone  business in fiscal 2000.  In  addition,  during the quarter
ended  March 31,  2001,  the Company  recorded  additional  impairment  reserves
related to the estimated net  realizable  value of  inventories  of its Internet
appliance business of approximately $2,193.


                                      105
<PAGE>

      A  summary  of  selected  unaudited  statements  of  operations  and other
comprehensive income (loss) data for the quarters ended June 30, 1999, September
30, 1999, December 31, 1999 and March 31, 2000 is set forth below:

                                                Quarter Ended
                              ------------------------------------------------
                               June 30,  September 30 December 31,   March 31,
                                 1999        1999         1999         2000
                              --------     --------     --------     --------
                                                (Unaudited)

Revenues and net sales        $ 12,758     $ 13,451     $ 12,669     $  8,417
Gross profit                  $  3,986     $  2,649     $  3,495     $  1,985
Net loss                      $   (350)    $ (1,574)    $ (1,484)    $ (7,780)
Comprehensive loss            $   (350)    $ (1,623)    $ (1,507)    $ (7,685)
Loss per common and
  common equivalent share:
    Basic                     $  (0.03)    $  (0.12)    $  (0.11)    $  (0.57)
    Diluted                   $  (0.03)    $  (0.12)    $  (0.11)    $  (0.57)

      During  the  quarter  ended  September  30,  1999,  the  Company  recorded
additional   impairment   reserves   related  to  slow  moving   inventories  of
approximately $821 as a result of the continued  contraction of revenues and net
sales of its payphone business.  During the quarters ended December 31, 1999 and
March 31,  2000,  the Company  recorded  restructuring  charges of $700 and $33,
respectively,  in connection with the planned  closure of its Sarasota,  Florida
manufacturing  facility and other restructuring  plans. During the quarter ended
March 31, 2000, the Company recorded income tax expense of $5,154 as a result of
recording a  valuation  allowance  amounting  to the entire  deferred  tax asset
balance  because of an  uncertainty  as to  whether  the  deferred  tax asset is
realizable.

NOTE 17 - COMMITMENTS AND CONTINGENCIES

Litigation

      The  Company is subject to various  legal  proceedings  incidental  to its
business.  However,  such legal  proceedings  have been  stayed  pursuant to the
Chapter  11  Proceedings.  Since the  Chapter  11  Proceedings  may  affect  any
potential liability,  the ultimate outcome of these matters cannot be determined
or predicted.

Operating Leases

      Minimum  future  rental  payments at March 31,  2001 under  non-cancelable
operating  leases with an initial term of more than one year are  summarized  as
follows:

               Fiscal 2002                                   $ 173
               Fiscal 2003                                     124
               Fiscal 2004                                     112
               Fiscal 2005                                      66
                                                             -----
                                                             $ 475
                                                             =====

      Rent  expense  for  the  years  ended  March  31,  2001,   2000  and  1999
approximated $306, $399 and $421, respectively.


                                      106
<PAGE>

License Agreements

      Pursuant  to the  terms of  patent  license  agreements,  the  Company  is
committed to pay royalties with respect to sales of licensed  products.  Royalty
expense under these  agreements  during the years ended March 31, 2001, 2000 and
1999 approximated $239, $319 and $220, respectively.

Employment Contracts

      The employment  agreement  between the Company and its President and Chief
Executive  Officer  provides for minimum  annual base  compensation  of $250 and
incentive  compensation  of up to 50% of base  compensation at the discretion of
the Board of Directors, subject to a minimum of 25% of base compensation for the
period  beginning  October 15, 1999 and ending  December 31, 2000.  In addition,
under the terms of the agreement,  the President and Chief Executive  Officer is
entitled to receive  benefits made available to other  executives of the Company
and reimbursement of relocation  expenses.  Further,  the agreement provides for
the payment of severance  compensation  if the Company  terminates the agreement
without cause equal to $250 unless the  remaining  term of the agreement is less
than 12 months in which event such amount is prorated  over the remainder of the
term. The employment  agreement also contains  confidentiality  and  non-compete
provisions.  The  agreement  expires on October 11,  2002 and may be  terminated
earlier by either party with 30 days prior written notice.

      In  addition,  the Company has entered  into  employment  agreements  with
certain of its other  officers that continue in effect until either party to the
agreement  terminates the agreement with at least 60 days prior written  notice,
subject to certain earlier termination  provisions.  Pursuant to the agreements,
the officers are entitled to minimum compensation  aggregating $370 annually. In
addition,  if these  agreements are terminated by the Company without cause, the
officers are entitled to receive the amount of  compensation  and benefits  they
would  otherwise  have  received  for a period  of six  months  from the date of
termination  and  thereafter  until they locate  employment  comparable to their
employment  at the date of  termination  but not for a period longer than twelve
months from the date of termination of employment.

Purchase Commitments

      Pursuant  to the terms of certain  manufacturing  agreements  between  the
Company and  subcontractors,  the Company is committed to  purchasing  materials
acquired by the  subcontractors to fulfill orders placed by the Company upon the
occurrence of certain  events,  including the  termination of the agreements and
cancellation  of purchase  orders.  These purchase  commitments are estimated to
range between $2,000 and $2,500 at March 31, 2001, and are subject to compromise
pursuant to the Chapter 11 Proceedings.

Retention Plan

      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. 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.


                                      107
<PAGE>

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

         None.

                                    PART III

Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

Directors

      Directors  are  elected  to serve  for a  one-year  term and  until  their
successors are elected and qualified.  Directors of the Company who were serving
as such at the end of fiscal 2001 are as follows:

         Name                                Age             Director Since

         Michael J. Boyle                    55                   1999
         Charles H. Moore                    71                   1993
         Thomas E. Patton                    60                   1989
         Mark L. Plaumann                    45                   1997

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

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


                                      108
<PAGE>

is  currently a director of The Sports  Authority  and a member of the  National
Board of the Smithsonian Institution.

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

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

Executive Officers

      Executive  officers are elected by the Board of Directors  and serve until
they resign or are removed by the Board. The Company's  executive  officers that
were serving as such at the end of fiscal 2001 are as follows:

     Name                      Age        Positions and Offices

     Michael J. Boyle          55         President, Chief Executive Officer
                                          and Chairman of the Board
     Daniel S. Fragen          42         Senior Vice President, Worldwide
                                          Sales and Marketing
     Jerrold Kollman           51         Vice President, International Sales
     Kenneth W. Noack          63         Vice President, Operations
     Timothy N. Sorenson       38         Vice President, Engineering and
                                          Development
     William H. Thompson       48         Senior Vice President, Administration
                                          & Finance, Chief Financial Officer
                                          and Secretary

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

      Mr. Fragen joined the Company as Senior Vice President of Worldwide  Sales
and  Marketing in March 2000.  From October 1997 to March 2000,  Mr.  Fragen was
Vice President of Sales and most recently President of the U.S. and Canada Sales
Division of Perle Systems,  Inc., which developed,  manufactured,  and sold data
communications products aimed at the remote access marketplace.  From


                                      109
<PAGE>

April  1989 to October  1997,  he held  various  executive  positions  including
Regional   Vice-President/General   Manager  and  General  Manager  of  National
Distribution of Fujitsu  Business  Communications  Systems,  Inc. Prior to that,
between 1980 and 1999, Mr. Fragen held various sales positions with Pitney Bowes
Corp.,  Automatic Data Processing,  Inc., ITT Business  Communications Corp. and
Merorex  Telex,  Inc.  Mr.  Fragen  holds a Masters in  Management  degree  from
Northwestern University Kellogg School of Management.

      Mr. Kollman joined the Company as Vice President of International Sales in
June 2000 and he served the Company in that capacity  until his  resignation  in
April 2001.  From November 1998 to June 2000, Mr. Kollman was Vice President and
General  Manager of the  International  Division  of Perle  Systems  Limited,  a
provider of remote  access  products.  From June 1991 to November  1998, he held
various executive positions including General Manager,  International  Division,
of Fujitsu Business Communications Systems, Inc. Prior to that, between February
1978 and May 1991,  Mr. Kollman held various sales  positions  with Telenova,  a
telecommunications  sales and service manufacturer and distributor.  Mr. Kollman
holds a Masters in International  Management  degree from the American  Graduate
School of International Management.

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

      Mr.  Sorenson  joined the Company in February 1999 as a Systems  Architect
and became Vice President of Engineering and Development in January 2001.  Prior
to joining the  Company,  Mr.  Sorenson  served L-3  Communications  Inc. for 15
years,  most  recently as a Principal  Systems  Engineer,  where he designed and
developed  several  generations  of Solid State Voice and Data Flight  Recorders
used in the airline  industry.  Mr. Sorenson holds a Bachelors of Science degree
from the College of Engineering, University of South Florida.

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

Section 16(a) Beneficial Ownership Reporting Compliance

      Section  16(a)  of the  Securities  Exchange  Act  of  1934  requires  the
Company's  officers  and  directors,  and  persons  who own  more  than 10% of a
registered class of the Company's equity securities ("Insiders") to file reports
of ownership and certain  changes in ownership  with the Securities and Exchange
Commission and to furnish the Company with copies of those reports. Based solely
on a review  of Forms 3 and 4 and  amendments  thereto  during  the most  recent
fiscal year ended March 31, 2001 and Forms 5 and amendments thereto furnished to
the Company with respect to the fiscal year


                                      110
<PAGE>

ended March 31, 2001, Mr. Sorenson filed late his Form 3, "Initial  Statement of
Beneficial Ownership of Securities"  (required as a result of his appointment as
Vice President of Engineering and Development in January 2001).

Item 11.   EXECUTIVE COMPENSATION

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

                           Summary Compensation Table

      The  following  table sets  forth the  compensation  earned  for  services
rendered during the fiscal years  indicated by our Chief  Executive  Officer and
our four  most  highly  compensated  executive  officers  other  than the  Chief
Executive Officer whose salary and bonus exceeded $100,000 during the year ended
March 31, 2001 ("named executive officers").

<TABLE>
<CAPTION>
                                                                                               Long Term
                                                                                                 Compen-
                                                                                                 sation
                                                        Annual Compensation                      Awards
                                          -----------------------------------------------     ------------
            (a)                  (b)          (c)                (d)              (e)              (g)          (i)
                                                                                 Other          Securities
                                                                                 Annual         Underlying    All Other
                                                                                 Compen-         Option/       Compen-
    Name and Principal                                                           sation            SARs        sation
         Position                Year      Salary ($)            Bonus ($)         ($)           (#) (1)        ($)
----------------------------     ----      ----------         ------------     ------------     ---------    ----------
<S>                              <C>         <C>              <C>               <C>             <C>             <C>
Michael J. Boyle                 2001        250,000          108,836 (2)       90,087 (3)       87,600          258 (4)
Chairman, President and          2000        105,894           47,414 (2)        5,949 (3)      539,988           28
Chief Executive Officer          1999             --               --               --               --           --

Daniel S. Fragen                 2001        192,195 (5)       14,835 (6)       98,120 (7)       85,000        3,505 (8)
Senior Vice President            2000             --               --               --               --           --
                                 1999             --               --               --               --           --

Jerrold Kollman                  2001        136,193 (9)       19,265 (6)       10,000 (10)      65,000           79 (11)
Vice President                   2000             --               --               --               --           --
                                 1999             --               --               --               --           --

Kenneth W. Noack                 2001        110,000            9,900 (6)           --           35,000        2,609 (12)
Vice President                   2000        108,904               --               --           55,000        2,689
                                 1999        105,250            6,000 (6)           --           25,000        2,802

William H. Thompson              2001        137,500           12,375 (6)        6,749 (3)       35,000        1,777 (13)
Senior Vice President            2000        134,385               --            8,273 (3)       70,000        3,013
                                 1999        124,532           12,000 (6)       17,221 (3)       25,000        1,592
---------------------
</TABLE>


                                      111
<PAGE>

Footnotes to Summary Compensation Table

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

(2)   Represents  bonus  compensation  accrued  under the  terms of Mr.  Boyle's
      employment agreement.  During the year ended March 31, 2001, Mr. Boyle was
      paid $125,000 of such accrued bonus  compensation for the period beginning
      October 15, 1999 and ending December 31, 2000.

(3)   Represents payments and reimbursements of relocation  expenses,  including
      related income taxes.

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

(5)   Includes paid sales  commissions of $27,962 and accrued sales  commissions
      of $2,115.

(6)   Represents bonuses paid or accrued pursuant to the Company's executive and
      key employee incentive compensation plan.

(7)   Includes  payments and  reimbursements  of relocation  expenses  including
      related income taxes and an employment-signing bonus of $15,000.

(8)   Includes the taxable  portion of Company paid group term life insurance of
      $50 and  matching  contributions  of  $3,455  that  we made to our  401(k)
      savings plan for the account of the executive.

(9)   Includes paid sales  commissions of $12,820 and accrued sales  commissions
      of $12,988.

(10)  Represents an employment-signing bonus of $10,000.

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

(12)  Includes the taxable  portion of Company paid group term life insurance of
      $396 and  matching  contributions  of  $2,213  that we made to our  401(k)
      savings plan for the account of the executive.

(13)  Includes the taxable  portion of Company paid group term life insurance of
      $90 and  matching  contributions  of  $1,687  that  we made to our  401(k)
      savings plan for the account of the executive.


                                      112
<PAGE>

Stock Option Grants in the Last Fiscal Year

      The following table sets forth certain  information  with respect to stock
options to purchase  shares of our common stock that were granted to each of the
named executive officers during the year ended March 31, 2001.

<TABLE>
<CAPTION>
                                                                                                  Potential
                                                                                             Realizable Value at
                                                                                                Assumed Annual
                                                                                             Rates of Stock Price
                                                                                                Appreciation
                                 Individual Grants                                           for Option Term (4)
----------------------------------------------------------------------------------------   -----------------------
           (a)                (b)               (c)            (d)            (e)            (f)            (g)
                                             % of Total
                            Number            Options
                              of             Granted to
                          Securities         Employees       Exercise
                          Underlying         in Fiscal        Price        Expiration
Name                        Options             Year        ($/Share)         Date            5%             10%
----------------          ----------         ----------     ---------      ----------      --------       --------
<S>                         <C>                 <C>         <C>             <C>            <C>            <C>
Michael J. Boyle            36,000 (1)          3.6%        $ 2.0650        07/17/05       $ 20,539       $ 45,385
                             1,600 (1)          0.2%        $ 2.0400        07/18/05            902          1,993
                            50,000 (2)          5.1%        $ 0.7500        10/31/05         10,361         22,894
Daniel S. Fragen            50,000 (3)          5.1%        $ 2.3130        04/13/05         31,952         70,605
                            35,000 (2)          3.5%        $ 0.7500        10/31/05          7,252         16,026
Jerrold Kollman             30,000 (3)          3.0%        $ 1.9380        06/01/05         16,063         35,495
                            35,000 (2)          3.5%        $ 0.7500        10/31/05          7,252         16,026
Kenneth W. Noack            35,000 (2)          3.5%        $ 0.7500        10/31/05          7,252         16,026
William H. Thompson         35,000 (2)          3.5%        $ 0.7500        10/31/05          7,252         16,026
</TABLE>
--------------------

      (1)   These  options were  granted  under the 1991 Stock Option Plan at an
            exercise  price  equal to the per share  market  value of our common
            stock on the grant  date upon the  exercise  of  options  previously
            granted to Mr.  Boyle  under the 1999  Stock  Option  Plan.  Options
            covering the purchase of 539,998 of our common stock  granted to Mr.
            Boyle on October  15,  1999 under the 1999  Stock  Option  Plan were
            initially  exercisable  in increments of 15,000 shares at the end of
            each month during the first  twenty-four  (24) months after the date
            of grant and in increments of 14,999 shares at the end of each month
            during the succeeding twelve months. Pursuant to resolutions adopted
            by the Board of  Directors,  unvested  options  granted to Mr. Boyle
            under the 1999 Stock  Option  Plan  became  exercisable  on July 13,
            2000, and the Board agreed to grant additional  options to Mr. Boyle
            to purchase the number of shares acquired by Mr. Boyle upon exercise
            of options  granted  under the 1999 Stock  Option  Plan at  exercise
            prices equal to market value on the date of grant.

      (2)   These  options were  granted  under the 1991 Stock Option Plan at an
            exercise  price  equal to the per share  market  value of our common
            stock on the grant date. The options become exercisable monthly on a
            pro-rata basis over a period of two years from the date of grant.

      (3)   These  options were  granted  under the 1991 Stock Option Plan at an
            exercise  price  equal to the per share  market  value of our common
            stock on the grant date. The options become exercisable at a rate of
            twenty-five  percent each year  beginning one year after the date of
            grant.


                                      113
<PAGE>

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

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

      The following  table sets forth for each of the named  executive  officers
certain  information  with respect to stock  options  exercised  during the year
ended March 31, 2001 and the number and value of exercisable  and  unexercisable
options  held by named  executive  officers  as of March 31,  2001.  The  "Value
Realized" on "Shares  Acquired on Exercise" during the year ended March 31, 2001
is based on the difference  between the closing market price of our common stock
on the  exercise  date and the option  exercise  price per share.  The "Value of
Unexercised  In-the-Money Options at Fiscal Year End" is based on the difference
between the closing  market  price of our common  stock on March 31, 2001 ($.063
per share) and the option exercise price per share.

<TABLE>
<CAPTION>
            (a)                     (b)           (c)              (d)                    (e)
                                                                Number of
                                                               Securities               Value of
                                                               Underlying             Unexercised
                                                               Unexercised            In-the-Money
                                                               Options at              Options at
                                  Shares                         Fiscal                  Fiscal
                                 Acquired                       Year-End                Year-End
                                    on           Value        Exercisable/            Exercisable/
                                 Exercise      Realized       Unexercisable          Unexercisable
Name                                (#)           ($)              (#)                    ($)
-----------------------------   ----------     --------       -------------          -------------
<S>                               <C>           <C>           <C>                         <C>
Michael J. Boyle                  36,700        14,816        550,413/39,585              0/0

Daniel S. Fragen                      --            --          7,289/77,711              0/0

Jerrold Kollman                       --            --          7,289/57,711              0/0

Kenneth W. Noack                      --            --         39,539/83,461              0/0

William H. Thompson                   --            --       117,539/100,211              0/0
</TABLE>

Employment  Contracts  and  Termination  of  Employment  and  Change in  Control
Arrangements

      Mr.  Michael J. Boyle.  We entered into an employment  agreement  with Mr.
Boyle that became  effective as of October 15, 1999.  The  employment  agreement
expires on October 11, 2002 and may be  terminated  earlier by either party with
30 days prior written  notice.  The agreement  provides for minimum  annual base
compensation  of $250,000 and an annual bonus of up to 50% of base  compensation
at the  discretion of the Board of Directors,  subject to a minimum bonus of 25%
of base  compensation  for the  period  beginning  October  15,  1999 and ending
December 31, 2000. In addition,  under the terms of the agreement, as amended by
subsequent  actions  taken by the Board of  Directors,  Mr. Boyle is entitled to
receive  benefits  made  available  to  other  executives  of  the  Company  and
reimbursement of all relocation expenses as approved by the Board.  Further, the
agreement  provides  for the payment of  severance  compensation  if the Company
terminates  the agreement  without cause equal to $250,000  unless the remaining
term of the  agreement  is less than  twelve  (12)  months,  in which event such
amount is prorated


                                      114
<PAGE>

over  the  remainder  of  the  term.  The  employment  agreement  also  contains
confidentiality and non-compete provisions. Under the terms of the agreement, we
granted  options  under our 1999  Stock  Option  Plan to Mr.  Boyle to  purchase
539,988 shares of our common stock at an exercise price of $1.67 per share.

      Initially,  the  options  granted  to Mr.  Boyle  were to vest and  become
exercisable  ratably at the end of each  month  over the term of the  employment
agreement.  However,  the Board of  Directors  accelerated  the  vesting of such
options to permit exercise thereof as of July 13, 2000. Pursuant to the terms of
the  employment  agreement,  unvested  options  expire  immediately if Mr. Boyle
voluntarily  terminates  his  employment  for  any  reason  or  if  the  Company
terminates Mr. Boyle's employment for cause. Upon the termination of Mr. Boyle's
employment by the Company  without cause,  options that would have vested during
the twelve months after such  termination  of employment or during the remaining
term of the employment agreement between Mr. Boyle and the Company, whichever is
less,  immediately  vest and are thereafter  exercisable  until their expiration
date, and any remaining unvested options expire as of the termination date.

      In addition,  the agreement provides that all outstanding  options held by
Mr. Boyle  immediately  vest in the event of a change in control of the Company,
including the transfer,  exchange or sale of substantially  all of the Company's
assets to a non-affiliated third party, a merger or consolidation of the Company
pursuant  to which  the  stockholders  of the  Company  own less than 50% of the
surviving  entity or the entity  into which the common  stock of the  Company is
converted or if any person,  other than Wexford Management LLC or its affiliates
or  Fundamental  Management  Corporation  or its  affiliates,  becomes the owner
directly  or   indirectly   of  securities  of  the  Company  or  its  successor
representing  35% or more of the combined  voting power of the  Company's or its
successor's securities then outstanding.

      Under the terms of the agreement, Mr. Boyle is indemnified with respect to
claims made against him as an officer  and/or  employee of the Company or any of
its  subsidiaries  to  the  fullest  extent  permitted  by  our  Certificate  of
Incorporation, our Bylaws and Delaware corporation law.

      Other Named Executive Officers. Each of Messrs. Noack and Thompson entered
into  employment  agreements  that became  effective as of December 10, 1998 and
that  continue in effect until either party  terminates  the  agreement  with at
least 60 days prior  written  notice,  subject to  certain  earlier  termination
provisions. The agreements provide for the payment of base annual salaries of at
least $105,000 and $125,000 to Messrs. Noack and Thompson,  respectively,  while
employed by the  Company.  The base  salaries of Messrs.  Noack and Thompson are
subject to annual review for merit and other  increases at the discretion of the
Board.  Messrs.  Noack and  Thompson are also  reimbursed  (in  accordance  with
Company policy from time to time in effect) for all reasonable business expenses
incurred by them in the performance of their duties.

      Mr. Kollman entered into an employment  agreement that became effective as
of July 11, 2000 and that continues in effect until either party  terminates the
agreement with at least 60 days prior written notice, subject to certain earlier
termination provisions.  The agreement provides for the payment of a base annual
salary of at least $140,000 to Mr.  Kollman while  employed by the Company,  and
the payment of sales  commissions  on the basis  determined by the Company.  The
base  salary of Mr.  Kollman  is  subject  to annual  review for merit and other
increases at the  discretion of the Board.  Mr.  Kollman is also  reimbursed (in
accordance  with Company  policy from time to time in effect) for all reasonable
business expenses incurred by him in the performance of his duties.

      Under the terms of the  agreements,  Messrs.  Kollman,  Noack and Thompson
(the  "Officers")  are  entitled to the same  benefits  made  available to other
senior  executives  on the same terms and  conditions  as such  executives.  The
Officers  are also  entitled to receive an annual  incentive  bonus,  if any, as


                                      115
<PAGE>

determined  or approved  by the Board or the  Compensation  Committee  under the
Company's incentive  compensation plan. Also, under the terms of the agreements,
the Officers will be granted such options to purchase shares of our common stock
as approved by the Compensation Committee.

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

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

      Key  Employee  Retention  and  Severance  Plan.  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. 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.  In  addition,  participants  in the  Retention  Plan are  entitled to
severance  benefits upon termination of employment by a successor company within
six months of a purchase  transaction  or upon the sale of all or  substantially
all of the Company's assets.  Aggregate  retention and emergence bonuses payable
to Messrs.  Boyle, Fragen,  Noack, Sorenson and Thompson pursuant to and subject
to the terms of the Retention  Plan  approximate  $250,000,  $131,000,  $87,000,
$91,000  and  $109,000,  respectively.  Maximum  severance  benefits  payable to
Messrs.  Boyle, Fragen,  Noack, Sorenson and Thompson pursuant to and subject to
the terms of the Retention Plan approximate $250,000,  $83,000, $55,000, $58,000
and $69,000, respectively.

Directors' Compensation

      Directors who are not employees receive an annual retainer fee of $15,000.
In addition, the Directors are entitled to receive stock option grants under our
Directors'  Stock  Option  Plan or other plan in effect to  purchase up to 5,000
shares of common stock based on the  percentage of the number of meetings of the
Board attended by them.  Directors are also reimbursed for expenses in attending
Board and Board  committee  meetings.  During  the year  ended  March 31,  2001,
Messrs.  Moore, Patton and Plaumann received the annual retainer fee of $15,000.
In addition,  on March 31, 2001,  the Company


                                      116
<PAGE>

granted stock options to purchase 3,000 shares of common stock to Messrs. Patton
and Plaumann and 2,000  shares to Mr.  Moore under the  Directors'  Stock Option
Plan at an  exercise  price of $2.00  per  share  based on their  attendance  at
meetings of the Board.

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

      On March 31, 2001, the Company  granted  formula stock options to purchase
4,000 shares of common stock to each of Messrs. Moore, Patton and Plaumann under
the  Directors'  Stock Option Plan at an exercise  price of $2.00 per share.  In
addition,   during  the  year  ended  March  31,  2001,   the  Company   granted
discretionary  stock options to purchase 5,000 shares of common stock to Messrs.
Moore, Patton, Plaumann at an exercise price of $2.00 per share. Options granted
under the Directors'  Stock Option Plan become fully  exercisable one year after
the date of grant and expire five years from the date of grant.

Compensation Committee Interlocks and Insider Participation

      The Compensation Committee of the Board, which during the year ended March
31, 2001  consisted  of Messrs.  Moore,  Patton and  Plaumann,  makes  decisions
concerning  executive  compensation.  Messrs.  Moore,  Patton and  Plaumann  are
neither officers nor employees of the Company or any of its subsidiaries. During
the year ended March 31, 2001, none of our executive officers served as a member
of the  compensation  committee  or as director  of another  entity of which any
executive  officers  thereof served as a director or member of our  Compensation
Committee.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following tables sets forth certain information  regarding  beneficial
ownership  of our  outstanding  common  stock  at  June  4,  2001  according  to
information  supplied to us by: (i) each person we know to own beneficially more
than 5% of our common stock; (ii) each of our directors; (iii) each of the named
executive officers; and (iv) all of our current directors and executive officers
as a group.  Under rules adopted by the  Securities and Exchange  Commission,  a
person is deemed to be a beneficial  owner of common stock with respect to which
he has or shares voting power (which includes the power to vote or to direct the
voting of the  security),  or  investment  power  (which  includes  the power to
dispose of, or to direct the  disposition  of, the  security).  A person is also
deemed to be the  beneficial  owner of  shares  with  respect  to which he could
obtain voting or investment  power within 60 days,  such as upon the exercise of
options or warrants. The numbers and percentages assume for each person or group
listed,  the exercise of all  warrants and stock  options held by such person or
group that are exercisable  within 60 days of June 4, 2001, but not the exercise
of such  warrants  and  stock  options  owned by any  other  person.  Except  as
otherwise  indicated in the footnotes,  we believe that the beneficial owners of
our common stock listed below have sole investment and voting power with respect
to the shares of common stock shown as beneficially owned by them.


                                      117
<PAGE>

Security Ownership of Certain Beneficial Owners

Name and Address                             Number of Shares         Percentage
of Beneficial Owner                         Beneficially Owned         of Class
-------------------                         ------------------        ----------
Wexford Partners Fund L.P.                      2,556,169                18.5%
411 West Putnam Avenue
Greenwich, Connecticut 06830

Security Ownership of Management

Name and Address                                Number of Shares      Percentage
of Beneficial Owner                            Beneficially Owned      of Class
-------------------                            ------------------     ----------
Michael J. Boyle                                  558,735  (1)             3.9%
Charles H. Moore                                   18,100  (2)               *
Thomas E. Patton                                   18,000  (3)               *
Mark L. Plaumann                                   33,938  (4)               *
Daniel S. Fragen                                   74,921  (5)               *
Jerrold Kollman                                    34,000                    *
Kenneth W. Noack                                   83,281  (6)               *
William H. Thompson                               137,750  (7)             1.0%
All directors and executive officers
as a group (9 persons)                            988,353  (8)             6.7%

* Less than 1%

---------------

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

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

      (3)   Includes  500 shares  held  jointly  with Mr.  Patton's  wife.  Also
            includes  17,000  shares of common stock that may be purchased  upon
            exercise of stock options within 60 days.

      (4)   Includes  15,000  shares of common stock that may be purchased  upon
            exercise of stock options within 60 days and 18,938 shares of common
            stock that may be purchased  upon exercise of common stock  purchase
            warrants  held by  Greyhawke  Capital  Advisors  LLC as to which Mr.
            Plaumann disclaims beneficial ownership.

      (5)   Includes  25,621  shares of common stock that may be purchased  upon
            exercise of stock options within 60 days.

      (6)   Includes  58,621  shares of common stock that may be purchased  upon
            exercise of stock options within 60 days.

      (7)   Includes  137,121  shares of common stock that may be purchased upon
            exercise of stock options within 60 days.

      (8)   Includes  600 shares held by family  members of  directors,  846,726
            shares of common stock that may be purchased  upon exercise of stock
            options within 60 days and 18,938 shares of common stock that may be
            purchased  upon exercise of common stock  purchase  warrants held by
            Greyhawke  Capital Advisors LLC as to which the respective  director
            disclaims beneficial ownership.


                                      118
<PAGE>

Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      On March 2, 2000,  the Company  engaged  Greyhawke  Capital  Advisors  LLC
("Greyhawke"),  of which Mr. Plaumann serves as a Managing Member, to assist the
Company in the  preparation  of its  business  plan and to assist the Company to
raise  capital.  Under the terms of the  agreement  to assist the Company in the
preparation  of its business  plan, the Company agreed to pay fees equal to $175
per hour and to issue common stock purchase  warrants  providing  Greyhawke with
the right to purchase a number of shares of the Company's  common stock equal to
six times cash fees earned by Greyhawke divided by the per-share  exercise price
of the  warrants,  which  would  be  equal  to 120% of the  market  price of the
Company's common stock on the date of issuance of the warrants.  Under the terms
of the agreement to assist the Company to raise  capital,  the Company agreed to
pay fees equal to three (3) percent of gross financing  proceeds received by the
Company  as a result of the  efforts  of  Greyhawke  and to issue  common  stock
purchase  warrants  providing  Greyhawke  with the right to purchase a number of
shares of the  Company's  common stock equal to six (6) percent of the equity or
equity  equivalents  purchased by the investor  with an exercise  price equal to
120% of the per-share  price of capital raised through the efforts of Greyhawke.
In addition,  the Company agreed to pay all  reasonable  out of pocket  expenses
incurred by Greyhawke in the performance of services under the agreements and to
indemnify  Greyhawke  against certain losses,  claims,  damages,  liabilities or
costs  arising  out of the  performance  of  such  services.  Either  party  may
terminate the  agreements by written  notice at any time.  During the year ended
March 31, 2001, the Company  issued common stock purchase  warrants to Greyhawke
to purchase  18,938 shares of common stock,  valued at $20,000,  exercisable  in
whole or in part,  through their  expiration  date, May 22, 2005, at an exercise
price of $2.48 per share and paid  Greyhawke  $5,425 for business  plan services
rendered pursuant to the agreement. No other fees have been incurred pursuant to
the agreements between the Company and Greyhawke.

      On March 1, 2000, the Company engaged Wexford  Management LLC ("Wexford"),
an  affiliate  of  Wexford   Partners  Fund  L.P.,  the   beneficial   owner  of
approximately  18.5% of our common stock,  to assist the Company in negotiations
with its bank, to raise equity capital and to perform other  services  requested
by the Company.  Under the terms of the agreement the Company agreed to pay fees
equal to two (2) percent of the gross financing proceeds received by the Company
as a result of the  efforts of  Wexford  and fees equal to $375 per hour for any
other services rendered to the Company.  In addition,  the Company agreed to pay
all reasonable out of pocket expenses  incurred by Wexford in the performance of
services under the agreements and to indemnify  Wexford  against certain losses,
claims,  damages,  liabilities  or costs arising out of the  performance of such
services. Either party may terminate the agreements upon twenty four hours prior
written notice.  During the year ended March 31, 2001, the Company incurred fees
aggregating  $11,281 under the terms of the  agreement.  No other fees have been
incurred under the agreement between the Company and Wexford.

      On December 17, 1997, the Company entered into a  stockholders'  agreement
with Fundamental Management Corporation and Wexford Partners Fund, L.P., each of
which was then a beneficial owner of over 5% of the Company's outstanding common
stock. Pursuant to the stockholders' agreement, the Company has agreed to file a
registration  statement  with  respect to the  Company's  common  stock owned by
Wexford Partners Fund, L.P. or Fundamental Management Corporation within 45 days
after any request by such persons. The Company would generally bear the expenses
of such registration.


                                      119
<PAGE>

                                     PART IV

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

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

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

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

            (3)   Exhibits -


Exhibit No.                        Description of Exhibit
-----------                        ----------------------
3.1         Certificate of Incorporation,  as amended (incorporated by reference
            to Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the
            quarter ended December 31, 1999)

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

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

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

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

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

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

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

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


                                      120
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

10.15       Forbearance and Modification  Agreement  between  Elcotel,  Inc. and
            Bank  of  America,  N.A.  dated  April  12,  2000  (incorporated  by
            reference to Exhibit  10.15 to  Registrant's  Annual  Report on Form
            10-K for the year ended March 31, 2000)


                                      121
<PAGE>

10.16       Mortgage and Security  Agreement  between Elcotel,  Inc. and Bank of
            America,  N.A.  dated April 12, 2000  (incorporated  by reference to
            Exhibit  10.15 to  Registrant's  Annual  Report on Form 10-K for the
            year ended March 31, 2000)

10.17       Mortgage  Modification  Agreement between Elcotel,  Inc. and Bank of
            America,  N.A.  dated April 12, 2000  (incorporated  by reference to
            Exhibit  10.15 to  Registrant's  Annual  Report on Form 10-K for the
            year ended March 31, 2000)

10.18       Second Forbearance and Modification  Agreement between Elcotel, Inc.
            and Bank of  America,  N.A.  dated July 31,  2000  (incorporated  by
            reference to Exhibit 10.1 to Registrant's  Quarterly  Report on Form
            10-Q for the quarter ended June 30, 2000)

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

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

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

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

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

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

21.1        Subsidiaries of the Registrant (filed herewith)

23.1        Independent Auditors' Consent (filed herewith)

27          Financial Data Schedule (Edgar filing only)

*  Management compensation agreements and plans.

      (b) Reports on Form 8-K

          The Registrant filed no reports on Form 8-K during  the fourth quarter
          of the year ended March 31, 2001.


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<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the Company has duly caused this Report to be signed on its behalf
by the undersigned thereunto duly authorized, on the 9th day of July 2001.


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

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

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

           Signature                         Title                      Date
           ---------                         -----                      ----

By: /s/ Michael J. Boyle            President & Chief Executive     July 9, 2001
    ------------------------------  Officer, Director and
         Michael J. Boyle           Chairman of the Board

By: /s/ William H. Thompson         Senior Vice President,          July 9, 2001
    ------------------------------  Chief Financial Officer and
         William H. Thompson        Secretary (principal financial
                                    and accounting officer)

By: /s/ Charles H. Moore            Director                        July 9, 2001
    ------------------------------
         Charles H. Moore

By: /s/ Thomas E. Patton            Director                        July 9, 2001
    ------------------------------
         Thomas E. Patton

By: /s/ Mark L. Plaumann            Director                        July 9, 2001
    ------------------------------
         Mark L. Plaumann


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