<PAGE>

================================================================================

                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

(Mark One)

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

     For the Quarterly Period Ended September 30, 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: 0-22610


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


            Delaware                                  59-3538257
(State or other jurisdiction of                    (I.R.S. Employer
 incorporation or organization)                        I.D. No.)


                      10120 Windhorst Road, Tampa, FL 33619
               (Address of principal executive offices) (Zip Code)

                  Registrant's telephone number: (813) 628-8000


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

As of November 9, 2001, there were 11,169,440 shares of the Registrant's Common
Stock outstanding.

================================================================================

<PAGE>



                   DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
                           FORM 10-Q QUARTERLY REPORT
                                TABLE OF CONTENTS

Part I  Financial Information

<TABLE>
<CAPTION>

<S>                                                                                           <C>
Item 1

Financial Statements:

Consolidated Balance Sheets ...............................................................    1

Consolidated Statements of Operations .....................................................    2

Consolidated Statements of Cash Flows .....................................................    4

Notes to Consolidated Financial Statements ................................................    5

Item 2

Management's Discussion and Analysis of Financial Condition and Results of Operations......   13

Liquidity and Capital Resources ...........................................................   21

Item 3

Quantitative and Qualitative Disclosures about Market Risk ................................   27

Part II  Other Information

Item 1

Legal Proceedings .........................................................................   29


Item 6

Exhibits and Reports on Form 8-K ..........................................................   30
</TABLE>


<PAGE>



PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS


                   DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                          September 30,     December 31,
                                                                                              2001             2000
                                                                                              ----             ----
                                                                                           (Unaudited)       (Audited)
<S>                                                                                     <C>                <C>
                                                       ASSETS

Current assets
Cash and cash equivalents                                                               $        5,917     $      6,104
Trade accounts receivable, net of allowance for doubtful
 accounts of $0 and $1,515, respectively                                                        12,795           14,307
Other current assets                                                                               691              626
                                                                                        --------------     ------------

        Total current assets                                                                    19,403           21,037

Property and equipment, net                                                                     52,382           64,702
Location contracts, net                                                                          2,256            2,571
Other assets                                                                                     2,131            4,877
                                                                                        --------------     ------------

        Total assets                                                                    $       76,172     $     93,187
                                                                                        ==============     ============

                                         LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities
   Current maturities of long-term debt and
    obligations under capital leases                                                    $      237,846     $    239,083
   Accrued interest payable                                                                     31,621           13,039
   Accounts payable and other accrued liabilities                                               25,786           26,493
                                                                                        --------------     ------------
        Total current liabilities                                                              295,253          278,615
                                                                                        --------------     ------------

Long-term debt and obligations under capital leases                                                396              839
Deferred revenue                                                                                     -              125
                                                                                        --------------     ------------

        Total liabilities                                                                      295,649          279,579
                                                                                        --------------     ------------

Shareholders' Deficit
   Preferred stock - $.01 par value, 1,000,000 shares
    authorized, none issued and outstanding                                                         -                -
   Common stock - $.01 par value, 50,000,000
    shares authorized, 11,169,440 and 11,169,540 shares issued
    and outstanding as of September 30, 2001 and December 31, 2000                                 112              112
   Additional paid-in capital                                                                  128,503          128,503
   Accumulated other comprehensive loss                                                            (18)               -
   Accumulated deficit                                                                        (348,074)        (315,007)
                                                                                        ---------------    -------------
        Total shareholders' deficit                                                           (219,477)        (186,392)
                                                                                        ---------------    -------------
        Total liabilities and shareholders' deficit                                     $       76,172     $     93,187
                                                                                        ==============     ============
</TABLE>


The accompanying Notes to Consolidated Financial Statements are an integral part
                         of these financial statements.



                                       1

<PAGE>



                   DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                     For the Three Months Ended September 30
                        (In thousands, except share data)

                                                 2001            2000
                                                 ----            ----

Revenues
   Coin calls                                $     16,020    $     20,454
   Non-coin calls                                   7,325          11,625
                                             ------------    ------------

Total revenues                                     23,345          32,079
                                             ------------    ------------

Costs and expenses
   Telephone charges                                7,305           9,558
   Commissions                                      5,802           9,122
   Service, maintenance and network costs           5,919           8,032
   Depreciation and amortization                    4,511           8,526
   Selling, general and administrative              3,399           7,144
                                             ------------    ------------

Total operating costs and expenses                 26,936          42,382
                                             ------------    ------------

Operating loss                                     (3,591)        (10,303)

   Interest expense                                 6,878           6,534
   Other (income) expense                            (180)              7
                                             ------------    ------------

Loss from operations before income taxes          (10,289)        (16,844)

   Income tax expense                                --                23
                                             ------------    ------------

Net loss                                     $    (10,289)   $    (16,867)
                                             ============    ============

Basic and diluted loss per share             $      (0.92)   $      (1.51)
                                             ============    ============

Weighted average shares outstanding            11,169,440      11,156,988
                                             ============    ============


The accompanying Notes to Consolidated Financial Statements are an integral part
                         of these financial statements.


                                       2

<PAGE>

                   DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                     For the Nine Months Ended September 30
                        (In thousands, except share data)

                                                 2001            2000
                                                 ----            ----

Revenues
   Coin calls                                $     47,400    $     64,259
   Non-coin calls                                  22,674          39,671
                                             ------------    ------------

Total revenues                                     70,074         103,930
                                             ------------    ------------

Costs and expenses
   Telephone charges                               23,029          29,320
   Commissions                                     17,574          25,732
   Service, maintenance and network costs          17,516          24,790
   Depreciation and amortization                   13,765          26,101
   Selling, general and administrative              9,667          16,398
                                             ------------    ------------

Total operating costs and expenses                 81,551         122,341
                                             ------------    ------------

Operating loss                                    (11,477)        (18,411)

   Interest expense                                21,880          19,565
   Other (income) expense                            (290)           (116)
                                             ------------    ------------

Loss from operations before income taxes          (33,067)        (37,860)

   Income tax expense                                   1              72
                                             ------------    ------------

Net loss                                     $    (33,068)   $    (37,932)
                                             ============    ============

Basic and diluted loss per share             $      (2.96)   $      (3.41)
                                             ============    ============

Weighted average shares outstanding            11,169,500      11,107,812
                                             ============    ============


The accompanying Notes to Consolidated Financial Statements are an integral part
                         of these financial statements.


                                       3

<PAGE>

                   DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                     For the Nine Months Ended September 30
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                     2001        2000
                                                                     ----        ----

<S>                                                               <C>         <C>
Cash flows from operating activities
   Net loss                                                       $(33,068)   $(37,932)
   Adjustments to reconcile net loss to cash flows
    from operating activities:
      Depreciation and amortization                                 13,765      26,101
      Amortization of deferred financing charges                     2,774       1,232
      Payment for certain location contracts                          (454)     (2,460)
      Write-off of fixed assets/asset valuation charge                  88         193
      Increase/(decrease) in allowance for doubtful accounts        (1,515)      1,649
      Stock issued as payment for services provided                   --           144
   Changes in assets and liabilities:
      Accounts receivable                                            3,027       2,876
      Other assets                                                    (368)       (832)
      Accrued interest                                              18,583      12,869
      Accounts payable and other accrued liabilities                  (686)    (10,270)
      Deferred revenue                                                (145)       (145)
                                                                  --------    --------

      Net cash flows provided by/(used in) operating activities      2,001      (6,575)
                                                                  --------    --------

Cash flows from investing activities
Capital expenditures                                                  (508)     (3,298)
                                                                  --------    --------

      Net cash flows (used in) investing activities                   (508)     (3,298)
                                                                  --------    --------

Cash flows from financing activities
   Payments on long-term debt                                         (941)     (5,237)
   Net proceeds/(payments) under revolving line of credit             (159)     17,043
   Principal payments under capital leases                            (580)       (557)
                                                                  --------    --------

      Net cash flows provided by/(used in) financing activities     (1,680)     11,249
                                                                  --------    --------

      Net increase/(decrease) in cash and cash equivalents            (187)      1,376

Cash and cash equivalents, beginning of period                       6,104       7,950
                                                                  --------    --------
Cash and cash equivalents, end of period                          $  5,917    $  9,326
                                                                  ========    ========

Cash paid for interest                                            $   --      $ 12,219
                                                                  ========    ========


Non-cash activities:

Property Plant and Equipment acquired under Capital Leases        $     29    $    810
                                                                  ========    ========
</TABLE>


The accompanying Notes to Consolidated Financial Statements are an integral part
                         of these financial statements.


                                       4

<PAGE>

                  DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                    (Dollars in thousands, except share data)

1.   BASIS OF PRESENTATION

     The accompanying consolidated balance sheet of Davel Communications, Inc.
and subsidiaries (the "Company") as of September 30, 2001 and the related
consolidated statements of operations for the three- and nine-month periods
ended September 30, 2001 and 2000 and of cash flows for the nine-month periods
ended September 30, 2001 and 2000 are unaudited. In the opinion of management,
all adjustments necessary for a fair presentation of such consolidated financial
statements have been included. Such adjustments consist only of normal,
recurring items. Certain information and footnote disclosures normally included
in audited financial statements have been omitted, in accordance with generally
accepted accounting principles for interim financial reporting. These interim
consolidated financial statements should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this Form 10-Q and with the Company's audited
consolidated financial statements and the notes thereto in the Company's Form
10-K for the year ended December 31, 2000. The results of operations for the
three-month and nine-month periods ended September 30, 2001 and 2000 are not
necessarily indicative of the results for the full years.

     The Company was incorporated on June 9, 1998 under the laws of the state of
Delaware to effect the merger, on December 23, 1998, of Davel Communications
Group, Inc. ("Old Davel") with Peoples Telephone Company, Inc. (the "Peoples
Merger"). As a result of the Peoples Merger, the Company is the largest domestic
independent payphone service provider in the United States, with nearly twice
the number of payphones as the second largest domestic independent payphone
service provider. The Company operates in a single business segment within the
telecommunications industry, operating, servicing and maintaining a system of
approximately 60,000 payphones in 44 states and the District of Columbia. The
Company's headquarters is located in Tampa, Florida, with directly leased
divisional and administrative facilities in 17 geographically dispersed
locations.

     See Note 8 for discussion of a potential merger with PhoneTel Technologies,
Inc.

2.   LIQUIDITY

     The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred losses of approximately $111.5 million and $33.1 million for the year
ended December 31, 2000 and nine months ended September 30, 2001, respectively.
These losses were primarily attributable to increased competition from providers
of wireless communication services and the impact on the Company's revenue of
certain regulatory changes. As of September 30, 2001, the Company had a working
capital deficit of $275.9 million and its liabilities exceeded it assets by
$219.5 million. In addition, the Company was unable to meet its debt principal
payments of $15.7 million and interest payments of $12.5 million, which would
have been due and payable on January 12, 2001 but for the Company's execution of
the Sixth Amendment to its loan agreement, which calls for interim principal
payments of $1.1 million due on April 15, 2001 (which was made), $2.2 million
due on July 15, 2001 (which has not yet been made), $3.3 million due on October
15, 2001 (which has not yet been made), and the remainder due on January 11,
2002. The Company is in discussions with its lenders regarding a waiver of,
among other things, the July 15 and October 15 amortization payments. The
Company believes that it is likely that the Company and its lenders will execute
a written waiver of any default effective as of no later than July 15, 2001. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." In the absence of improved
operating results or cash flows, modifications to the Senior Credit Facility, or
the completion of possible strategic combinations (including the PhoneTel Merger
discussed in Note 8), the Company will face liquidity problems and might be
required to dispose of material assets or operations to fund its operations and
to meet its debt service and other obligations. There can be no assurances as to
the ability of


                                       5

<PAGE>

                  DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                   (Dollars in thousands, except share data)
                                  (Continued)


the Company to execute such sales, or the timing thereof or the proceeds that
the Company could realize from such sales. As a result of these matters,
substantial doubt exists about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

     The Company's plans to increase liquidity include efforts to substantially
reduce costs, including through the PhoneTel Merger or alternative strategic
transactions. Management believes this will result in expansion of its market
presence and further leveraging of its infrastructure. In order to pursue this
strategy, the Company will need to obtain additional modifications to the Senior
Credit Facility, including forgiveness of a portion of its debt. The Company may
also need to obtain additional debt or equity financing. There can be no
assurance that such debt modifications or financings will be available to the
Company, or that they will be available on terms acceptable to the Company.
Further, any additional equity financing may be dilutive to existing
shareholders.

3.   ACCOUNTING CHANGE - DERIVATIVE FINANCIAL INSTRUMENTS

     Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), and its corresponding amendments under
SFAS 138. SFAS 133 requires the Company to measure all derivatives at fair value
on the accompanying consolidated balance sheet. For derivatives designated as
cash flow hedges, the effective portions of changes in fair value of the
derivative are reported in other comprehensive income ("OCI") and are
subsequently reclassified into earnings when the hedged item affects earnings.
Changes in fair value of derivative instruments not designated as hedging
instruments and ineffective portions of hedges are recognized in earnings in the
current period. The adoption of SFAS 133 at January 1, 2001, resulted in a
cumulative after tax reduction to OCI of $51,000. For the three months and nine
months ended September 30, 2001, the change in fair market value of derivative
instruments was recorded as interest expense and was not material.

4.   PROVISION FOR DIAL-AROUND COMPENSATION

     On September 20, 1996, the Federal Communications Commission (the "FCC")
adopted rules in a docket entitled IN THE MATTER OF IMPLEMENTATION OF THE
PAYPHONE RECLASSIFICATION AND COMPENSATION PROVISIONS OF THE TELECOMMUNICATIONS
ACT OF 1996, FCC 96-388 (the "1996 Payphone Order"), implementing the payphone
provisions of Section 276 of the Telecommunications Act of 1996 (the "Telcom
Act"). The 1996 Payphone Order, which became effective November 7, 1996,
initially mandated dial-around compensation for both access code calls and 800
subscriber calls at a flat rate of $45.85 per payphone per month (131 calls
multiplied by $0.35 per call). Commencing October 7, 1997, and ending October 6,
1998, the $45.85 per payphone per month rate was to transition to a per-call
system at the rate of $0.35 per call. Several parties filed petitions for
judicial review of certain of the FCC regulations including the dial-around
compensation rate. On July 1, 1997, the U.S. Court of Appeals for the District
of Columbia Circuit (the "Court") responded to appeals related to the 1996
Payphone Order by remanding certain issues to the FCC for reconsideration. These
issues included, among other things, the manner in which the FCC established the
dial-around compensation for 800 subscriber and access code calls, the manner in
which the FCC established the interim dial-around compensation plan and the
basis upon which interexchange carriers (the "IXCs") would be required to
compensate payphone service providers (the "PSPs"). The Court remanded the issue
to the FCC for further consideration, and clarified on September 16, 1997 that
it had vacated certain portions of the FCC's 1996 Payphone Order, including the
dial-around


                                       6

<PAGE>

                  DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                   (Dollars in thousands, except share data)
                                  (Continued)


compensation rate. Specifically, the Court determined that the FCC did not
adequately justify (i) the per-call compensation rate for 800 subscriber and
access code calls at the deregulated local coin rate of $0.35, because it did
not sufficiently justify its conclusion that the costs of local coin calls are
similar to those of 800 subscriber and access code calls; and (ii) the
allocation of the payment obligation among the IXCs for the period November 7,
1996 to October 6, 1997.

     In accordance with the Court's mandate, on October 9, 1997, the FCC adopted
and released its SECOND REPORT AND ORDER in the same docket, FCC 97-371 (the
"1997 Payphone Order"). This order addressed the per-call compensation rate for
800 subscriber and access code calls that originate from payphones in light of
the decision of the Court which vacated and remanded certain portions of the
FCC's 1996 Payphone Order. The FCC concluded that the rate for per-call
compensation for 800 subscriber and access code calls from payphones is the
deregulated local coin rate adjusted for certain cost differences. Accordingly,
the FCC established a rate of $0.284 ($0.35-$0.066) per call for the first two
years of per-call compensation (October 7, 1997 through October 6, 1999). The
IXCs were required to pay this per-call amount to PSPs, including the Company,
beginning October 7, 1997.

     On March 9, 1998, the FCC issued a Memorandum Opinion and Order, FCC
98-481, which extended and waived certain requirements concerning the provision
by the LECs of payphone-specific coding digits which identify a call as
originating from a payphone. Without the transmission of payphone-specific
coding digits, some of the IXCs have claimed they are unable to identify a call
as a payphone call eligible for dial-around compensation. With the stated
purpose of ensuring the continued payment of dial-around compensation, the FCC,
by Memorandum and Order issued on April 3, 1998, left in place the requirement
for payment of per-call compensation for payphones on lines that do not transmit
the requisite payphone-specific coding digits, but gave the IXCs a choice for
computing the amount of compensation for payphones on LEC lines not transmitting
the payphone-specific coding digits of either accurately computing per-call
compensation from their databases or paying per-phone, flat-rate compensation
computed by multiplying the $0.284 per call rate by the nationwide average
number of 800 subscriber and access code calls placed from RBOC payphones for
corresponding payment periods. Accurate payments made at the flat rate are not
subject to subsequent adjustment for actual call counts from the applicable
payphone.

     On May 15, 1998, the Court again remanded the per-call compensation rate to
the FCC for further explanation without vacating the $0.284 per call rate. The
Court opined that the FCC had failed to explain adequately its derivation of the
$0.284 default rate. The Court stated that any resulting overpayment would be
subject to possible refund if warranted in the circumstances and directed the
FCC to conclude its proceedings within a six-month period from the effective
date of the Court's decision.

     In response to the Court's second remand, the FCC conducted further
proceedings and sought additional comment from interested parties to address the
relevant issues posed by the Court. On February 4, 1999, the FCC released its
Third Report and Order, and Order on Reconsideration of the Second Report and
Order (the "1999 Payphone Order"), in which the FCC abandoned its efforts to
derive a "market-based" default dial-around compensation rate and instead
adopted a "cost-based" rate of $0.24 per dial-around call.

     On June 16, 2000, the Court affirmed the 1999 Payphone Order setting a
24-cent dial-around compensation rate. On all the issues, including those raised
by the IXCs and the payphone providers, the court applied the "arbitrary and
capricious" standard of review, and found that the FCC's rulings were lawful and
sustainable under that standard. As a result of the Court's June 16, 2000
decision, the 24-cent dial-around compensation rate is likely to remain in place
until at least the end of 2001, when the FCC may reexamine the


                                       7

<PAGE>

                  DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                   (Dollars in thousands, except share data)
                                  (Continued)


rate. Certain payphone providers have filed with the FCC a Petition for
Reconsideration of the 1999 Payphone Order. This Petition is still pending and
has yet to be ruled on by the FCC. In view of the Court's affirmation of the
1999 Payphone Order, it is unlikely that the FCC will adopt material changes to
the key components of the Order pursuant to the pending Reconsideration
Petition, although no assurances can be given.

     On April 5, 2001, the FCC released an order that is expected to have a
significant impact on the obligations of telecommunications carriers to pay
dial-around compensation to PSPs. The effect of the decision is to clarify that
the first long distance carrier to handle a dial-around call originating from a
pay telephone has the obligation to track and pay compensation on the call,
regardless of whether other carriers may subsequently transport or complete the
call. Under the FCC ruling, implementation of this system modification is
scheduled to occur on November 27, 2001. The Company believes that this
modification to the dial-around compensation system will result in a significant
increase to the number of calls for which the Company is able to collect such
compensation. Because, however, the FCC ruling is potentially subject to
administrative reconsideration or judicial appeal and the system modification is
as yet untested, no assurances can be given as to the precise timing or
magnitude of revenue impact that may flow from the decision.

     The new 24-cent rate became effective April 21, 1999, and will serve as the
default rate through January 31, 2002. Pursuant to a FCC ruling that is pending
reconsideration, the new rate will also be applied retroactively to the period
beginning on October 7, 1997, less a $0.002 amount to account for FLEX ANI
payphone tracking costs, for a net compensation of $0.238. The 1999 Payphone
Order deferred a final ruling on the interim period (November 7, 1996 to October
6, 1997) treatment to a later, as yet unreleased, order; however, it appears
that the $0.238 rate will be applied to the period from November 7, 1996 to
October 6, 1997. Upon establishment of the interim period rate, the FCC has
further ruled that a true-up may be made for all payments or credits (with
applicable interest) due and owing between the IXCs and the PSPs, including the
Company, for the payment period commencing on November 7, 1996 through the
effective date of the new $0.24 per call rate. It is possible that the final
implementation of the 1999 Payphone Order, including resolution of this
retroactive adjustment and the outcome of any related administrative or judicial
review, could have a material adverse effect on the Company. Based on the FCC's
tentative conclusion in the 1997 Payphone Order, the Company during 1997
adjusted the amounts of dial-around compensation previously recorded relating to
the period November 7, 1996 to June 30, 1997 from the initial $45.85 rate to
$37.20 ($0.284 per call multiplied by 131 calls). As a result of this
adjustment, the provision recorded for the year ended December 31, 1997 relating
to reduced dial-around compensation is approximately $3.3 million. Based on the
reduction in the per-call compensation rate in the 1999 Payphone Order, the
Company further reduced non-coin revenues by $9.0 million for 1998. The
adjustment included approximately $6.0 million to adjust revenue recorded during
the period November 7, 1996 to October 6, 1997 from $37.20 per-phone per-month
to $31.18 per phone per month ($0.238 per call multiplied by 131 calls). The
remaining $3.0 million of the adjustment was to adjust revenues recorded during
the period October 7, 1997 to December 31, 1998 to actual dial-around call
volumes for the period multiplied by $0.238 per call. The Company recorded
dial-around compensation revenue, net of adjustments, of approximately $14.8
million for the first nine months of 2001 and $22.9 million, $35.9 million, and
$27.2 million for 2000, 1999, and 1998, respectively.

     The Company's counsel, Dickstein, Shapiro, Morin & Oshinsky, is of the
opinion that the Company is legally entitled to fair compensation under the
Telcom Act for dial-around calls the Company delivered to any carrier during the
period November 7, 1996 to October 6, 1997. Based on the information available,
the Company believes that the minimum amount it is entitled to as fair
compensation under the Telcom Act for the period November 7, 1996 to October 6,
1997 is $31.18 per payphone per month and the Company, based on the information
available to it, does not believe that it is reasonably possible that the amount
will be materially


                                       8

<PAGE>

                  DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                   (Dollars in thousands, except share data)
                                  (Continued)


less than $31.18 per payphone per month that it has recorded as discussed above.
While the amount of $0.24 per call ($0.238 for retroactive periods) constitutes
the Company's position on the minimum appropriate level of fair compensation,
certain IXCs have asserted in the past, are asserting, and are expected to
assert in the future that the appropriate level of fair compensation should be
lower than $0.24 per call. If the level of fair compensation is ultimately
determined to be an amount less than $0.24 per call, such determination could
have a material adverse effect on the Company's results of operations and
financial position. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

5.   EARNINGS PER SHARE

     The treasury stock method was used to determine the dilutive effect of the
options and warrants on earnings per share data. Diluted loss per share is equal
to basic loss per share because the exercise of the Company's 1,405,000
outstanding options and 427,323 warrants outstanding would be anti-dilutive for
all periods presented. In accordance with SFAS No. 128 and the requirement to
report "Earnings Per Share" data, the basic and diluted loss from continuing
operations per weighted average common shares outstanding were $(0.92) and
$(1.51) for the three months ended September 30, 2001 and 2000, respectively,
and $(2.96) and $(3.41) for the nine months ended September 30, 2001 and 2000,
respectively.

6.   COMMITMENTS & CONTINGENCIES

Litigation

     In December 1995, Cellular World, Inc. filed suit in Dade County Circuit
Court against the Company's affiliates, Peoples Telephone and PTC Cellular,
Inc., alleging tortious interference with Cellular World's trade secrets. The
matter proceeded to trial, during which the Company and Cellular World agreed to
settle and resolve the dispute in its entirety. Pursuant to the parties'
agreement, the Company agreed to pay Cellular World a total of $1.5 million. Due
to the Company's subsequent default under the settlement agreement, the parties
entered into discussions for purposes of negotiating a revised payment schedule.
Notwithstanding the parties' negotiations, on April 12, 2001, Cellular World
obtained a judgment in the amount of $750,000 plus interest in accordance with
the settlement agreement. On or about June 11, 2001, the parties agreed to a
payment schedule, and, on or about October 15, 2001, the Company fully satisfied
the judgment.

     On September 29, 1998, the Company announced that it was exercising its
contractual rights to terminate a merger agreement (the "Original Davel/PhoneTel
Merger Agreement") with PhoneTel, based on breaches of representations,
warranties and covenants by PhoneTel. On October 1, 1998, the Company filed a
lawsuit in Delaware Chancery Court seeking damages, rescission of the Original
Davel/PhoneTel Merger Agreement and a declaratory judgment that such breaches
occurred. On October 27, 1998, PhoneTel answered the complaint and filed a
counterclaim against the Company alleging that the Original Davel/PhoneTel
Merger Agreement had been wrongfully terminated. At the same time, PhoneTel also
filed a third party claim against Peoples Telephone (acquired by the Company on
December 23, 1998) alleging that Peoples Telephone wrongfully caused the
termination of the Original Davel/PhoneTel Merger Agreement. The counterclaim
and third party claim seek specific performance by the Company of the
transactions contemplated by the Original Davel/PhoneTel Merger Agreement and
damages and other equitable relief from the Company and Peoples Telephone. The
Company and PhoneTel currently anticipate settling this litigation in connection
with the announced proposed combination of the companies.


                                       9

<PAGE>

                  DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                   (Dollars in thousands, except share data)
                                  (Continued)


     In December 1999, the Company and its affiliate Telaleasing Enterprises,
Inc. were sued in the United States District Court, Central District of
California, by Telecommunications Consultant Group, Inc. ("TCG") and U.S.
Telebrokers, Inc. ("UST"), two payphone consulting companies which allege to
have assisted the Company in obtaining a telephone placement agreement with CSK
Auto, Inc. The suit alleges that the Company breached its commission agreement
with the plaintiffs based on the Company's alleged wrongful rescission of its
agreement with CSK Auto, Inc. Plaintiffs' amended complaint alleges damages in
excess of $700,000. The Company moved to dismiss the complaint, and, on August
24, 2000, the Court denied the Company's motion. The Company subsequently
answered the complaint and asserted a counterclaim, seeking declaratory relief.
On October 13, 2000, plaintiffs answered the counterclaim, denying its material
allegations. The Company, during a mediation conference held on October 29,
2001, agreed to a confidential settlement of this case, pursuant to which the
case would be dismissed with prejudice in exchange for payments to the
plaintiffs, the sum of which was not material to the Company and was recorded in
the third quarter.

     In March 2000, the Company and its affiliate, Telaleasing Enterprises,
Inc., were sued in a related action in Maricopa County, Arizona Superior Court
by CSK Auto, Inc. ("CSK"). The suit alleges that the Company breached a location
agreement between the parties. CSK's complaint alleges damages in excess of $5
million. The Company removed the case to the U.S. District Court for Arizona and
moved to have the matter transferred to facilitate consolidation with the
related case in California brought by TCG and UST. On October 16, 2000, the U.S.
District Court for Arizona denied the Company's transfer motion and ordered the
case remanded back to Arizona state court. On November 13, 2000, the Company
filed its Notice of Appeal of the remand order to the United States Court of
Appeals for the Ninth Circuit. The appeal and underlying suit are in their
initial stages. Discovery is now underway. The Company intends to vigorously
defend itself in the case. While the Company believes it possesses certain
meritorious defenses to the claims, the matter remains in its initial stages.
Accordingly, the Company cannot at this time predict its likelihood of success
on the merits.

     On or about December 15, 2000, the Company filed and served its Amended
Complaint against LDDS WorldCom, Inc., MCI WorldCom Network Services, Inc., MCI
WorldCom Communications, Inc., and MCI WorldCom Management Company, Inc.
(collectively "Defendants"), claiming a violation of the Telecom Act and breach
of contract and seeking damages and equitable and injunctive relief associated
with Defendants' wrongful withholding of approximately $3.1 million in
dial-around compensation due to the Company, based upon an alleged, unrelated
indebtedness. Although the Company believed it possessed meritorious claims in
the case, given the uncertainty of litigation, the parties agreed at a mediation
conference to a settlement agreement, which effected, in exchange for
consideration paid to the Company, the dismissal of this suit and preserved the
Company's Telecom Act claim for prosecution in an action currently pending in
another forum. On July 23, 2001, the Court dismissed the matter.

     In February 2001, Picus Communications, LLC, a debtor in Chapter 11
bankruptcy in the United States Bankruptcy Court for the Eastern District of
Virginia, brought suit against the Company and its wholly owned subsidiary,
Telaleasing Enterprises, Inc., in the United States District Court for the
Eastern District of Virginia, claiming unpaid invoices of over $600,000 for
local telephone services in Virginia, Maryland, and the District of Columbia.
The Company sought relief from the bankruptcy court to assert claims against
Picus and answered Picus' complaint in the district court, denying its material
allegations. On or about April 2, 2001, Picus moved the district court to
dismiss its case and indicated that it may file its claim as an adversary
proceeding with the bankruptcy court. As of the date hereof, Picus has yet to do
so. In such an event, the Company intends to reassert its counterclaim in
bankruptcy court. On March 13, 2001, the Company filed a proof of claim in the
bankruptcy court to recover damages based on Picus's breach of contract and
failure to


                                       10

<PAGE>

                  DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                   (Dollars in thousands, except share data)
                                  (Continued)


secure and pay federally mandated dial-around compensation for the Company's
benefit. On September 21, 2001, the Company filed an application for
administrative payment with the bankruptcy court seeking approximately $1.5
million in post-petition damages incurred by the Company as a result of Picus's
actions. The Company believes it has meritorious defenses and counterclaims
against Picus and intends to vigorously defend itself and pursue recovery from
Picus on its counterclaims. The Company cannot at this time predict its
likelihood of success on the merits.

     The Company is involved in other litigation arising in the usual course of
business which it believes will not materially affect its financial position,
results of operations, or liquidity.

7.   RECENT ACCOUNTING PRONOUNCEMENTS

     On July 20, 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141 (SFAS No. 141), "Business
Combinations", and No. 142 (SFAS No. 142), "Goodwill and Other Intangible
Assets." SFAS No. 141 addresses financial accounting and reporting for goodwill
and other intangible assets acquired in a business combination at acquisition.
SFAS No. 141 requires the purchase method of accounting to be used for all
business combinations initiated after June 30, 2001; establishes specific
criteria for the recognition of intangible assets separately from goodwill; and
requires unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized). SFAS No.142
addresses financial accounting and reporting for intangible assets acquired
individually or with a group of other assets (but not those acquired in a
business combination) at acquisition. SFAS No. 142 also addresses financial
accounting and reporting for goodwill and other intangible assets subsequent to
their acquisition. SFAS No. 142 provides that goodwill and intangible assets
which have indefinite useful lives will not be amortized but rather will be
tested at least annually for impairment. It also provides that intangible assets
that have finite useful lives will continue to be amortized over their useful
lives, but those lives will no longer be limited to forty years. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 are
effective for fiscal years beginning after December 15, 2001. The Company will
adopt SFAS No. 142 beginning January 1, 2002. The Company is considering the
provisions of SFAS No. 141 and No. 142 and at present has not determined the
impact of adopting SFAS No 141 and SFAS No. 142.

8.   ACQUISITIONS

     On June 13, 2001, the Company announced that it had signed a letter of
intent to merge with PhoneTel Technologies, Inc., which is headquartered in
Cleveland, Ohio and which operates approximately 33,000 phones in 45 states and
the District of Columbia. The letter of intent contemplates the execution of a
definitive merger agreement and a substantial debt restructuring of each
company. In connection with the expected merger, PhoneTel will become a wholly
owned subsidiary of Davel. In addition, the two companies have entered into a
servicing agreement designed to commence cost savings initiatives in advance of
the closing of the merger. In the third quarter the two companies began
implementing these initiatives with regard to the service, maintenance, and
network services. For the Company, this resulted in the termination of 55
employees, including skilled service technicians and field office support staff,
late in the third quarter. The annualized savings for the Company from these
changes is expected to be approximately $2.2 million.

     The transaction is subject to the execution of a definitive merger
agreement, approval by the boards of directors of PhoneTel and Davel, approval
by the shareholders and existing senior secured lenders of both companies, and
the receipt of material third party and governmental approvals and consents.


                                       11

<PAGE>

                  DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                   (Dollars in thousands, except share data)
                                  (Continued)


     As part of the completion of the merger of the two companies (the "PhoneTel
Merger"), the senior secured creditors of both Davel and PhoneTel will exchange
a substantial amount of the combined debt for equity securities of the
respective companies and will restructure the remaining debt. In connection with
PhoneTel's debt exchange, its senior secured lenders will own 87% of PhoneTel's
outstanding common stock immediately prior to the PhoneTel Merger, with the
remaining senior secured debt not to exceed $36.5 million (as compared to
approximately $59 million currently outstanding). Existing holders of PhoneTel
common stock will own 9% of PhoneTel's outstanding shares, and 4% will be
reserved for PhoneTel employee stock options or other stock-based incentive
awards. In connection with Davel's debt exchange, its senior secured lenders
will own 93% of Davel's outstanding common stock immediately prior to the
PhoneTel Merger, with the remaining senior secured debt not to exceed $63.5
million (as compared to approximately $270 million currently outstanding,
including accrued interest). Existing stockholders of Davel common stock will
own 3% of Davel's outstanding shares and 4% of the common stock will be reserved
for the issuance of stock options or other stock-based incentive awards to Davel
employees.

     Immediately following the PhoneTel Merger, current PhoneTel stockholders
will own approximately 3.28% of the shares of Davel common stock and current
Davel stockholders will own approximately 1.91%. Of the remaining shares, 4%
will be reserved for issuance of employee stock options or other stock-based
incentive awards and the companies' combined lenders will own approximately
90.81%.

     Effective with the PhoneTel Merger, the then outstanding debt of both
entities, currently in the approximate amount of $329 million, will be reduced
to $100 million in total debt of the merged entity through the debt and equity
restructuring outlined above. Of this $100 million of restructured debt, $50
million will be amortizing term debt with interest and principal payable from
operating cash flows. Payment of the interest and principal on the remaining $50
million of debt will be deferred under terms to be negotiated in connection with
the definitive merger agreement.

     On July 31, 2001, the letter of intent between the Company and PhoneTel
expired without the execution of a definitive merger agreement. On August 7,
2001, the parties amended the letter of intent to extend its expiration date to
August 31, 2001. On August 31, 2001, the letter of intent was extended to
September 30, 2001. On September 30, 2001, the letter of intent was extended to
October 31, 2001, and on October 30, 2001, the letter of intent was extended to
November 30, 2001.


                                       12

<PAGE>

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

     The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto appearing
elsewhere herein.

     With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Result of Operations ("MD&A") are
forward-looking statements that necessarily are based on certain assumptions and
are subject to certain risks and uncertainties. The forward-looking statements
are based on management's expectations as of the date hereof. Actual future
performance and results could differ materially from that contained in or
suggested by these forward-looking statements as a result of the factors set
forth in this MD&A and related filings with the Securities and Exchange
Commission. The Company assumes no obligation to update any such forward-looking
statements.

General

     During 2001, the Company has derived its revenues from two principal
sources: coin calls and non-coin calls. Coin calls represent calls paid for by
callers with coins deposited in the payphone. Coin call revenues are recorded at
the time coins are deposited into the payphone and the service is provided.

     Non-coin calls include credit card, calling card, collect, and third party
billed calls, handled by operator service providers selected by the Company.
Non-coin call revenues are recognized in the period in which the customer places
the related call and are based upon the commission received by the Company from
the carriers of these calls.

     The Company also recognizes non-coin revenues from calls that are dialed
from its payphones to gain access to a long distance company other than the one
pre-programmed into the telephone or to make a traditional "toll free" call
(dial-around calls). Revenues from dial-around calls are recognized in the
period in which the customer places the related call and are based on estimates
of calls made using most recent actual historical data and the FCC mandated
dial-around compensation rate in effect. This is commonly referred to as
"dial-around" access.

     The principal costs related to the ongoing operation of the Company's
payphones include telephone charges, commissions, and service, maintenance and
network costs. Telephone charges consist of payments made by the Company to LECs
and long distance carriers for line charges and use of their networks for
interconnection and completion of calls originating at the Company's payphones.
Commission expense represents payments to location owners. Service, maintenance
and network costs represent the cost of servicing and maintaining the payphones
on an ongoing basis.

Regulatory impact on revenue

Local Coin Rates

     In ensuring "fair compensation" for all calls, the FCC previously
determined that local coin rates from payphones should be generally deregulated
by October 7, 1997, but provided for possible modifications or exemptions from
deregulation upon a detailed showing by an individual state that there are
market failures within the state that would not allow market-based rates to
develop. On July 1, 1997, a federal court issued an order which upheld the FCC's
authority to deregulate local coin call rates. In accordance with the FCC's


                                       13

<PAGE>

ruling and the court order, certain LECs and IPPs, including the Company,
increased rates for local coin calls from $0.25 to $0.35. In 2001, the Company
has experienced lower coin call volumes on its payphones resulting from the
increased rates, growth in wireless communication services and changes in call
traffic and the geographic mix of the Company's payphones.

Dial-around Compensation

     In September and November 1996, the FCC issued its rulings implementing
Section 276 (the "1996 Payphone Order"). In the 1996 Payphone Order, the FCC
determined that the best way to ensure fair compensation to independent and LEC
PSPs for each and every call was to deregulate, to the maximum extent possible,
the price of all calls originating from payphones. For local coin calls, the FCC
mandated that deregulation of the local coin rate would not occur until October
1997 in order to provide a period of orderly transition from the previous system
of state regulation.

     To achieve fair compensation for dial-around calls through deregulation and
competition, the FCC in the 1996 Payphone Order directed a two-phase transition
from a regulated market. In the first phase, November 1996 to October 1997, the
FCC prescribed flat-rate compensation payable to the PSPs by the IXCs in the
amount of $45.85 per month per payphone. This rate was arrived at by determining
that the deregulated local coin rate was a valid market-based surrogate for
dial-around calls. The FCC applied a market-based, deregulated coin rate of
$0.35 per call to a finding from the record that there was a monthly average of
131 compensable dial-around calls per payphone. This total included both carrier
access code calls dialed for the purpose of reaching a long distance company
other than the one designated by the PSP as well as 800 "toll free" calls. The
monthly, per phone flat-rate compensation of $45.85 was to be assessed only
against IXCs with annual toll-call revenues in excess of $100 million and
allocated among such IXCs in proportion to their gross long-distance revenues.
During the second phase of the transition to deregulation and market-based
compensation (initially from October 1997 to October 1998, but subsequently
extended in a later order by one year to October 1999), the FCC directed the
IXCs to pay the PSPs on a per-call basis for dial-around calls at the assumed
deregulated coin rate of $0.35 per call. At the conclusion of the second phase,
the FCC set the market-based local coin rate, determined on a
payphone-by-payphone basis, as the default per-call compensation rate in the
absence of a negotiated agreement between the PSP and the IXC. To facilitate
per-call compensation, the FCC required the PSPs to transmit payphone-specific
coding digits which would identify each call as originating from a payphone and
required the LECs to make such coding available to the PSPs as a tariffed item
included in the local access line service.

     In July 1997, a federal court (the "Court") responded to an appeal of the
1996 Payphone Order, finding that the FCC erred in (1) setting the default
per-call rate at $0.35 without considering the differences in underlying costs
between dial-around calls and local coin calls, (2) assessing the flat-rate
compensation against only the carriers with annual toll-call revenues in excess
of $100 million, and (3) allocating the assessment of the flat-rate compensation
based on gross revenues rather than on a factor more directly related to the
number of dial-around calls processed by the carrier. The Court also assigned
error to other aspects of the 1996 Payphone Order concerning inmate payphones
and the accounting treatment of payphones transferred by an RBOC to a separate
affiliate.

     In response to the Court's remand, the FCC issued its modified ruling
implementing Section 276 (the "1997 Payphone Order") in October of 1997. The FCC
determined that distinct and severable costs of $0.066 were attributable to coin
calls that did not apply to the costs incurred by the PSPs in providing access
for dial-around calls. Accordingly, the FCC adjusted the per call rate during
the second phase of interim compensation to $0.284 (which is $0.35 less $0.066).
While the FCC tentatively concluded that the $0.284 default rate should be
utilized in determining compensation during the first phase and reiterated that
PSPs were entitled to compensation for each and every call during the first
phase, it deferred a decision on the precise method of


                                       14

<PAGE>

allocating the initial interim period (November 1996 through October 1997)
flat-rate payment obligation among the IXCs and the number of calls to be used
in determining the total amount of the payment obligation.

     On March 9, 1998, the FCC issued a Memorandum Opinion and Order, FCC
98-481, which extended and waived certain requirements concerning the provision
by the LECs of payphone-specific coding digits which identify a call as
originating from a payphone. Without the transmission of payphone-specific
coding digits, some of the IXCs have claimed they are unable to identify a call
as a payphone call eligible for dial-around compensation. With the stated
purpose of ensuring the continued payment of dial-around compensation, the FCC's
Memorandum and Order issued on April 3, 1998 left in place the requirement for
payment of per-call compensation for payphones on lines that do not transmit the
requisite payphone-specific coding digits but gave the IXCs a choice for
computing the amount of compensation for payphones on LEC lines not transmitting
the payphone-specific coding digits of either accurately computing per-call
compensation from their databases or paying per-phone, flat-rate compensation
computed by multiplying the $0.284 per call rate by the nationwide average
number of 800 subscriber and access code calls placed from RBOC payphones for
corresponding payment periods. Accurate payments made at the flat rate are not
subject to subsequent adjustment for actual call counts from the applicable
payphone.

     On May 15, 1998, the Court again remanded the per-call compensation rate to
the FCC for further explanation without vacating the $0.284 per call rate. The
Court opined that the FCC had failed to explain adequately its derivation of the
$0.284 default rate. The Court stated that any resulting overpayment would be
subject to possible refund if warranted in the circumstances and directed the
FCC to conclude its proceedings within a six-month period from the effective
date of the Court's decision.

     In response to the Court's second remand, the FCC conducted further
proceedings and sought additional comment from interested parties to address the
relevant issues posed by the Court. On February 4, 1999, the FCC released the
Third Report and Order and Order on Reconsideration of the Second Report and
Order (the "1999 Payphone Order"), in which the FCC abandoned its efforts to
derive a "market-based" default dial-around compensation rate and instead
adopted a "cost-based" rate of $0.24 per dial-around call. Both PSPs and IXCs
petitioned the Court for review of the 1999 Payphone Order's determination of
the dial-around compensation rate. On June 16, 2000, the Court affirmed the 1999
Payphone Order setting a 24-cent dial-around compensation rate. On all the
issues, including those raised by the IXCs and the payphone providers, the Court
applied the "arbitrary and capricious" standard of review, and found that the
FCC's rulings were lawful and sustainable under that standard. As a result of
the Court's June 16, 2000 decision, the 24-cent dial-around compensation rate is
likely to remain in place until at least the end of 2001, when the FCC may
reexamine the rate. With respect to the Petition for Reconsideration of the 1999
Payphone Order filed with the FCC by the payphone providers, this Petition is
still pending and has yet to be ruled on by the FCC. In view of the Court's
affirmation of the 1999 Payphone Order, it is unlikely that the FCC will adopt
material changes to the key components of the Order pursuant to the pending
Reconsideration Petition, although no assurances can be given.

     On April 5, 2001, the FCC released an order that is expected to have a
significant impact on the obligations of telecommunications carriers to pay
dial-around compensation to PSPs. The effect of the decision is to clarify that
the first long distance carrier to handle a dial-around call originating from a
pay telephone has the obligation to track and pay compensation on the call,
regardless of whether other carriers may subsequently transport or complete the
call. Under the FCC ruling, implementation of this system modification is
scheduled to occur on November 27, 2001. The Company believes that this
modification to the dial-around compensation system will result in a significant
increase to the number of calls for which the Company is able to collect such
compensation. Because, however, the FCC ruling is potentially subject to
administrative reconsideration or judicial appeal and the system modification is
as yet untested, no assurances can be given as to the precise timing or
magnitude of revenue impact that may flow from the decision.


                                       15

<PAGE>

     The new 24-cent rate became effective April 21, 1999, and will serve as the
default rate through January 31, 2002. Pursuant to a FCC ruling that is still
pending reconsideration, the new rate will also be applied retroactively to the
period beginning on October 7, 1997, less a $0.002 amount to account for FLEX
ANI payphone tracking costs, for a net compensation of $0.238. The 1999 Payphone
Order deferred a final ruling on the interim period (November 7, 1996 to October
6, 1997) treatment to a later, as yet unreleased, order; however, it appears
that the $0.238 rate will be applied to the period November 7, 1996 to October
6, 1997. Upon establishment of the interim period rate, the FCC has further
ruled that a true-up may be made for all payments or credits (with applicable
interest) due and owing between the IXCs and the PSPs, including Davel, for the
payment period commencing on November 7, 1996 through the effective date of the
new $0.24 per call rate. It is possible that the final implementation of the
1999 Payphone Order, including resolution of this retroactive adjustment and the
outcome of any related administrative or judicial review, could have a material
adverse effect on the Company.

     The payment levels for dial-around calls prescribed in the 1996 and 1997
Payphone Orders significantly increase per-call dial-around compensation
revenues to the Company over the levels received prior to implementation of the
1996 Telecom Act (although the 1999 Payphone Order has now moderated those
increases). However, market forces and factors outside the Company's control
could significantly affect these per-call revenue increases. These factors
include the following: (i) the resolution by the FCC of the "true up" of the
initial interim period flat-rate and "per call" assessment periods, (ii) the
possibility of other administrative proceedings seeking to modify prospectively
the rate established by the 1999 Payphone Order or portions thereof, (iii) the
IXC's reaction to the FCC's recognition that existing regulations do not
prohibit an IXC from blocking 800 subscriber numbers from payphones in order to
avoid paying per-call compensation on such calls, (iv) ongoing technical or
other difficulties in the responsible carriers' ability and willingness to
properly track or pay for dial-around calls actually delivered to them, and (v)
changes in the Company's total volume of dial-around calls.

Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000

     For the three months ended September 30, 2001, total revenues decreased
approximately $8.8 million, or 27.2%, to approximately $23.3 million from
approximately $32.1 million in the same period of 2000. This decrease was
primarily attributable to the removal of unprofitable phones and lower call
volumes due to increased competition from the wireless communications industry,
resulting in lower average revenue per phone.

     Coin call revenues decreased approximately $4.5 million, or 21.7%, to
approximately $16.0 million in the three months ended September 30, 2001 from
approximately $20.5 million in the third quarter of 2000. The decrease in coin
call revenues was primarily attributable to a reduction in the number of average
payphones per month from approximately 69,600 phones for the quarter ended
September 30, 2000 to approximately 61,700 for the quarter ended September 30,
2001. This is the result of the Company's ongoing strategy to remove
unprofitable payphones. In addition, revenues were impacted by lower call
volumes on the Company's payphones resulting from increased competition from
wireless communication services and changes in call traffic.

     Non-coin call revenues, which is comprised primarily of dial-around revenue
and long distance revenue, decreased approximately $4.3 million, or 37.0%, to
approximately $7.3 million in the three months ended September 30, 2001 from
approximately $11.6 million in the three months ended September 30, 2000. The
decrease was primarily attributable to the removal of unprofitable payphone
locations and lower call volumes on the Company's payphones resulting from the
growth in wireless communication services and changes in call traffic.
Dial-around revenue decreased approximately $1.0 million, to approximately $4.8
million in the three months ended September 30, 2001 from approximately $5.8
million in the third quarter of 2000. The dial-around decrease is primarily
attributable to the net removal of approximately 7,900 unprofitable payphones,
or 11.3% of the total payphone base over the 12-month period, and lower calls
per payphone due to increased competition


                                       16

<PAGE>

from wireless services. Long-distance revenues decreased approximately $3.3
million, to approximately $2.5 million in the third quarter of 2001 from
approximately $5.8 million in the three months ended September 30, 2000. The
decrease is attributable to fewer payphones in service, fewer long distance
calls made per payphone, and reduced call time per call.

     Telephone charges decreased approximately $2.3 million, or 23.6%, to
approximately $7.3 million for the quarter ended September 30, 2001 from
approximately $9.6 million in the three months ended September 30, 2000.
Telephone charges were favorably affected by a $0.7 million reduction resulting
from the refund of prior charges in Louisiana due to a regulatory ruling and
were offset by a $0.7 million increase associated with the settlement of a
dispute with MCI. The Company is currently negotiating contracts and pursuing
additional regulatory relief that it believes will further reduce local access
charges on a per-phone basis, but is unable to estimate the impact of further
telephone charge reductions at this time.

     Commissions decreased approximately $3.3 million, or 36.4%, to
approximately $5.8 million in the three months ended September 30, 2001 from
approximately $9.1 million in the three months ended September 30, 2000. The
decline was primarily due to the decline in revenues for the period. The Company
is actively reviewing its strategies related to contract renewals in order to
maintain its competitive position while retaining its customer base.

     Service, maintenance and network costs decreased approximately $2.1
million, or 26.3%, to approximately $5.9 million in the three months ended
September 30, 2001 from approximately $8.0 million in the three months ended
September 30, 2000. The decrease was primarily attributable to reductions in
headcount and wage related costs of approximately $1.1 million generated from
rationalization of field office expenses, increased geographic and route density
of the phones and the Company's ability to improve efficiency on servicing the
Company's payphones. Reductions in service and collection expenses of
approximately $0.6 million, vehicle servicing expenses of approximately $0.2
million, and field office expenses of approximately $0.2 million occurred as a
result of lower payphone count and field office reorganizations. Reductions of
$0.7 million in network costs were partially offset by a $0.5 million cost
increase associated with the settlement of a dispute with MCI.

     In the third quarter of 2001, the Company began implementing the PhoneTel
Merger servicing agreement initiatives with regard to the service, maintenance,
and network services. This resulted in the termination of 55 employees,
including skilled service technicians and field office support staff, late in
the third quarter. The Company did not experience material savings from this
initiative in the third quarter of 2001, due to the timing of employee
terminations and the payment of severance pay. The annualized savings for the
Company from these changes is expected to be approximately $2.2 million.

     Depreciation expense in the three months ended September 30, 2001 declined
to approximately $4.1 million from approximately $5.7 million recorded in the
three months ended September 30, 2000. Amortization expense in the three months
ended September 30, 2001 declined to approximately $0.4 million from
approximately $2.8 million recorded in the three months ended September 30,
2000. The decrease in depreciation and amortization expense is primarily
attributable to impairment charges that were taken in the fourth quarter of 2000
for installed phones, goodwill and site contract intangibles.

     Selling, general and administrative expenses decreased approximately $3.7
million, or 52.4%, to approximately $3.4 million in the three months ended
September 30, 2001 from approximately $7.1 million in the three months ended
September 30, 2000. The decrease in expense was attributable to a reduction in
salaries and salary-related expenses of approximately $0.9 million, which
occurred as a result of continued rationalization of overhead expenses in light
of the declining revenue base. In addition, professional fees declined
approximately $1.2 million, bad debt expense declined $1.4 million, and
reductions totaling approximately $0.2 million in a


                                       17

<PAGE>

variety of other areas such as travel, regulatory compliance, insurance, and
property and franchise taxes were also realized.

     Interest expense in the three months ended September 30, 2001 increased
approximately $0.4 million, or 5.3%, compared to the prior-year period, to
approximately $6.9 million in the third quarter of 2001 from approximately $6.5
million in the third quarter of 2000. The increase in recorded interest is the
result of higher average outstanding debt on which interest was computed in the
third quarter of 2001 compared with the third quarter of 2000.

     Net loss decreased approximately $6.6 million, or 39.0%, to approximately
$10.3 million in the three months ended September 30, 2001 from approximately
$16.9 million in the third quarter of 2000.

Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000

     For the nine months ended September 30, 2001, total revenues decreased
approximately $33.8 million, or 32.6%, to approximately $70.1 million from
approximately $103.9 million in the same period of 2000. This decrease was
primarily attributable to the removal of unprofitable payphones and lower call
volumes due to increased competition from the wireless communications industry,
resulting in lower average revenue per payphone.

     Coin call revenues decreased approximately $16.9 million, or 26.2%, to
approximately $47.4 million in the nine months ended September 30, 2001 from
approximately $64.3 million in the first nine months of 2000. The decrease in
coin call revenues was primarily attributable to a reduction in the number of
average payphones per month from approximately 73,400 phones for the nine months
ended September 30, 2000 to approximately 64,000 for the nine months ended
September 30, 2001. This is the result of the Company's ongoing strategy to
remove unprofitable payphones, and from lower call volumes on the Company's
payphones resulting from increased competition from wireless communication
services and changes in call traffic.

     Non-coin call revenues, which is comprised primarily of dial-around revenue
and long distance revenue, decreased approximately $17.0 million, or 42.8%, to
approximately $22.7 million in the nine months ended September 30, 2001 from
approximately $39.7 million in the nine months ended September 30, 2000. The
decrease was primarily attributable to the removal of unprofitable payphone
locations and lower call volumes on the Company's payphones resulting from the
growth in wireless communication services and changes in call traffic.
Dial-around revenue decreased approximately $7.4 million, to approximately $14.8
million in the nine months ended September 30, 2001 from approximately $22.2
million in the first nine months of 2000. The dial-around decrease is primarily
attributable to the net removal of approximately 9,400 unprofitable payphones,
or 12.8% of the total payphone base over the 12-month period, and lower calls
per payphone due to increased competition from wireless services. Long-distance
revenues decreased approximately $8.3 million, to approximately $7.9 million in
the first nine months of 2001 from approximately $16.2 million in the nine
months ended September 30, 2000. The decrease is attributable to fewer payphones
in service, fewer long distance calls made per payphone, and reduced call time
per call.

     Telephone charges decreased approximately $6.3 million, or 21.5%, to
approximately $23.0 million for the nine months ended September 30, 2001 from
approximately $29.3 million in the nine months ended September 30, 2000. Such
charges, however, increased as a percentage of revenues to 32.9% in the first
nine months of 2001 from 28.2% in the first nine months of 2000, due to the
decline in revenues. Average monthly telephone bill charges were $39.99 per
phone in the first nine months of 2001 compared with $44.39 per phone in the
first nine months of 2000. Telephone charges for the nine months ended September
30, 2001 would have been impacted by a $2.7 million refund received in the first
quarter of the year from BellSouth for prior period charges pursuant to a
recently adopted Tennessee `New Service Test'. However, the Company has not yet


                                       18

<PAGE>

recognized the refund in its Statement of Operations due to the pending court
ruling on BellSouth's appeal. Telephone charges were favorably affected in the
first nine months of 2001 by the receipt of $2.1 million of refunds from other
local LECs which complied with the NST orders relating to prior year telephone
charges and were partially offset by a $0.7 million increase associated with the
settlement of a dispute with MCI. The Company is currently negotiating contracts
and pursuing additional regulatory relief that it believes will further reduce
local access charges on a per-phone basis, but is unable to estimate the impact
of further telephone charge reductions at this time.

     Commissions decreased approximately $8.1 million, or 31.7%, to
approximately $17.6 million in the nine months ended September 30, 2001 from
approximately $25.7 million in the nine months ended September 30, 2000.
Commissions for the nine months ended September 30, 2001 included favorable
adjustments of $0.6 million resulting from a change in a contract. Commissions
as a percentage of revenues have begun to rise due to revenue mix changes as
well as the removal of payphones that had lower commission rates. The shift in
revenue mix to the higher commissioned sources has given rise to higher average
commissions per phone. The Company is actively reviewing its strategies related
to contract renewals in order to maintain its competitive position while
retaining its customer base.

     Service, maintenance and network costs decreased approximately $7.3
million, or 29.3%, to approximately $17.5 million in the nine months ended
September 30, 2001 from approximately $24.8 million in the nine months ended
September 30, 2000. The decrease was primarily attributable to reductions in
headcount and wage related costs of approximately $3.8 million generated from
rationalization of field office expenses, increased geographic and route density
of the phones and the Company's ability to improve efficiency on servicing the
Company's payphones. Reductions in service and collection expenses of
approximately $1.4 million, vehicle servicing expenses of approximately $0.6
million and field office expenses of approximately $0.4 million occurred as a
result of lower phone count and field office reorganizations. Network access
savings of $2.2 million were partially offset by a $0.5 million network expense
increase associated with the settlement of a dispute with MCI, increased
property taxes of $0.4 million and increases of $0.2 million in a variety of
other expense items.

     In the third quarter of 2001, the Company began implementing the PhoneTel
Merger servicing agreement initiatives with regard to the service, maintenance,
and network services. This resulted in the termination of 55 employees,
including skilled service technicians and field office support staff, late in
the third quarter. The Company did not experience material savings from this
initiative in the third quarter of 2001, due to the timing of employee
terminations and the payment of severance pay. The annualized savings for the
Company from these changes is expected to be approximately $2.2 million.

     Depreciation expense in the nine months ended September 30, 2001 declined
to approximately $12.7 million from approximately $15.5 million recorded in the
nine months ended September 30, 2000. Amortization expense in the nine months
ended September 30, 2001 declined to approximately $1.0 million from
approximately $10.6 million recorded in the nine months ended September 30,
2000. The decrease in depreciation and amortization expense is primarily
attributable to impairment charges that were taken in the fourth quarter of 2000
for installed phones, goodwill, and site contract intangibles.

     Selling, general and administrative expenses decreased approximately $6.7
million, or 41.1%, to approximately $9.7 million in the nine months ended
September 30, 2001 from approximately $16.4 million in the nine months ended
September 30, 2000. The decrease in expense was primarily attributable to a
reduction in salaries and salary-related expenses of approximately $2.5 million,
which occurred as a result of continued rationalization of overhead expenses in
light of the declining revenue base. In addition, there were decreases in
professional fees of $1.5 million, travel expenses of $0.3 million, association
and regulatory compliance expenses of $0.5 million, property taxes of $0.2
million, and bad debts of $1.4 million. A variety of other expense items
provided a reduction of $0.3 million as compared to the same period last year.


                                       19

<PAGE>

     Interest expense in the nine months ended September 30, 2001 increased
approximately $2.3 million, or 11.8%, compared to the prior-year period, to
approximately $21.9 million in the first nine months of 2001 from approximately
$19.6 million in the first nine months of 2000. The increase in recorded
interest is the result of higher average outstanding debt on which interest was
computed in the first nine months of 2001 compared with the first nine months of
2000.

     Net loss decreased approximately $4.8 million, or 12.8%, to approximately
$33.1 million in the nine months ended September 30, 2001 from approximately
$37.9 million in the first nine months of 2000.


                                       20

<PAGE>

Liquidity and Capital Resources

Cash Flows

     Historically, the Company's primary sources of liquidity have been cash
from operations, borrowings under various credit facilities and, periodically,
proceeds from the issuance of common stock and proceeds from the issuance of
preferred stock. There was no stock issued in the most recent two years, and
borrowings under the Company's credit facilities ceased after the third quarter
of 2000.

     The Company's payphone revenues by operating region are affected by
seasonal variations, geographic distribution of payphones, removal of
unprofitable phones and type of location. Because many of the payphones are
located outdoors, weather patterns have differing effects on the Company's
results depending on the region of the country where the payphones are located.
Payphones located in the southern United States produce substantially higher
call volume in the first and second quarters than at other times during the
years, while the Company's payphones throughout the midwestern and eastern
United States produce their highest call volumes during the second and third
quarters.

     In the nine months ended September 30, 2001, operating activities provided
approximately $2.0 million of net cash compared to the use of approximately $6.6
million of net cash in the similar period last year. During the nine months
ended September 30, 2001, net cash was favorably affected by a decrease of $3.0
million in trade receivables, the amortization of $2.8 million of deferred
financing charges, and increases of $0.1 million from the disposal of fixed
assets, $18.6 million in accrued interest, and $13.8 million in depreciation and
amortization. Net cash was reduced by the decrease in the allowance for bad
debts of $1.5 million, payment for contracts of $0.5 million, and increases in
other assets of $0.4 million, and reductions of $0.1 million in deferred revenue
and in accounts payable and other accrued liabilities of $0.7 million.

     Capital expenditures for the nine months ended September 30, 2001 were $0.5
million compared to $3.3 million in the same period last year. The current
strategy of removing under-performing phones, combined with the existence of an
extensive inventory of phone components, allows for minimal capital equipment
expenditures.

     The Company's principal source of liquidity in the nine months ended
September 30, 2001 came from cash flow generated from operating activities. The
Company's primary uses of liquidity are to provide working capital and to meet
debt service requirements. At September 30, 2001, the Company no longer had
borrowing availability through a revolving line of credit under the Senior
Credit Facility. See "-Credit Agreement" section below for a discussion of the
amendments that have restructured the Senior Credit Facility and a description
of current indebtedness. All outstanding debt in connection with the senior
credit facility has been reclassified to current liabilities. The Company made
principal payments of $5.2 million and borrowed $17.0 under the Company's Senior
Credit Facility in the nine months ended September 30, 2000. A principal payment
of $1.1 million was paid in April 2001 as required under the Sixth Amendment to
the Senior Credit Facility. A required payment of $2.2 million was not made in
July 2001, nor was a required payment of $3.3 million made in October 2001 as
previously required under such Sixth Amendment.

Credit Agreement

     In connection with the Peoples Telephone Merger, the Company entered into a
senior credit facility ("Senior Credit Facility") with Bank of America, formerly
known as NationsBank, N.A. (the "Administrative Agent"), and the other lenders
named therein. The Senior Credit Facility provides for borrowings by Davel from
time to time of up to $245.0 million, including a $45 million revolving
facility, for working capital and other corporate purposes.


                                       21

<PAGE>

     Indebtedness of the Company under the Senior Credit Facility is secured by
substantially all of its and its subsidiaries' assets, including but not limited
to their equipment, inventory, receivables and related contracts, investment
property, computer hardware and software, bank accounts, and all other goods and
rights of every kind and description and is guaranteed by Davel and all its
subsidiaries.

     The Company's borrowings under the original Senior Credit Facility bore
interest at a floating rate and may be maintained as Base Rate Loans (as defined
in the Senior Credit Facility) or, at the Company's option, as Eurodollar Loans
(as defined in the Senior Credit Facility). Base Rate Loans bear interest at the
Base Rate (defined as the higher of (i) the applicable prime lending rate of
Bank of America or (ii) the Federal Reserve reported certificate of deposit rate
plus 1%). Eurodollar Loans bear interest at the Eurodollar Rate (as defined in
the Senior Credit Facility).

     The Company is required to pay the lenders under the Senior Credit Facility
a commitment fee, payable in arrears on a quarterly basis, on the average unused
portion of the Senior Credit Facility during the term of the facility. The
Company is also required to pay an annual agency fee to the Agent. In addition,
the Company was also required to pay an arrangement fee for the account of each
bank in accordance with the banks' respective pro rata share of the Senior
Credit Facility. The Administrative Agent and the other lenders will receive
such other fees as have been separately agreed upon with the Administrative
Agent.

     The Senior Credit Facility requires the Company to meet certain financial
tests and contains certain covenants that, among other things, limit the
incurrence of additional indebtedness, prepayments of other indebtedness, liens
and encumbrances and other matters customarily restricted in such agreements.

First Amendment

     In the first quarter of 1999, the Company gave notice to the Administrative
Agent that lower than expected performance in the first quarter of 1999 would
result in the Company's inability to meet certain financial covenants contained
in the Senior Credit Facility. On April 8, 1999, the Company and the Lenders
agreed to the First Amendment to Credit Agreement and Consent and Waiver (the
"First Amendment") which waived compliance, for the fiscal quarter ended March
31, 1999, with the financial covenants set forth in the Senior Credit Facility.
In addition, the First Amendment waived any event of default related to two
acquisitions made by the Company in the first quarter of 1999, and waived the
requirement that the Company deliver annual financial statements to the Lenders
within 90 days of December 31, 1998, provided that such financial statements be
delivered no later than April 15, 1999. The First Amendment contained amendments
that provided for the following:

     .    Amendment of the applicable percentages for Eurodollar Loans for the
          period between April 1, 1999 and June 30, 2000 at each pricing level
          to 0.25% higher than those in the previous pricing grid

     .    Payment of debt from receipt of dial-around compensation accounts
          receivable related to the period November 1996 through October 1997

     .    Further limitations on permitted acquisitions as defined in the Credit
          Agreement through June 30, 2000

     .    During the period April 1, 1999 to June 30, 2000, required lenders'
          consent for the making of loans or the issuance of letters of credit
          if the sum of revolving loans outstanding plus letter of credit
          obligations outstanding exceeds $50.0 million

     .    The introduction of a new covenant to provide certain operating data
          to the Lenders on a monthly basis


                                       22

<PAGE>

     .    Increases in the maximum allowable ratio of funded debt to EBITDA
          through the quarter ended June 30, 2000

     .    Decreases in the minimum allowable interest coverage ratio through the
          quarter ended June 30, 2000

     .    Decreases in the minimum allowable fixed charge coverage ratio through
          the quarter ended June 30, 2000.

     The First Amendment also places limits on capital expenditures and required
the payment of an amendment fee equal to the product of the Lender's commitment
multiplied by 0.35%.

Second Amendment

     In the first quarter of 2000, the Company gave notice to the Administrative
Agent that lower than expected performance in the first quarter of 2000 would
result in the Company's inability to meet certain financial covenants contained
in the Senior Credit Facility. Effective March 9, 2000, the Company and the
Lenders agreed to the Second Amendment to Credit Agreement and Consent and
Waiver (the "Second Amendment"), which waived certain covenants through January
15, 2001. In exchange for the covenant relief, the Company agreed to a lowering
of the available credit facility to $245 million (through a permanent reduction
of the revolving line of credit to $45 million), placement of a block on the
final $10 million of borrowing under the revolving credit facility (which
requires that all of the Lenders be notified in order to access the final $10.0
million of availability on that facility), a fee of 35 basis points of the
Lenders commitment and a moratorium on acquisitions. The Second Amendment
contained amendments that provided for the following:

     .    Amendment of the applicable percentages for Eurodollar Loans to:

          (a)  3.50% for all Revolving Loans which are Eurodollar Loans, all
               Tranche A Term Loans which are Eurodollar Loans, and all Letter
               of Credit Fees;

          (b)  4.25% for all Tranche B Term Loans which are Eurodollar Loans;

          (c)  2.00% for all Revolving Loans which are Base Rate Loans and all
               Tranche A Term Loans which are Base Rate Loans;

          (d)  2.75% for all Tranche B Term Loans which are Base Rate Loans; and

          (e)  0.75% for all Commitment Fees;

     .    After March 9, 2000, introduction of a new covenant requiring lenders'
          consent for the making of loans or the issuance of letters of credit
          if the sum of revolving loans outstanding plus letter of credit
          obligations outstanding exceeds $35.0 million;

     .    The addition of a new covenant to provide financial statements to the
          Lenders on a monthly basis;

     .    Increases in the maximum allowable ratio of funded debt to EBITDA
          through the maturity date of the loan;

     .    Decreases in the minimum allowable interest coverage ratio through the
          maturity date of the loan;

     .    Decreases in the minimum allowable fixed charge coverage ratio through
          the maturity date of the loan;

     .    Decreases in permitted capital expenditures to $10 million annually;
          and


                                       23

<PAGE>

     .    Reduction of the maximum interest period for Eurodollar loans to 30
          days.

Third Amendment

     In the second quarter of 2000, the Company gave notice to the
Administrative Agent that lower than expected performance during the first six
months of 2000 would result in the Company's inability to meet certain financial
covenants contained in the Senior Credit Facility as well as the June 30, 2000
debt amortization and interest payments. On June 22, 2000, the Company and the
Lenders agreed to the Third Amendment to Credit Agreement (the "Third
Amendment"), which eliminated the financial covenant compliance test for the
fiscal quarter ended June 30, 2000, as was set forth in the Senior Credit
Facility. The Third Amendment also provided for the following:

     .    Term Loan A amortization payments totaling $5.0 million scheduled for
          June 30, 2000 would be due on September 30, 2000 together with the
          $5.0 million amortization payment scheduled for that date. The total
          Term A amortization payments due on September 30, 2000 are $10.0
          million;

     .    Term Loan B amortization payments totaling approximately $0.2 million
          scheduled for June 30, 2000 would be due on September 30, 2000
          together with the approximately $0.2 million amortization payment
          scheduled for that date. The total Term B amortization payments due on
          September 30, 2000 are approximately $0.5 million;

     .    Interest payments due on June 30, 2000 became due and were paid on
          July 10, 2000; and

     .    All interest otherwise due and payable on each interest payment date
          occurring after June 30, 2000 and before September 30, 2000 continued
          to accrue on the applicable loans from and after such interest payment
          date and were to have been due and payable in arrears on September 30,
          2000.

Fourth Amendment

     In the third quarter of 2000, the Company gave notice to the Administrative
Agent that lower than expected performance during the first nine months of 2000
would result in the Company's inability to meet certain financial covenants
contained in the Senior Credit Facility as well as the September 30, 2000 debt
amortization and interest payments. On September 28, 2000, the Company and the
Lenders agreed to the Fourth Amendment to Credit Agreement, which eliminated the
financial covenants in their entirety with respect to all periods ending on and
after September 30, 2000 and also provided for the following:

     .    Term Loan A, Term Loan B and Revolving Loan amortization payments
          totaling $15.7 million were to have been due on January 12, 2001. In
          addition, amortization payments of approximately $7.7 million are due
          on each of March 31, June 30, September 30 and December 31, 2001, and
          the balance of the then outstanding principal amount of all loan
          obligations is due on January 11, 2002;

     .    Interest payments otherwise due and payable on any interest payment
          date prior to January 12, 2001 will continue to accrue were to have
          been payable in arrears on January 12, 2001;

     .    Applicable percentages for adjusted LIBOR interest rates after
          September 29, 2000 were generally lowered from those set forth in the
          Third Amendment to 2.75% for all Loans, except that rates will
          continue to equal 3.50% for all Letter of Credit Fees and 0.75% for
          all Commitment Fees;

     .    Positive net cash on hand in excess of $2.0 million at the end of each
          month will be paid to the Lenders as a prepayment of the Loans;


                                       24

<PAGE>

     .    The Revolving Loan commitment was terminated;

     .    Capital expenditures for the period October 1, 2000 to January 12,
          2001 were limited to $400,000; and

     .    The provision regarding the application of prepayments was modified,
          and a new provision was added requiring the Company to submit to the
          Lenders bi-weekly cash flow forecasts and a revised business plan for
          the 2001 fiscal year.

Fifth Amendment

     On November 29, 2000, the Borrower requested that the Lenders waive its
noncompliance with the requirements of the Credit Agreement resulting from the
Borrower's non-delivery of a revised business plan to the Lenders on or before
November 15, 2000. In exchange, the Borrower agreed to amend certain provisions
of the Credit Agreement that had permitted the Borrower to dispose of certain
property outside the ordinary course of business and to make certain investments
outside the ordinary course of business so as to require, in each case, the
Lenders' prior written approval for any such disposition or investment.

Sixth Amendment

     In the fourth quarter of 2000, the Company gave notice to the new
Administrative Agent that the Company would not be able to make the January 12,
2001 debt amortization and interest payments. On March 23, 2001, the Company and
the Lenders entered into the Sixth Amendment to Credit Agreement and Waiver,
effective as of January 12, 2001 (the "Sixth Amendment"), which provided for the
following:

     .    Principal amortization payments would be made in the amounts of $1.1
          million on April 15, 2001 (which was timely paid), $2.2 million on
          July 15, 2001 and $3.3 million on October 15, 2001;

     .    The remaining outstanding principal amount of all loans, together with
          all accrued and unpaid interest, will be due on January 11, 2002;

     .    The Company will provide monthly budget reconciliation reports to the
          Lenders;

     .    The Company will comply with an agreed-upon budget for expenses in
          2001;

     .    The Company will be subject to a limit on capital expenditures and
          certain location signing bonuses in 2001 and a minimum EBITDA covenant
          for 2001; and

     .    The Company agreed to the substitution of a new administrative agent
          for the Lenders, to pay such new agent a monthly fee of $30,000 and to
          pay certain earned fees of the professional advisors to the Lenders.

     In the second quarter of 2001, the Company gave notice to the
Administrative Agent that the Company would not be able to make the July 15,
2001 debt amortization payment of $2.2 million. In the third quarter of 2001,
the Company gave notice to the Administrative Agent that (i) the Company was out
of compliance with the minimum EBITDA covenant for May and June 2001 and,
because such covenant is cumulative, expected that it would fail to comply with
such covenant through December 2001 and (ii) expected to be unable to make the
$3.3 million amortization payment on October 15, 2001, as required by the Sixth
Amendment. The Company is in discussions with its lenders regarding a waiver of
the requirements to make the July 15 and


                                       25

<PAGE>

October 15, 2001 amortization payments, effective as of July 15, 2001, and an
amendment to the minimum EBITDA covenant, effective as of May 2001. Although
execution of such a waiver and amendment has been delayed by negotiations
concerning the PhoneTel Merger, the Company continues to believe that it is
likely that the Company and its Lenders will execute a written agreement that
will prevent the occurrence of any default with respect to such matters.

     The Senior Credit Facility contains customary events of default, including
without limitation, payment defaults, defaults for breaches of representations
and warranties, covenant defaults, cross-defaults to certain other indebtedness,
defaults for certain events of bankruptcy and insolvency, judgment defaults,
failure of any guaranty or security document supporting the Senior Credit
Facility to be in full force and effect, and defaults for a change of control of
the Company.

     The Company incurred losses of approximately $111.5 million and $33.1
million for the year ended December 31, 2000 and the nine months ended September
30, 2001, respectively. These losses were primarily attributable to increased
competition from providers of wireless communication services and the impact on
the Company's revenue of certain regulatory changes. As of September 30, 2001,
the Company had a working capital deficit of $275.9 million and its liabilities
exceeded its assets by $219.5 million. In addition, the Company was unable to
meet its debt principal payments of $15.7 million and interest payments of $12.5
million, which would have been due and payable on January 12, 2001 but for the
Company's execution of the Sixth Amendment, which called for interim principal
payments of $1.1 million due on April 15, 2001 (which was made), $2.2 million
due on July 15, 2001 (which has not yet been made), $3.3 million due on October
15, 2001 (which has not yet been made), and the remainder due on January 11,
2002. In the absence of improved operating results or cash flows, modifications
to the Senior Credit Facility, or the completion of possible strategic
combinations (including the PhoneTel Merger, as discussed in Note 8 to the
Consolidated Financial Statements), the Company will face liquidity problems and
might be required to dispose of material assets or operations to fund its
operations and to meet its debt service and other obligations. There can be no
assurances as to the ability of the Company to execute the PhoneTel Merger, or
any asset sales, or the timing thereof or the proceeds that the Company could
realize from such sales. As a result of these matters, substantial doubt exists
about the Company's ability to continue as a going concern.

     The Company's plans to increase liquidity include efforts to substantially
reduce costs, including through the PhoneTel Merger or alternative strategic
transactions. Management believes this will result in expansion of its market
presence and further leveraging of its infrastructure. In order to pursue this
strategy, the Company will need to obtain additional modifications to the Senior
Credit Facility, including forgiveness of a portion of its debt. The Company may
also need to obtain additional debt or equity financing. There can be no
assurance that such debt modifications or financings will be available to the
Company, or that they will be available on terms acceptable to the Company.
Further, any additional equity financing may be dilutive to existing
shareholders.

Impact of Inflation

     Inflation is not considered a material factor affecting the Company's
business. General operating expenses such as salaries, employee benefits and
occupancy costs are, however, subject to normal inflationary pressures.

Seasonality

     The Company's revenues from its payphone operation regions are affected by
seasonal variations, geographic distribution of payphones and type of location.
Because many of the Company's payphones are


                                       26

<PAGE>

located outdoors, weather patterns have differing effects on the Company's
results depending on the region of the country where they are located. Most of
the Company's payphones in the southeastern United States produce substantially
higher call volume in the first and second quarters than at other times during
the year, while the Company's payphones throughout the midwestern and eastern
United States produce their highest call volumes during the second and third
quarters. While the aggregate effect of the variations in different geographical
regions tend to counteract the effect of one another, the Company has
historically experienced higher revenue and income in the second and third
quarters than in the first and fourth quarters. Changes in the geographical
distribution of its payphones may in the future result in different seasonal
variations in the Company's results.

Recent Accounting Pronouncements

     On July 20, 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141 (SFAS No. 141), "Business
Combinations", and No. 142 (SFAS No. 142), "Goodwill and Other Intangible
Assets." SFAS No. 141 addresses financial accounting and reporting for goodwill
and other intangible assets acquired in a business combination at acquisition.
SFAS No. 141 requires the purchase method of accounting to be used for all
business combinations initiated after June 30, 2001; establishes specific
criteria for the recognition of intangible assets separately from goodwill; and
requires unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized). SFAS No.142
addresses financial accounting and reporting for intangible assets acquired
individually or with a group of other assets (but not those acquired in a
business combination) at acquisition. SFAS No. 142 also addresses financial
accounting and reporting for goodwill and other intangible assets subsequent to
their acquisition. SFAS No. 142 provides that goodwill and intangible assets
which have indefinite useful lives will not be amortized but rather will be
tested at least annually for impairment. It also provides that intangible assets
that have finite useful lives will continue to be amortized over their useful
lives, but those lives will no longer be limited to forty years. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 are
effective for fiscal years beginning after December 15, 2001. The Company will
adopt SFAS No. 142 beginning January 1, 2002. The Company is considering the
provisions of SFAS No. 141 and No. 142 and at present has not determined the
impact of adopting SFAS No 141 and SFAS No. 142.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to certain market risks inherent in the Company's
financial instruments that arise from transactions entered into in the normal
course of business. The Company is subject to variable interest rate risk on its
existing Senior Credit Facility and any future financing requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

     In connection with the provisions of its Senior Credit Facility and the
Company's overall interest rate management objectives, the Company utilizes
derivative financial instruments to reduce its exposure to market risks from
significant increases in interest rates. The Company's strategy is to purchase
interest rate swaps, collars and caps from large financial institutions to limit
the impact of increases in interest rates on the Company's variable rate
long-term debt.

     The Company has an interest rate collar agreement with a large financial
institution that terminates in February 2002. The notional amount of the
interest rate collar is $25 million and the agreement has a cap rate of 6.5% and
a floor rate of 4.8% based on the U.S. one month LIBOR rate.


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<PAGE>

     Based upon the Company's variable rate indebtedness and weighted average
interest rates at September 30, 2001, a ten percent (or one thousand basis
points) increase in market interest rates would decrease future earnings and
cash flows by approximately $6.6 million per quarter. A ten percent (or one
thousand basis points) decrease in market interest rates would increase future
earnings and cash flows by approximately $5.1 million per quarter.

     These amounts were determined by considering the impact of hypothetical
interest rates and equity prices on the Company's financial instruments. These
analyses do not consider the effects of the reduced level of overall economic
activity that could exist in such an environment. Further, in the event of a
change of such magnitude, management would likely take actions to further
mitigate its exposure to the change. However, due to the uncertainty of specific
actions that would be taken and their possible effects, this analysis assumes no
changes in the Company's financial arrangements or capital structure.


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<PAGE>

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     In December 1995, Cellular World, Inc. filed suit in Dade County Circuit
Court against the Company's affiliates, Peoples Telephone and PTC Cellular,
Inc., alleging tortious interference with Cellular World's trade secrets. The
matter proceeded to trial, during which the Company and Cellular World agreed to
settle and resolve the dispute in its entirety. Pursuant to the parties'
agreement, the Company agreed to pay Cellular World a total of $1.5 million. Due
to the Company's subsequent default under the settlement agreement, the parties
entered into discussions for purposes of negotiating a revised payment schedule.
Notwithstanding the parties' negotiations, on April 12, 2001, Cellular World
obtained a judgment in the amount of $750,000 plus interest in accordance with
the settlement agreement. On or about June 11, 2001, the parties agreed to a
payment schedule, and, on or about October 15, 2001, the Company fully satisfied
the judgment.

     On September 29, 1998, the Company announced that it was exercising its
contractual rights to terminate a merger agreement (the "Original Davel/PhoneTel
Merger Agreement") with PhoneTel, based on breaches of representations,
warranties and covenants by PhoneTel. On October 1, 1998, the Company filed a
lawsuit in Delaware Chancery Court seeking damages, rescission of the Original
Davel/PhoneTel Merger Agreement and a declaratory judgment that such breaches
occurred. On October 27, 1998, PhoneTel answered the complaint and filed a
counterclaim against the Company alleging that the Original Davel/PhoneTel
Merger Agreement had been wrongfully terminated. At the same time, PhoneTel also
filed a third party claim against Peoples Telephone (acquired by the Company on
December 23, 1998) alleging that Peoples Telephone wrongfully caused the
termination of the Original Davel/PhoneTel Merger Agreement. The counterclaim
and third party claim seek specific performance by the Company of the
transactions contemplated by the Original Davel/PhoneTel Merger Agreement and
damages and other equitable relief from the Company and Peoples Telephone. The
Company and PhoneTel currently anticipate settling this litigation in connection
with the announced proposed combination of the companies.

     In December 1999, the Company and its affiliate Telaleasing Enterprises,
Inc. were sued in the United States District Court, Central District of
California, by Telecommunications Consultant Group, Inc. ("TCG") and U.S.
Telebrokers, Inc. ("UST"), two payphone consulting companies which allege to
have assisted the Company in obtaining a telephone placement agreement with CSK
Auto, Inc. The suit alleges that the Company breached its commission agreement
with the plaintiffs based on the Company's alleged wrongful rescission of its
agreement with CSK Auto, Inc. Plaintiffs' amended complaint alleges damages in
excess of $700,000. The Company moved to dismiss the complaint, and, on August
24, 2000, the Court denied the Company's motion. The Company subsequently
answered the complaint and asserted a counterclaim, seeking declaratory relief.
On October 13, 2000, plaintiffs answered the counterclaim, denying its material
allegations. The Company, during a mediation conference held on October 29,
2001, agreed to a confidential settlement of this case, pursuant to which the
case would be dismissed with prejudice in exchange for payments to the
plaintiffs, the sum of which was not material to the Company and was recorded in
the third quarter.

     In March 2000, the Company and its affiliate, Telaleasing Enterprises,
Inc., were sued in a related action in Maricopa County, Arizona Superior Court
by CSK Auto, Inc. ("CSK"). The suit alleges that the Company breached a location
agreement between the parties. CSK's complaint alleges damages in excess of $5
million. The Company removed the case to the U.S. District Court for Arizona and
moved to have the matter transferred to facilitate consolidation with the
related case in California brought by TCG and UST. On October 16, 2000, the U.S.
District Court for Arizona denied the Company's transfer motion and ordered the
case remanded back to Arizona state court. On November 13, 2000, the Company
filed its Notice of Appeal of


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<PAGE>

the remand order to the United States Court of Appeals for the Ninth Circuit.
The appeal and underlying suit are in their initial stages. Discovery is now
underway. The Company intends to vigorously defend itself in the case. While the
Company believes it possesses certain meritorious defenses to the claims, the
matter remains in its initial stages. Accordingly, the Company cannot at this
time predict its likelihood of success on the merits.

     On or about December 15, 2000, the Company filed and served its Amended
Complaint against LDDS WorldCom, Inc., MCI WorldCom Network Services, Inc., MCI
WorldCom Communications, Inc., and MCI WorldCom Management Company, Inc.
(collectively "Defendants"), claiming a violation of the Telecom Act and breach
of contract and seeking damages and equitable and injunctive relief associated
with Defendants' wrongful withholding of approximately $3.1 million in
dial-around compensation due to the Company, based upon an alleged, unrelated
indebtedness. Although the Company believed it possessed meritorious claims in
the case, given the uncertainty of litigation, the parties agreed at a mediation
conference to a settlement agreement, which effected, in exchange for
consideration paid to the Company, the dismissal of this suit and preserved the
Company's Telecom Act claim for prosecution in an action currently pending in
another forum. On July 23, 2001, the Court dismissed the matter.

     In February 2001, Picus Communications, LLC, a debtor in Chapter 11
bankruptcy in the United States Bankruptcy Court for the Eastern District of
Virginia, brought suit against the Company and its wholly owned subsidiary,
Telaleasing Enterprises, Inc., in the United States District Court for the
Eastern District of Virginia, claiming unpaid invoices of over $600,000 for
local telephone services in Virginia, Maryland, and the District of Columbia.
The Company sought relief from the bankruptcy court to assert claims against
Picus and answered Picus' complaint in the district court, denying its material
allegations. On or about April 2, 2001, Picus moved the district court to
dismiss its case and indicated that it may file its claim as an adversary
proceeding with the bankruptcy court. As of the date hereof, Picus has yet to do
so. In such an event, the Company intends to reassert its counterclaim in
bankruptcy court. On March 13, 2001, the Company filed a proof of claim in the
bankruptcy court to recover damages based on Picus's breach of contract and
failure to secure and pay federally mandated dial-around compensation for the
Company's benefit. On September 21, 2001, the Company filed an application for
administrative payment with the bankruptcy court seeking approximately $1.5
million in post-petition damages incurred by the Company as a result of Picus's
actions. The Company believes it has meritorious defenses and counterclaims
against Picus and intends to vigorously defend itself and pursue recovery from
Picus on its counterclaims. The Company cannot at this time predict its
likelihood of success on the merits.

     The Company is involved in other litigation arising in the usual course of
business which it believes will not materially affect its financial position,
results of operations, or liquidity.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  No exhibits are being filed with this Report.

     (b)  The Company did not file any Current Report on Form 8-K during the
          quarter ended September 30, 2001.


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SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.

                                  DAVEL COMMUNICATIONS, INC.

Date: November 14, 2001           /s/ MARC S.  BENDESKY
                                  ---------------------

                                  Marc S. Bendesky
                                  Chief Financial Officer

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