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


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q


                 (X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1998

                                       OR

                ( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                           Commission File No. 1-10588


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

    Delaware                                                  75-1993841
(State or other jurisdiction of                           (I.R.S. Employer
 incorporation or organization)                         Identification number)

                            2155 Chenault, Suite 410
                              Carrollton, TX 75006
                    (Address of Principal Executive Offices)

                                 (972) 416-0022
              (Registrant's telephone number, including area code)


Indicate by check mark  whether the  Registrant  (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities  Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing  requirements  for
the past 90 days.

         Yes   X                                            No ___

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

                                                          Outstanding at
               Class                                      August 11,1998
Common Stock $.01 par value                                 9,919,161
--------------------------------------------------------------------------------



<PAGE>





INDEX

INTELLICALL, INC.

Part I.           Financial Information

     Item 1.      Financial Statements

                  Balance Sheets at June 30, 1998
                  (Unaudited) and December 31, 1997............................1

                  Statements of Operations for each of the
                  three month periods ended June 30, 1998 and 1997
                  (Unaudited)       ...........................................3

                  Statements of Operations for each of the
                  six month periods ended June 30, 1998 and 1997
                   (Unaudited)      ...........................................4

                  Statements of Cash Flows for each of the
                  six month periods ended June 30, 1998 and 1997
                  (Unaudited)       ...........................................5

                  Notes to Financial Statements...............................16

     Item 2.      Management's Discussion and Analysis of Financial Condition
                  and Results of Operations...................................15

Part II.          Other Information

     Item 1.      Litigation        ..........................................19

     Item 6.      Exhibits and Reports on Form 8-K............................19

Signatures....................................................................20










<PAGE>



Part I.  Financial Information
     Item 1.  Financial Statements

INTELLICALL, INC.
       BALANCE SHEETS
       ASSETS
      (in thousands)
<TABLE>
<CAPTION>

                                                                                 June 30, 1998       December 31, 1997
                                                                                    (unaudited)
<S>                                                                                     <C>                      <C>    
Current assets

     Restricted cash ..................................................                     $  17                $ 2,488

     Cash and cash equivalents ........................................                     2,000                     66

     Receivables............................................................               15,669                 34,881

          Less allowance for doubtful accounts.........................                     5,059                  6,211
                                                                                        ---------              ---------

                                                                                           10,610                 28,670

     Inventories, net..................................................                     5,669                  5,002

     Related party, net................................................                     1,071                     --

     Other current assets..............................................                       366                  1,908
                                                                                        ---------              ---------

          Total current assets.........................................                    19,733                 38,134

Fixed assets, net......................................................                     1,563                  8,387

Capitalized software costs, net........................................                     2,272                  2,968

Notes receivable, net..................................................                     1,068                  1,125

Intangible assets, net.................................................                       794                 31,802

Investment in unconsolidated investee..................................                     2,012                     --

Other assets, net......................................................                     1,432                  2,373
                                                                                        ---------              ---------

                                                                                         $ 28,874               $ 84,789
                                                                                         ========               ========
</TABLE>



See notes to financial statements.


                                      - 1 -

<PAGE>



INTELLICALL, INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share information)

<TABLE>
<CAPTION>
                                                                                 June 30,1998        December 31, 1997
                                                                                 (Unaudited)
<S>                                                                                   <C>                      <C>
Current liabilities
     Accounts payable..........................................                       $ 2,758                  $11,320
     Accrued transmission, customer commissions and billing
         charges...............................................                         2,071                   12,222
     Deferred revenue..........................................                            84                    1,262
     Accrued liabilities.......................................                           875                    4,456
     Capital lease obligation, current.........................                            --                      157
     Current portion of long-term debt ........................                         1,000                    4,928
                                                                                     --------             ------------
     Total current liabilities.................................                         6,788                   34,345
Long-term debt ................................................                         9,587                   21,217
Deferred gain on sale to unconsolidated investee...............                           968                       --
Capital lease obligation .....................................                             --                      843
Other liabilities..............................................                           250                      948
Minority interest..............................................                            --                    6,769
Commitments and contingent liabilities.........................                            --                       --
                                                                                   ----------            -------------
      Total liabilities                                                                17,593                   64,122
Redeemable preferred stock Series B-2, $100 par value;
     zero and 111,960 shares issued and outstanding,
     respectively..............................................                            --                   11,196
Redeemable preferred stock Series B-3, $300 par value; zero
     and 6,667 shares issued and outstanding,
     respectively..............................................                            --                    2,000
Stockholders' equity
     Preferred stock, $.01 par value; 1,000,000 shares
         authorized;  2,840 and 4,000 shares issued
         and outstanding, respectively.........................                             1                        1
     Common stock, $.01 par value; 20,000,000 shares
          authorized; 9,887,163 and 9,471,944 shares issued,
          respectively.........................................                            98                       95
     Additional paid-in capital................................                        57,834                   57,486
     Less common stock in treasury, at cost;
          24,908 shares........................................                         (258)                    (258)
     Accumulated deficit.......................................                      (46,394)                 (49,853)
                                                                                   ---------                  -------
          Total stockholders' equity...........................                        11,281                    7,471
                                                                                   ----------                  -------
                                                                                     $ 28,874                 $ 84,789
                                                                                     ========                 ========
</TABLE>
See notes to financial statements.

                                      - 2 -

<PAGE>



INTELLICALL, INC.
STATEMENTS OF OPERATIONS(UNAUDITED)
(in thousands, except share information)


<TABLE>
<CAPTION>
                                                                       THREE MONTHS ENDED
                                                                             June 30,
                                                                       1998             1997
                                                                       ----             ----
<S>                                                                 <C>             <C>    
Revenues and sales:
         Service revenues                                           $  7,528        $   20,403
         Equipment sales                                               3,321             4,679
                                                                      ------            ------
                                                                      10,849            25,082
                                                                      ------            ------

Cost of revenues and sales:
         Service revenues                                              7,012            18,565
         Equipment sales                                               2,557             4,481
                                                                      ------            ------
                                                                       9,569            23,046
                                                                      ------           -------

Gross profit:
         Service revenues                                                516             1,838
         Equipment sales                                                 764               198
                                                                      ------           -------
                                                                       1,280             2,036

Selling, general and administrative expenses                           2,198             2,677
Provision for doubtful accounts                                           59               147
Research and development expenses                                        262                77
                                                                      ------           -------

Operating loss                                                        (1,239)             (865)

Interest income                                                           79               133

Interest expense                                                        (390)             (612)

Gain on sale of assets                                                   493                --

Equity in loss of investee                                              (111)               --

Minority interest                                                         --               (27)
                                                                   ---------           -------

Net loss                                                           $  (1,168)        $  (1,371)
                                                                   =========         =========

Basic net loss per share                                           $    (.12)        $    (.15)
                                                                   =========         =========

Weighted average number of shares outstanding                          9,762             9,293
                                                                   =========         =========

Fully diluted net loss per share                                   $    (.12)        $    (.15)
                                                                   =========         =========

Shares used in fully diluted net loss per share calculation            9,762             9,293
                                                                   =========         =========
</TABLE>
See notes to financial statements.

                                      - 3 -

<PAGE>



INTELLICALL, INC.
STATEMENTS OF OPERATIONS(UNAUDITED)
(in thousands, except share information)

<TABLE>
<CAPTION>
                                                                       SIX MONTHS ENDED
                                                                           June 30,
                                                                       1998             1997
                                                                       ----             ----
<S>                                                               <C>                <C>
Revenues and sales:
         Service revenues                                         $  13,147          $  40,285
         Equipment sales                                              7,583              7,951
                                                                     ------             ------
                                                                     20,730             48,236
                                                                   --------          ---------

Cost of revenues and sales:
         Service revenues                                            12,282             36,452
         Equipment sales                                              6,069              8,098
                                                                    -------             ------
                                                                     18,351             44,550
                                                                   --------           --------

Gross profit:
         Service revenues                                               865              3,833
         Equipment sales                                              1,514               (147)
                                                                    -------            -------
                                                                      2,379              3,686

Selling, general and administrative expenses                          4,266              5,306
Provision for doubtful accounts                                         144                252
Research and development expenses                                       557                196
                                                                     ------             ------

Operating loss                                                       (2,588)            (2,068)

Interest income                                                         158                229

Interest expense                                                       (782)            (1,212)

Gain on sale of assets                                                6,892                 --

Equity in loss of investee                                             (330)                --

Minority interest                                                        --                (46)
                                                                    -------            -------

Net income (loss)                                                   $ 3,350          $  (3,097)
                                                                    =======          =========

Basic net income (loss) per share                                   $   .35          $    (.34)
                                                                    =======          =========

Weighted average number of shares outstanding                         9,616              9,071
                                                                    =======          =========

Fully diluted net income (loss) per share                           $   .30          $    (.34)
                                                                    =======          =========

Shares used in fully diluted net income (loss) per share calculation 12.499              9,071
                                                                    =======          =========
</TABLE>
See notes to financial statements.

                                      - 4 -

<PAGE>



INTELLICALL, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands)                                                         SIX MONTHS ENDED


                                                                           June 30,
                                                                       1998             1997
                                                                       ----             ----
<S>                                                                 <C>              <C>
Operating Activities:
         Net income (loss)                                          $  3,350         $  (3,097)
         Adjustments to reconcile net income (loss) to
           net cash provided by operating activities:
           Depreciation and amortization                                 995             1,876
           Provision for doubtful accounts                               144               252
           Provision for inventory                                       150                18
           Equity in loss of investee                                    330                --
           Minority interest in income of ILD                             --                46
           Changes in operating assets and liabilities (See Note 1):
              Restricted cash                                             (5)               (1)
              Receivables                                              4,337               563
              Inventories                                               (847)              444
              Related party                                             (941)               --
              Other current assets                                       285               236
              Notes receivable                                            20               (27)
              Accounts payable                                        (3,226)            1,006
              Accrued transmissions, commissions and billing charges    (573)              732
              Accrued liabilities                                       (242)              (41)
              Deferred revenue                                            --              (317)
              Deferred gain on sale to unconsolidated investee           968                --
              Other                                                    1,603               258
                                                                    --------         ---------
Net cash provided by operating activities                              6,348             1,948
Investing activities:
         Purchase of equipment                                          (296)             (606)
         Capitalized software                                           (500)             (891)
                                                                    --------         ---------
Net cash used in investing activities                                   (796)           (1,497)
Financing activities:
         Net repayments on line of credit                             (3,946)             (312)
         Proceeds from issuance of stock                                 394               239
                                                                    --------         ---------
Net cash used in by financing activities                              (3,552)              (73)
Net increase in cash and cash equivalents                              2,000               378
Cash and cash equivalents at beginning of period                          --             2,271
                                                                    --------         ---------
Cash and cash equivalents at end of period                          $  2,000         $   2,649
                                                                    ========         =========
Supplemental cash flow information:
         Interest paid                                              $    573         $     958
                                                                    ========         =========
Supplemental non cash information:
         Conversion of debt to equity                               $    210         $     945
                                                                    =========        =========
         Conversion of preferred stock to common stock              $   1,160        $      --
                                                                    =========        =========
</TABLE>
See notes to financial statements.

                                      - 5 -

<PAGE>


                                INTELLICALL, INC.
                          NOTES TO FINANCIAL STATEMENTS




NOTE 1 - CERTAIN ACCOUNTING POLICIES

         Basis  of  Presentation.   The  accompanying  financial  statements  of
Intellicall,  Inc. (the  "Company")  have been  prepared in accordance  with the
requirements of Form 10-Q and do not include all disclosures  normally  required
by generally  accepted  accounting  principles or those  normally made in annual
reports on Form 10-K.  The  financial  statements  as of  December  31, 1997 and
results of operations  for the quarter ended June 30, 1997 include the financial
position and results of operations of the  Company's  majority-owned  subsidiary
ILD  Telecommunications,  Inc. ("ILD"). In the quarter ended March 31, 1998, the
Company's ownership percentage of ILD decreased from 54% at December 31, 1997 to
42%. At June 30, 1998, the Company's ownership in ILD remained at 42%. (See Note
6 herein). Accordingly, effective January 1, 1998, the Company accounted for its
investment in ILD under the equity method of accounting retroactively to January
1,  1998.  In  management's  opinion,  all  adjustments  necessary  for  a  fair
presentation  of the results of operations  for the periods shown have been made
and are of a normal and recurring nature.

The  results of  operations  for the six months  ended  June 30,  1998,  are not
necessarily  indicative of the results of operations  expected for the full year
1998. The financial  statements  herein should be read in  conjunction  with the
consolidated  financial  statements and notes thereto  included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.

         Statement Presentation.  Certain prior year amounts have been
reclassified to conform to current year presentation.

         Software  Development  Costs. The Company  capitalizes costs related to
the development of certain  software  products.  In accordance with Statement of
Financial  Accounting  Standards  No. 86,  capitalization  of costs  begins when
technological  feasibility  has been  established  and ends when the  product is
available  for  general  release to  customers.  Amortization  is computed on an
individual  product basis based on the products'  estimated  economic life using
the straight line method, not to exceed five years.

The amounts of software  development  costs capitalized in the second quarter of
1998 and 1997 were $250,000 and  $416,000,  respectively.  The Company  recorded
$135,000  and  $446,000 of software  amortization  expense for the three  months
ended June 30, 1998 and 1997.

For the six  months  ended  June 30,  1998 and  1997,  the  Company  capitalized
$500,000 and $891,000,  respectively. The software amortization expense recorded
was $254,000 and $1.0 million for the six months ended June 30, 1998 and 1997.

                                      - 6 -

<PAGE>


                                INTELLICALL, INC.
                          NOTES TO FINANCIAL STATEMENTS





         Cash and Cash  Equivalents.  For  purposes  of the  balance  sheets and
statements of cash flows,  cash and cash equivalents  include  short-term liquid
investments purchased with remaining maturities of three months or less.

              Earnings  per Share:  Basic net  income  (loss) per share has been
computed in accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share",  ("FAS 128") using the weighted  average  number of common
shares outstanding.  The provision and disclosure  requirements for FAS 128 were
required to be adopted for interim and annual  periods ending after December 15,
1997, with restatement of EPS for all prior periods.

         The following  table sets forth a  reconciliation  of the numerator and
denominator  used in the basic and diluted EPS computation for the three and six
month periods ended June 30, 1998 and 1997, respectively:

<TABLE>
<CAPTION>

                                                          Three months      Three months   Six months   Six months
                                                             ended             ended         ended         ended
                                                            June 30,         June 30,       June 30,     June 30,
                                                              1998             1997           1998         1997
                                                           ------------      -----------    -----------  ----------
<S>                                                       <C>                 <C>         <C>           <C>    
Net income (loss)                                         $  (1,168)          $ (1,371)   $   3,350     $ (3,097)
Basic:
    Weighted average number of shares outstanding             9,762              9,293        9,616        9,071
                                                              =====              =====        =====        =====


Diluted:
   Weighted average number of shares outstanding used
       in the basic net income (loss) per share calculation   9,762              9,293        9,616        9,071
    Weighted average shares from assumed exercise of
        dilutive stock options and warrants, net of shares
        assumed to be repurchased with exercise proceeds         --                 --          310           --
     Assumed conversion of Series A Preferred Stock
        at beginning of period                                   --                 --          787           --
     Assumed conversion of convertible debt                      --                 --        1,786           --
                                                              -----            -------        -----       ------

     Weighted average number of shares outstanding used
         in the fully diluted net income (loss) per share
         calculation                                          9,762              9,293       12,499        9,071
                                                              =====              =====       ======        =====
</TABLE>

         In accordance with FAS 128, options and warrants to purchase  2,945,205
and 2,802,740 shares respectively,  of Common Stock were excluded in the diluted
EPS calculation because they were antidilutive,  for the three months ended June
30, 1998 and 1997,  respectively.  Conversion of debt and  preferred  stock were
antidilutive  and  therefore  were  excluded for both of the three month periods
calculations.  For the six month periods  ended June 30, 1998 and 1997,  options
and warrants to purchase 1,262,180 and 2,802,740 shares respectively,  of Common
Stock were excluded in the diluted

                                      - 7 -

<PAGE>


                                                    INTELLICALL, INC.
                                              NOTES TO FINANCIAL STATEMENTS




EPS calculation when they were  antidilutive,  as applicable,  for the six month
periods  presented.  Conversion of debt and preferred stock was excluded for the
six month period ended June 30, 1997 calculation because they were antidilutive.

         Disclosures  about  Reporting   Comprehensive  Income:  In  June  1997,
Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income" ("FAS 130") was issued. FAS 130 establishes  standards for reporting and
display of comprehensive income and its components (revenues,  expenses,  gains,
and losses) in a full set of general-purpose  financial statements.  It requires
all items that are  required to be  recognized  under  accounting  standards  as
components of comprehensive  income be reported in a financial statement that is
displayed with the same  prominence as other  financial  statements.  FAS 130 is
effective for fiscal years  beginning  after December 15, 1997. The Company will
adopt this Statement in the year ending December 31, 1998.  Reclassification  of
financial  statements for earlier periods  provided for comparative  purposes is
required upon adoption.  The Company has no components of  comprehensive  income
not already included in net income.

         Disclosures about Segments of an Enterprise and Related Information: In
June 1997,  Statement of Financial  Accounting  Standards  No. 131  "Disclosures
About Segments of an Enterprise and Related Information" ("FAS 131") was issued.
FAS 131  establishes  standards  for the way that  public  business  enterprises
report information about operating  segments in annual financial  statements and
requires that those  enterprises  report  selected  information  about operating
segments  in  interim  financial  reports  issued  to  shareholders.  FAS 131 is
effective for financial  statements  for periods  beginning  after  December 15,
1997. The Company will adopt FAS 131 in the year ending December 31, 1998.

         Disclosures  about  Accounting for Derivative  Instruments  and Hedging
Activities:  On June 15, 1998, the Financial  Accounting Standards Boards (FASB)
issued  Statement of Financial  Accounting  Standards No. 133,  "Accounting  for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 is effective
for all  fiscal  quarters  of all fiscal  years  beginning  after June 15,  1999
(January  1,  2000  for the  Company).  FAS 133  requires  that  all  derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current  earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction.  Management of
the Company anticipates that, due to its limited use of derivative  instruments,
the  adoption  of FAS 133 will not have a  significant  effect on the  Company's
results of operations or its financial position.




                                      - 8 -

<PAGE>


                                                    INTELLICALL, INC.
                                              NOTES TO FINANCIAL STATEMENTS





         Year 2000  Discussion.  The Company has conducted an initial  review of
Year 2000 issues as they may relate to the Company, its customers and certain of
its suppliers who provide critical services to the Company.

The Company has installed a new  accounting  system  integrating  all accounting
aspects of the  Company's  manufacturing  operations.  The Company is  currently
evaluating  all  internal   operations   including  hardware  and  software  for
compliance.

Certain of the software included in the Company's Products sold to its customers
or used to process call records  received from  customers  through the Company's
billing  system,  will require some  modifications  to address Year 2000 issues.
During 1997 the  Company  commenced  a program  pursuant  to which all  software
utilized in the Company's Products is to be evaluated for Year 2000 problems.
All evaluations are actively being evaluated by management.

Finally the Company utilizes an industry  standard format,  EMI, for the billing
and  collection  of  call  records  submitted  to  it  by  its  customers.  Upon
publication of the new format for Year 2000  compliance,  the Company will adopt
such format and forward such format to its  customers  for their use in the year
2000 and thereafter.



                                      - 9 -

<PAGE>


                                                    INTELLICALL, INC.
                                              NOTES TO FINANCIAL STATEMENTS





NOTE 2 - LONG-TERM DEBT AND LINE OF CREDIT

         The Company's debt consisted of the following (in thousands):

<TABLE>
<CAPTION>

                                                                                  June 30, 1998      December 31, 1997
<S>                                                                              <C>                  <C>    
Intellicall, Inc.
         8% Convertible subordinated notes, due 2000                             $   2,630            $  2,840
         8% Convertible subordinated notes, due 2001                                 5,000               5,000
         Convertible subordinated note, due 1999                                     1,000               1,000
         Asset-based note collateralized by certain assets, due 1999                 2,336               4,114
         Installment note, due 1998                                                     --                  28
                                                                                 -----------           ---------
                                                                                    10,966              12,982
         Less unamortized debt discount                                               (379)               (450)
                                                                                 ---------            --------
                                                                                    10,587              12,532
                                                                                 ---------            --------

ILD Telecommunications, Inc. related debt                                               --              13,613
                                                                                 ---------           ---------


              Total debt                                                            10,587              26,145

         Less: Current portion of long-term debt                                    (1,000)             (4,928)
                                                                                 ---------           ---------
              Total long-term debt                                               $   9,587          $   21,217
                                                                                 =========          ==========
</TABLE>


         On  February  15,  1994  the  Company  issued  a $1.0  million,  10.0%,
convertible,   subordinated  note  to  T.J.  Berthel  Investments,  L.P.,  whose
ownership also controls 7.2% of the Company's outstanding common stock. Interest
is payable  quarterly and commenced March 31, 1994. The entire  principal amount
matures on March 31, 1999.  The note may be converted by the holder into 160,000
shares of the Company's Common Stock at any time.

         On December 29, 1995 the Company  completed the sale of $7.5 million of
8.0%  convertible  subordinated  notes,  due  December  31,  2000,  to Banca Del
Gottardo in Lugano,  Switzerland  with the  proceeds  used to repay the previous
lender and for working capital purposes.  The notes were issued with warrants to
purchase 300,000 shares of the Company's Common Stock. The notes are convertible
into  1,785,714  shares of the  Company's  Common  Stock at a price of $4.20 per
share.  As of June 30, 1998,  $4.87 million of the Banca Del Gottardo Notes were
converted to 1,159,517 shares of the Company's Common Stock. Interest is payable
semi-annually and commenced June 30, 1996.

                                     - 10 -

<PAGE>


                                                    INTELLICALL, INC.
                                              NOTES TO FINANCIAL STATEMENTS





         On November 22, 1996 the Company  completed the sale of $5.0 million of
8.0%  convertible  subordinated  notes,  due  November  22,  2001,  to Banca Del
Gottardo in Lugano, Switzerland with the proceeds used to repay a portion of the
previous lender's debt and for working capital  purposes.  The notes were issued
with warrants to purchase  200,000 shares of the Company's Common Stock at $5.00
per share.  The notes are  convertible  into one million shares of the Company's
Common  Stock at a price of $5.00 per share.  Interest is payable  semi-annually
beginning May 1997.

         On  November  22,  1996 the Company  entered  into a Loan and  Security
Agreement  (the "Loan  Agreement")  with Finova Capital  Corporation  ("Finova")
pursuant  to which  Finova  agreed to loan the  Company up to  $12,000,000  (the
"Loan")  based on an available  borrowing  base.  The  borrowing  base  consists
primarily of call traffic and trade equipment receivables and inventory, subject
to eligibility  requirements determined by Finova. Amounts loaned subject to the
borrowing base are determined by percentages  established in the Loan Agreement,
but are within the discretion of Finova.  Such percentages are subject to change
based on experience and Finova's expectations regarding future collectibility of
receivables and usage of inventory.

         The Loan is evidenced by a Secured  Revolving  Credit Note (the "Note")
payable to the order of Finova.  Borrowings  under the Loan bear interest at the
rate of prime plus 1.75%. The interest rate may be decreased prospectively by up
to 0.5% based on future  profitability  of the  Company.  The  Company  used the
proceeds  from the Finova  Loan and  Gottardo  Notes (net of  placement  fees of
$509,406)  to repay the  remaining  balance  of its Series A Notes due to Nomura
Holding America,  Inc.,  Intellicall's  previous lender,  in the amount of $12.7
million.  Also the Loan has an  unused  line  fee  equal to one  quarter  of one
percent  (0.25%)  per annum of the unused  portion of the Total  Facility  and a
facility fee equal to one-half of one percent (0.50%) per annum of the amount of
the Total  Facility  payable on the first  anniversary  of the Agreement and one
each subsequent anniversary thereof.
Interest is paid monthly.

         The initial  term of the Loan  Agreement  is three years at which time,
unless extended, all amounts then outstanding must be repaid. The Loan Agreement
contains prepayment  penalties in the event it is terminated prior to expiration
of its initial  term.  The Loan is secured by first and prior liens and security
interests encumbering substantially all of the assets of the Company,  including
inventory,  equipment, accounts receivable, general intangibles,  trademarks and
tradenames.  The Loan  Agreement  contains  various  restrictions  (including  a
prohibition   against  the  payment  of   dividends,   limitations   on  capital
expenditures,  and restrictions on investments) and financial ratio  maintenance
requirements (including minimum working capital and net worth requirements).  As
of June 30, 1998 the Company was in compliance with all covenants.

         At December 31, 1997 ILD Telecommunications, Inc. (ILD) had $13.6
million of long term

                                     - 11 -

<PAGE>


                                INTELLICALL, INC.
                          NOTES TO FINANCIAL STATEMENTS




debt due from 1998 through 2001 at interest rates ranging from 9% to 13.5%.

NOTE 3 - INVENTORY

         As  of  June  30,  1998  and  December  31,  1997,  the  Company's  net
inventories consisted of the following (in thousands):

                                               June 30,       December 31,
                                                 1998               1997
                                             ------------     ------------
         Raw materials                      $    4,075        $    2,491
         Work-in-process                           397               378
         Finished goods                          1,197             2,133
                                            ------------      ----------
              Total inventories, net        $    5,669        $    5,002
                                            =============     ==========


NOTE 4 - LITIGATION AND CONTINGENCIES

         In April 1997,  U.S.  Long  Distance,  Inc.,  ("USLDI")  filed a Second
Amended  Complaint  against the Company,  the ("Lawsuit").  The complaint sought
actual damages of $4.0 million, exemplary damages,  attorney's fees and interest
for  the  Company's  alleged  tortious  interference  of  USLDI's  existing  and
prospective   contractual   relationships  with  PhoneTel   Technologies,   Inc.
("PhoneTel").  The Second  Amended  Complaint  alleged  the Company and its then
subsidiary, Intellicall Operator Services, Inc. interfered with USLDI's existing
contractual  relationship  with  PhoneTel,   another  defendant,  when  PhoneTel
executed an operator services agreement with the Company and its subsidiary.  On
July 24, 1998, the Company,  Intellicall  Operator  Services and ILD settled the
Lawsuit with USLDI through the collective payment of $225,000 and execution of a
mutual release of all claims.


NOTE 5 - EQUITY FINANCING

         On July 21,  1997 (the  "Closing  Date")  the  Company  entered  into a
Securities Purchase Agreement (the "Purchase Agreement") with four institutional
investors (the "Investors") pursuant to which the Investors purchased $4,000,000
of the Company's Series A Convertible  preferred stock (the "preferred  stock").
The Company utilized the net proceeds from the sale of the preferred stock

                                     - 12 -

<PAGE>


                                INTELLICALL, INC.
                          NOTES TO FINANCIAL STATEMENTS




(approximately  $3,800,000) to pay down  indebtedness to Finova.  As of June 30,
1998,  $1,160,000  of the  Company's  preferred  stock had been  converted  into
308,871  shares of the Company's  Common Stock.  During July 1998, 150 shares of
the Company's  Preferred  Stock were converted to 49,506 shares of the Company's
Common Stock.

         Commencing 90 days after the Closing Date,  the preferred  stock,  plus
all accrued stock dividend  premiums at 7% annually,  is convertible into Common
Stock of the Company at the option of each Investor at a conversion  price equal
to the lower of $5.05 per share (the "Fixed Conversion Price") or eighty percent
(80%) of the average  fifteen day trading price preceding the date of conversion
(the "Variable  Conversion Price").  However, in the event any Investor acquires
common stock upon conversion of the preferred stock and the conversion  price is
based on the Variable  Conversion  Price,  such  Investor  must pay a fee to the
Company as follows:

         (a) in the event the  issuance of such common  stock  occurs form 91 to
180 days after the Closing Date, the fee payable to the Company is 25% times the
Variable Conversion Price times the number of such shares of Common Stock; and

         (b) in the event the  issuance of such common  stock occurs from 181 to
365 days after the Closing  Date,  the fee payable to the Company is 6.25% times
the Variable Conversion Price times the number of such shares of Common Stock.

         Any shares of preferred  stock  outstanding two years after the Closing
Date will automatically convert into Common Stock.

         The  Investors  may  require the  Company to redeem  certain  shares of
preferred  stock (i) in the event the number of shares of common stock  issuable
upon conversion  (based on the conversion  price in existence from time to time)
multiplied  by 1.25 would  exceed the maximum  number of shares of common  stock
which the Company can issue without shareholder  approval pursuant to applicable
New York Stock Exchange  Guidelines,  unless shareholder approval is so obtained
within  120 days of such  occurrence,  (ii) in the  event the  Company  fails to
reserve an  adequate  number of shares of common  stock as  contemplated  by the
designation of preferred stock creating the preferred stock (the "Designation"),
unless such failure is cured by board of directors and/or shareholder  approvals
as required,  (iii) in the event the Company fails to honor a conversion  notice
and (iv) in other  events  as more  fully  set  forth  in the  Designation.  Any
redemptions,  however, are limited to the Company's borrowing availability under
its loan agreement with Finova, as further described below.

         The  Designation  grants  to the  Company  the  option,  under  certain
circumstances,  to redeem for cash any shares of preferred  stock  submitted for
conversion  if the  Variable  Conversion  Price is less than $4.00 per share and
funds are available under the Company's loan agreement with Finova.


                                     - 13 -

<PAGE>




         The  Company  filed  a  registration  statement  on  the  common  stock
underlying the conversion of the preferred stock on September 5, 1997.

         In conjunction  with the issuance of the preferred  stock,  the Company
entered into a Second  Amendment to the Loan and Security  Agreement with Finova
(the "Second  Amendment").  The Second Amendment modified one financial covenant
and allowed the Company to redeem the  preferred  stock as  contemplated  in the
Designation  if (i) following and giving effect to such  redemption  the Company
shall have excess  borrowing  availability  under its borrowing base of not less
than $500,000, and shall have paid in full or made provision for payment in full
of all of the  Company's  accounts  payable  in  excess  of  $500,000  which are
outstanding  beyond  their due date and are not  contested  in good faith by the
Company and all bank overdrafts and (ii) at the time of such redemption no event
of Monetary Default,  as defined in the loan agreement with Finova, and no event
which,  with  notice or passage of time or both,  would  constitute  an event of
Monetary  Default  under the loan  agreement  with  Finova has  occurred  and is
continuing, or would result from such redemption.

NOTE 6 - SALE OF STOCK OF ILD TELECOMMUNICATIONS, INC.

         On March 30, 1998,  the Company sold to SMCO,  LLP 18,348.62  shares of
ILD Telecommunications, Inc. common stock. SMCO is an unrelated third party, the
negotiations for the sale transactions  were at arm's length,  and there were no
additional  obligations or elements of financial  consideration  relating to the
sale transaction. The Company sold the shares for $325.00 per share and recorded
a gain  on  the  sale  in the  amount  of  $5.6  million.  The  transaction  was
consummated on March 30, 1998.

         On  April  3,  1998 the  Company  sold  1,539  shares  of its  Series A
preferred stock in ILD  Telecommunications,  Inc. to SMCO Investments,  LLC. The
shares were sold for $325.00 per share, or $500,175, resulting in a gain on sale
of assets of $493,000, net of legal fees.



                                     - 14 -

<PAGE>



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

Forward-Looking Statements - Cautionary Statements

         This Form 10-Q contains certain "forward-looking statements" within the
meaning  of  Section  27A of  the  Securities  Act  of  1933,  as  amended  (the
"Securities  Act"),  and Section 21E of the Securities  Exchange Act of 1934, as
amended (the "Exchange Act"). Specifically, all statements other than statements
of historical  facts included in this report  regarding the Company's  financial
position,  business  strategy  and plans and  objectives  of  management  of the
Company   for  future   operations   are   forward-looking   statements.   These
forward-looking statements are based on the beliefs of the Company's management,
as well  as  assumptions  made by and  information  currently  available  to the
Company's  management.  When  used  in  this  report,  the  words  "anticipate,"
"believe,"  "estimate,"  "expect,"  and "intend" and words or phrases of similar
import,  as they relate to the Company or Company  management,  are  intended to
identify   forward-looking   statements.   Such  statements   (the   "cautionary
statements")  reflect the current  view of the  Company  with  respect to future
events  and are  subject  to risks,  uncertainties  and  assumptions  related to
various factors including,  without  limitation,  competitive  factors,  general
economic  conditions,  customer  relations,   relationships  with  vendors,  the
interest rate environment, governmental regulation and supervision, seasonality,
product introductions and acceptance,  technological change, changes in industry
practices and one-time events.  Although the Company believes that  expectations
are reasonable, it can give no assurance that such expectations will prove to be
correct.  Based upon changing conditions,  should any one or more of these risks
or  uncertainties  materialize,  or  should  any  underlying  assumptions  prove
incorrect,  actual results may vary materially  from those  described  herein as
anticipated,  believed,  estimated, expected or intended. All subsequent written
and oral  forward-looking  statements  attributable  to the  Company  or persons
acting on its behalf are expressly qualified in their entirety by the applicable
cautionary statements.

Recent Developments

         The Company  accounts for its investment in ILD under the equity method
as  consolidation  is no longer  appropriate  due to,  among other  things,  the
Company's ownership percentage in ILD Telecommunications,  Inc. ("ILD") declined
to approximately  42% of the outstanding  shares of ILD during the first quarter
of 1998.  Under the equity  method,  an  investment in common stock is generally
shown in the  balance  sheet of an  investor as a single  amount.  Likewise,  an
investor's  share of earnings or losses from its investment is ordinarily  shown
in its income statement as a single amount.

         Effective January 1, 1998, Intellicall's investment in ILD is accounted
for  using  the  equity  method.   However,  prior  year  comparative  financial
information  has not been  restated  to the equity  method and is  presented  as
previously reported,  as is required under SEC rules. In reviewing the financial
statements and discussion  contained in this Form 10-Q, the reader must be aware
that  much  of the  information  is not  directly  comparable  as the  financial
information in 1997 includes the operating results and balance sheet information
of ILD.


                                     - 15 -

<PAGE>



Financial Condition

Liquidity and Capital Resources

              During the six months  ended June 30, 1998 the  Company  generated
$6.3 million of cash from operations  including  changes in operating assets and
liabilities.  The Company invested $296,000 in capital equipment and $500,000 in
software  and  product  development.  Financing  activities  were  comprised  of
approximately  $3.9 million of  repayments on the  Company's  revolving  line of
credit,  and the  conversion of stock options into  Intellicall's  Common Stock.
These activities  resulted in a cash use of $3.6 million.  The net result of all
such changes  described  above was an increase in cash and cash  equivalents  of
$2.0 million.

              The net  effects of changes in  operating  assets and  liabilities
during  the six months  ended June 30,  1998,  was an  increase  in cash of $1.4
million. The primary factors affecting these changes were a decrease in accounts
receivable  of $4.3  million,  a decrease in payables of $3.2  million,  and the
disposition  of  assets  and  liabilities  of  the  Company's  prepaid  services
operation which was sold to ILD.

              In recent years, the Company has financed its net losses,  capital
expenditures  and research and development  costs through a combination of asset
sales, reduction in working capital and external financing. As described in Note
6 to the financial  statements,  on March 30, 1998 and April 3, 1998 the Company
sold a portion of its interest in ILD to an unrelated third party. Proceeds from
the sales totaled $6.5 million.  A portion of the proceeds were used for working
capital purposes.  The remainder of the proceeds will be used to fund operations
and for working capital and capital expenditures. In the second half of 1998 and
beyond,  management  of the Company  believes  that funds  required  for capital
spending,  new product  development,  debt  service and fixed  expenses  will be
generated from operations, provided that equipment sales increase by 25% or more
over  comparable  sales in 1997, and the mix of products sold continues to shift
toward sales of higher margin products.  Should the anticipated growth in demand
for the Company's products be insufficient to generate the required liquidity or
the mix of such sales is not  favorable,  the  Company  may be  required to sell
assets or seek further  external  funding.  If such a situation were to develop,
the Company believes that it has adequate  opportunities to obtain,  in a timely
manner, the funds required for its operations.


                                     - 16 -

<PAGE>



Results of Operations


         Service  Revenues.  Service  revenues for the second quarter ended June
30,  1998 were $7.5  million  compared  to $20.4  million for the same period in
1997. For the six month period ended June 30, 1998,  service revenues were $13.1
million  compared to $40.3  million for the six months ended June 30, 1997.  The
table below  provides a detailed  analysis  of service  revenues by type for the
three and six month periods ended June 30, 1998 and 1997 (in thousands):

<TABLE>
<CAPTION>

                                      Three months  Three months   Six months   Six months
                                         ended        ended          ended        ended
                                       June 30,      June 30,       June 30,     June 30,
                                         1998          1997           1998        1997
                                    --------------  ------------   ----------   ----------
<S>                                 <C>             <C>            <C>          <C>
Call Traffic Revenue                $     7,528     $  10,611      $ 13,147     $ 21,668
Long-distance Resale                         --         1,101            --        2,209
Operator Services                            --         7,208            --       13,538
Prepaid Calling Services                     --         1,483            --        2,870
                                    -----------     ---------      --------     --------
    Total Service Revenues          $     7,528     $  20,403      $ 13,147     $ 40,285
                                    ===========     =========      ========     ========
</TABLE>


         Call traffic  revenues  declined $3.1 million in the second  quarter of
1998 compared to the second quarter of 1997. Revenues decreased $8.5 million for
the first half of 1998 compared to the first half of 1997.  The period to period
changes  are  principally  the result of the  discontinuation  of the  Company's
inmate  services  program  eliminated  during 1997 due to an  unacceptably  high
experience of  uncollectible  phone calls.  Revenues from this program were $2.7
million  and $7.2  million  for the three and six months  ended  June 30,  1997,
respectively. Furthermore, the average calls per day per phone has declined from
 .465 in June of 1997  compared to .346 in June of 1998  reflecting  the negative
impact of the practice  known as  "dial-around."  This practice is the result of
payphone patrons  accessing  operator  services systems other than those used by
the  payphone  owner.  Partially  offsetting  these  declines  are the number of
easy*star  and bundled  phones  reporting in June of 1998 of 52,487  compared to
41,355 in June of 1997 caused by a significant  customer's increased utilization
of the  Intelli*Star  technology.  Long-distance  resale and  operator  services
revenues relate to the operations of ILD, an unconsolidated  investee  beginning
January 1, 1998.

         Gross profit from  services  revenues  decreased  $1.3 million and $3.0
million for the three and six months ended June 30, 1998,  compared to the three
and six months  ended June 30,  1997.  Of this  decline  $1.1  million  and $2.0
million relate to the ILD  operations  listed above for the three and six months
ended  June  30,  1997,  respectively.  However  on a  comparable  basis  (i.e.,
excluding  the gross  profit  contributed  by the  revenue  streams  of ILD) the
pro-forma  Intellicall  gross profit for the three and six months ended June 30,
1997  would  have  been   $751,000   (or  7.1%)  and  $1.8  million  (or  8.3%),
respectively. Absolute gross profit declined $235,000 and $941,000 for the three
and six month periods  ended June 30, 1998  compared to the  pro-forma  June 30,
1997 amounts.  This pro-forma  decline is attributable to the loss of the inmate
services  program,  lower unbundled  revenues in the 1998 period compared to the
1997 period,  and the  recognition in 1997 of deferred  revenues from validation
services, which had no cost of goods sold associated with it.

                                     - 17 -

<PAGE>




         Equipment Sales.  Equipment sales were $3.3 million and $4.7 million in
the three months ended June 30, 1998 and 1997, respectively and $7.6 million and
$8.0  million  for the six month  periods  ended  June 30,  1998 and  1997.  The
following table analyzes sales by market (in thousands):

<TABLE>
<CAPTION>
                                                Three Months Ended                              Six Months Ended

                                       June 30, 1998           June 30, 1997          June 30, 1998         June 30, 1997
                                       -------------           -------------          -------------         -------------

<S>                                        <C>                     <C>                    <C>                   <C>   
Independent payphone                       $2,628                  $3,877                 $5,342                $7,122
providers

International                                 175                     802                  1,723                   819

Regulated                                     518                      --                    518                    10
                                           ------                --------                -------               -------

  Total equipment sales                    $3,321                  $4,679                 $7,583                $7,951
                                           ======                  ======                 ======                ======
</TABLE>


         The decrease in  equipment  sales is  primarily  attributable  to lower
sales to independent  payphone  providers  ("IPP's").  The Company believes that
sales  to  IPP's  continue  to  be  negatively  impacted  by  unresolved  issues
surrounding  dial-around  compensation.  The IPP  customers  began  receiving  a
portion  of their  long  overdue  dial-around  compensation  in late  July  1998
although the issues are not totally resolved.  International sales for the three
month  period  comparison  is lower in 1998  compared to 1997 due to lower sales
volumes  while the six month period ended June 30, 1998  reflects an increase of
$904,000  compared  to the six month  period  ended  June 30,  1997.  The higher
revenues  reflect  shipments in the first  quarter to Indonesia  and Mexico with
very low  international  revenues  during the first quarter of 1997.  Also,  the
Company received  $518,000 in the second quarter of 1998 from Ameritech  related
to the unfulfillment of a contract with the Company.

         The  Company's  gross profit on equipment  sales for the quarter  ended
June 30, 1998 was $764,000 ( or 23.0% of related  sales)  compared to $198,000 (
or 4.2% of related sales) for the quarter ended June 30, 1997.  Gross profit for
the six month period ended June 30, 1998 on equipment sales was $1.5 million (or
20.0 % of related  revenues)  compared to a gross loss for the six month  period
ended June 30, 1997 of $147,000  (or (1.8%) of related  sales).  The increase is
attributable  to  decreased  material  costs and  improved  efficiencies  in the
Company's  manufacturing  facility.  Also  contributing  was  lower  capitalized
software amortization of $135,000 for the three month period ended June 30, 1998
compared to $446,000 for the three month period ended June 30, 1997 and $254,000
compared  to $1.0  million  for the six  months  ended  June 30,  1998 and 1997,
respectively.  This  improvement  resulted from the September 1997 write down of
the carrying value of software  development costs related to the Company's older
product lines.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  expenses  decreased $479,000 for the three months ended June 30,
1998 compared to the three months ended June 30, 1997 and decreased $1.0 million
for the six months ended June 30, 1998 compared to the six months ended June 30,
1997.  Selling,  general  and  administrative  expense  for the  ILD  operations
approximated $763,000 and $1.5 million for the three and six month periods ended
June 30, 1997. The increase in selling,  general and administrative expenses for
the  pro-forma  periods  were a result of the  settlement  of the USLD  lawsuit,
higher sales and marketing  expenditures  through  advertising  and travel,  and
higher investor relations expenditures.

                                     - 18 -

<PAGE>




         Provision for Doubtful Accounts. During the quarter ended June 30, 1998
the Company  provided  $59,000 for doubtful  accounts related to equipment sales
compared to $147,000  provided for the quarter ended June 30, 1997.  For the six
month period  ended June 30, 1998,  the Company  provided  $144,000  compared to
$252,000 for the six month period ended June 30, 1997.

         Research  and  Development  Expenses.  Gross  spending for research and
development  increased $19,000 for the three months ended June 30, 1998 compared
to the three month period ended June 30, 1997 and decreased  $30,000 for the six
month period ended June 30, 1998 from the six month period ended June 30, 1997.

         Gain on Sale of Assets.  During the second  quarter ended June 30, 1998
the  Company  reported a gain on sale of assets of  $493,000  from the sale of a
portion of the Company's  ownership  interest in ILD to an unrelated third party
(see Note 6).

         During the three month period ended March 31, 1998 the Company reported
gains on sales of assets totaling $6.4 million. Such gains resulted from partial
gain  recognition  on the January 1998 sale of the  Company's  prepaid  services
operation  to ILD and from the gain on the March  1998 sale of a portion  of the
Company's  ownership  interest in the common stock of ILD to an unrelated  third
party.  The ILD common stock sold in March of 1998 by the Company was originally
acquired in connection with the disposition of the prepaid services operation.


Part II. Other Information

Item 1.  Legal Proceedings

         In April 1997,  U.S.  Long  Distance,  Inc.,  ("USLDI")  filed a Second
Amended  Complaint  against the Company,  the ("Lawsuit").  The complaint sought
actual damages of $4.0 million, exemplary damages,  attorney's fees and interest
for  the  Company's  alleged  tortious  interference  of  USLDI's  existing  and
prospective   contractual   relationships  with  PhoneTel   Technologies,   Inc.
("PhoneTel").  The Second  Amended  Complaint  alleged  the Company and its then
subsidiary, Intellicall Operator Services, Inc. interfered with USLDI's existing
contractual  relationship  with  PhoneTel,   another  defendant,  when  PhoneTel
executed an operator services agreement with the Company and its subsidiary.  On
July 24, 1998, The Company,  Intellicall  Operator  Services and ILD settled the
Lawsuit with USLDI through the collective payment of $225,000 and execution of a
mutual release of all claims.

Item 6.   Exhibits and Reports on Form 8-K

         (a)  Exhibits: None

         (b)  Reports on Form 8-K:  None.


                                     - 19 -

<PAGE>



Signatures

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


                                          INTELLICALL, INC.



                                /s/ John J. McDonald, Jr.
                                ----------------------------------------
                                          John J. McDonald, Jr.
                                          President and
                                          Chief Executive Officer

                                /s/ John M. Carradine
                                ---------------------------------------- 
                                          John M. Carradine
                                          Vice President Finance
                                          and Chief Financial Officer


Date:   August 14, 1998

                                     - 20 -