<PAGE>

                                   FORM 10-QSB

                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549



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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
                               -------------

COMMISSION FILE NUMBER 0-230 17
                       --------

                        CHOICETEL COMMUNICATIONS, INC.
            ------------------------------------------------------
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MINNESOTA                                                  41-1649949
------------------------------                        -------------------
(STATE OF JURISDICTION OR                             IRS EMPLOYER ID NO.
INCORPORATION OF ORGANIZATION)

9724 10TH AVE. NORTH, PLYMOUTH, MN                           55441
----------------------------------------                  ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                  (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE  612-544-1260
                                                    ------------

                                   N/A
                                   ---
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED FROM LAST
REPORT)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
                             YES    X      NO
                                  ----         ----

AS OF DATE OF FILING, THE COMPANY HAS 2,915,007 SHARES OUTSTANDING.

<PAGE>

                         CHOICETEL COMMUNICATIONS, INC.

                              FORM 10-QSB INDEX
                               AUGUST 13, 1999


Part I:    Financial Information

Item 1.    Financial Statements

  Consolidated Balance Sheet --
           December 31, 1998 and June 30, 1999

  Consolidated Statements of Operations --
           Three months ended June 30, 1998 and 1999
           Six months ended June 30, 1998 and 1999

  Consolidated Statements of Cash Flows --
           Six months ended June 30, 1998 and 1999

  Notes to Consolidated Financial Statements

Item 2.    Management's Discussion and Analysis


Part II:   Other Information

Item 1.    Legal Proceedings

Item 6.    Exhibits and Reports on Form 8-K
           (a)  Financial Data Schedule
           (b)  Reports on 8-K


<PAGE>

Signature

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


                         CHOICETEL COMMUNICATIONS, INC.


Date: August 13, 1999    By: /S/ JACK S. KOHLER
                             ------------------
                         Jack S. Kohler
                         Vice President and Chief Financial Officer



<PAGE>

                   CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY
                            CONSOLIDATED BALANCE SHEET
                  DECEMBER 31, 1998 AND JUNE 30, 1999 (UNAUDITED)

<TABLE>
<CAPTION>
                                                              JUNE 30,       DECEMBER 31,
                            ASSETS                              1999             1998
------------------------------------------------------      -----------      ------------
<S>                                                         <C>              <C>
Current assets:
  Cash ...............................................      $   602,028      $   363,239

  Accounts receivable ................................        1,216,879        1,080,794

  Prepaid:
    Rent .............................................          103,437          176,411

    Other ............................................          210,661          487,149

  Deferred taxes .....................................          757,000          710,000
                                                            -----------      -----------
      Total current assets ...........................        2,890,005        2,817,593
                                                            -----------      -----------

  Property and equipment, net ........................        6,728,494        6,336,401
                                                            -----------      -----------

Other assets:
  Prepaid rents ......................................           56,055           73,998

  Rental agreements, net of accumulated amortization
of  $776,333 at Dec. 1998, and $1,075,320 at June 1999        5,239,249        5,501,771

  Deferred financing, net of accumulated amortization
of $3,000 at Dec. 1998, and $8,000 at June 1999 ......           35,065           27,000
                                                            -----------      -----------

                                                              5,330,369        5,602,769
                                                            -----------      -----------
                                                            $14,948,868      $14,756,763
                                                            -----------      -----------
                                                            -----------      -----------
             LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Checks outstanding in excess of bank balance .......      $    45,935      $    74,604
  Notes payable ......................................          350,000          350,000
  Current portion of long-term debt ..................        1,485,207        1,222,559
  Accounts payable ...................................          343,217          238,944
  Accrued expenses ...................................        2,316,511        2,339,805
  Deposit on sale of assets ..........................          325,000
                                                            -----------      -----------
    Total  current liabilities .......................        4,865,870        4,225,912
                                                            -----------      -----------

Long-term liabilities:
  Deferred taxes .....................................          652,000          653,000
  Long-term debt, net of current portion .............        3,493,907        3,891,732
                                                            -----------      -----------
                                                              4,145,907        4,544,732
                                                            -----------      -----------

Shareholders' equity .................................        5,937,091        5,986,119
                                                            -----------      -----------

                                                            $14,948,868      $14,756,763
                                                            -----------      -----------
                                                            -----------      -----------

</TABLE>

                 See notes to consolidated financial statements.

<PAGE>

                   CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF OPERATIONS
               THREE MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
                SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)

<TABLE>
<CAPTION>
                                                       SIX MONTHS ENDED                    THREE MONTHS ENDED
                                                           JUNE 30,                             JUNE 30,
                                               ------------------------------        -----------------------------
                                                    1999              1998              1999               1998
                                               -----------         ----------        ----------         ----------
<S>                                             <C>                <C>               <C>                <C>
Service revenue..............................  $ 5,153,902         $3,998,755        $2,718,888         $2,015,074
Cost of service..............................    2,437,969          1,851,712         1,251,209            920,051
                                               -----------         ----------        ----------          ---------
Gross margin.................................    2,715,933          2,147,043         1,467,679          1,095,023
                                               -----------         ----------        ----------         ----------
Selling, general and admin:
  Service and collection.....................      831,922            462,082           410,009            231,041
  Marketing..................................      246,156            231,332            96,214            115,666
 Admin, office and overhead .................      697,590            540,748           354,513            324,019
                                               -----------          ---------        ----------         ----------
                                                 1,775,668          1,234,162           860,736            670,726
Depreciation and amortization................      708,154            581,174           359,902            289,677
Interest.....................................      235,099             73,144           121,296             32,659
Sales tax contingency........................      104,336            133,550            53,152             63,841
                                               -----------         ----------        ----------         ----------
                                                 2,823,257          2,022,029         1,395,086          1,056,903
                                               -----------         ----------        ----------         ----------
Income (loss) before income taxes ...........     (107,324)           125,014            72,593             38,120
Provision (credit) for income taxes..........      (48,296)            50,006            32,667             15,140
                                               -----------         ----------        ----------          ---------
Net income (loss)............................  $   (59,028)        $   75,008        $   39,926          $  22,980
                                               -----------         ----------        ----------          ---------
                                               -----------         ----------        ----------          ---------
Per share net income (loss)..................  $     (0.02)        $     0.03        $     0.01          $    0.01
                                               -----------         ----------        ----------          ---------
                                               -----------         ----------        ----------          ---------
Shares outstanding-weighted average..........    2,915,006          2,915,006         2,915,006          2,915,006
Per share diluted net income.................                      $     0.03        $     0.01          $    0.01
                                                                   ----------        ----------          ---------
                                                                   ----------        ----------          ---------

Shares outstanding - diluted.................                       2,915,006         2,915,006          2,915,006

</TABLE>

                 See notes to consolidated financial statements.

<PAGE>

                   CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)

<TABLE>
<CAPTION>
                                                   SIX MONTHS ENDED JUNE 30,
                                                   -------------------------
                                                      1999            1998
                                                   ---------       ---------
<S>                                                <C>             <C>
Cash flows from operating activities:
  Net (loss)income .............................   $ (59,028)      $  75,008

  Adjustments to reconcile net (loss) income to
  net cash provided by operating activities:

Depreciation and amortization ..................     708,154         581,174

  Changes in operating assets and liabilities

   (Increase) decrease in:

      Accounts receivable ......................    (136,085)       (293,961)

      Prepaid rent and other ...................     263,636         206,891

      Deferred taxes ...........................     (48,000)

    Increase (decrease) in:

      Accounts payable .........................      75,604        (105,416)

      Accrued  expenses ........................     (23,294)        (64,794)
                                                   ---------       ---------

Net cash provided by operating activities ......     780,987         398,902
                                                   ----------      ---------
Cash flows used in investing activities:

  Purchase of equipment and rental contracts ...    (742,021)     (4,988,568)

  Deposit received on sale of assets ...........     325,000

  Sales of short-term investments ..............                   1,151,215
                                                   ----------

Net cash (used in) investing activities ........    (417,021)     (3,837,353)
                                                   ----------     ----------

Cash flows from financing activities:

  Proceeds from

    Issuance of:

      Long-term debt ...........................     450,000       4,300,000

    Collections of subscription receivable .....      10,000           8,571

    Principal payments on long-term  debt ......    (585,177)       (577,208)
                                                   ---------       ---------

    Net cash provided by (used in) financing
      activities ...............................    (125,177)      3,731,363
                                                   ---------       ---------

Net increase in cash ...........................     238,789         292,912

Cash, beginning balance ........................     363,239         343,705
                                                   ---------       ---------

Cash, ending balance ...........................   $ 602,028       $ 636,617
                                                   ----------      ---------
                                                   ----------      ---------
Supplemental disclosure of cash flow
  information:

  Cash paid for interest .......................   $ 235,099       $  73,144
                                                   ----------      ---------
                                                   ----------      ---------

</TABLE>

                      See notes to consolidated financial statements
<PAGE>



                CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEAR ENDED DECEMBER 31, 1998 AND
               SIX MONTH PERIOD ENDED JUNE 30 1999 (UNAUDITED)

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION:
     The consolidated financial statements include the accounts of ChoiceTel
Communications, Inc (formerly Intelliphone, Inc.) and its wholly owned
subsidiaries Choicetel, Inc., and Public Internet Access Holding Corp.
All material intercompany balances have been eliminated.

NATURE OF BUSINESS:
     Intelliphone, Inc. was incorporated in October 1989 and changed its name
to ChoiceTel Communications, Inc. in April 1997. The Company provides coin
operated telephone service in fourteen states and Puerto Rico, however,
revenue is generated predominately in Minnesota, Oregon, Pennsylvania and
Puerto Rico.

     Choicetel, Inc. was incorporated in 1995 and was dormant until June 1996
when operations began. Choicetel is a Competitive local exchange carrier
(CLEC) which resells local telephone service to pay telephone owners in
Minnesota. Choicetel's largest customer is ChoiceTel Communications.

     Public Internet Access Holding Corp. was incorporated in 1998 and has
not started operations.

PROPERTY AND EQUIPMENT AND DEPRECIATION METHODS:
     Property and equipment, consisting principally of coin operated telephones,
are stated at cost. Depreciation is being provided by the straight-line method
over the estimated useful lives, principally ten years, of the related assets.
In October 1998, the Company changed the estimated useful life of all phones
from 7 years to 10 years, based upon its experience. The effect of this change
resulted in $75,000 less depreciation expense in 1998 and $150,000 less
depreciation expense in 1999. Phone locations are evaluated by management to
determine if their carrying amounts have been impaired. No reductions for
impaired assets have occurred.

PREPAID RENTS:
     Prepaid rents represent incentives paid to property owners to secure long
term phone location agreements at such sites and are being amortized as consumed
per the phone location agreement.

RENTAL AGREEMENTS:
     Rental agreements consist of the purchase price paid for phone location
agreements in excess of the purchase price of the related equipment on site and
are amortized on a straight line basis over the estimated economic life of the
rental agreements, currently ranging from five to twelve years.

DEFERRED FINANCING:
     Deferred financing costs are being amortized over the life of the related
notes on a straight-line basis.

STOCK-BASED COMPENSATION:



<PAGE>

     The Company accounts for its stock options in accordance with the
provisions of Accounting Principles Board Opinion No. 25 (APB No. 25),
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. As such, compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. The Company has also adopted SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS No. 123), which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based award on the date of grant. Alternatively, SFAS No. 123 allows
entities to continue to apply the provisions of APB No. 25 and provide pro forma
net income disclosures for employee stock option grants as if the fair-value
based method defined in SFAS No. 123 had been applied. The Company has elected
to continue to apply the provisions of APB No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.

NET INCOME (LOSS) PER SHARE:
     In 1997, the Company adopted SFAS Statement No. 128, "Earnings per share".
Basic earnings per common share are based on the weighted average number of
common shares outstanding in each year. Diluted earnings per common share assume
that outstanding common shares are increased by shares issuable upon exercise of
stock options and warrants for which market price exceeds exercise price, less
shares which could have been purchased by the Company with the related proceeds.
This calculation added 1,451 shares to the diluted weighted average shares
outstanding for 1998.

ESTIMATES:
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of certain assets and
liabilities and disclosures. Accordingly, the actual amounts could differ from
those estimates. Any adjustments applied to estimated amounts are recognized in
the year in which such adjustments are determined. Estimates that are
susceptible to significant change are disclosed in note 7.

2.  SHAREHOLDERS' EQUITY:

In February, 1997 the shareholders of Choicetel, Inc. contributed all
outstanding shares of Choicetel, Inc. to the Company. The contribution was
recorded as an adjustment to additional paid-in capital.

In April 1997, the shareholders approved an increase in the number of authorized
shares of common stock from 2,000,000 with no par value to 15,000,000 with $0.01
par value. The shareholders also approved the authorization of 5,000,000 shares
of preferred stock with $0.01 par value. The change in par value did not affect
any existing rights of shareholders and has been recorded as an adjustment to
additional paid-in capital and common stock.

In November 1997, the Company completed an initial public offering of 800,000
Units at an offering price of $7.00 per Unit. Each Unit consisted of one share
of Common Stock and one Redeemable Warrant. The Company received net proceeds of
approximately $4,499,000 after the payment of approximately $1,101,000 in
related underwriting fees and offering costs.



3. ACQUISITIONS:

Jay Telephone Vending:



<PAGE>

On June 30, 1998, the Company purchased a route of payphones in Philadelphia,
Pennsylvania along with the trade name Jay Telephone Vending from Edward Steven
Corporation and Drake Telephone Company. The purchase price for the acquired
assets was $4,005,000, and was financed with the bank with a $3,800,000 note
payable.

The following summarized unaudited pro forma information assumes the acquisition
had occurred on January 1, 1998. The pro forma statement is presented for
illustration purposes only and is not indicative of what the Company's actual
results would have been.

<TABLE>
<CAPTION>
                               YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
                                                          PRO FORMA
                           COMPANY    JAY TELEPHONE     ADJUSTMENTS     COMBINED
                           -------    -------------     -----------     --------
<S>                      <C>                <C>           <C>          <C>
GROSS MARGIN             5,112,906          878,434                    5,991,340
                         ---------          -------                    ---------
SELLING, GENERAL AND
ADMINISTRATIVE           3,021,734          617,674        -223,173    3,416,235
INTEREST EXPENSE           310,081           13,413         176,587      500,081
DEPRECIATION AND
AMORTIZATION
                         1,317,051                0         235,539    1,552,590
SALES TAX CONTINGENCY      253,972                0               0      253,972
                         ---------          -------        --------    ---------
INCOME BEFORE
INCOME TAXES               210,068          247,347        -188,953      268,462
PROVISION FOR INCOME
TAXES                       95,000           98,939         -75,582      118,357
                         ---------          -------        --------    ---------
NET INCOME AFTER TAX       115,068          148,408        -113,471      150,105
                         ---------          -------        --------    ---------
                         ---------          -------        --------    ---------

</TABLE>

<TABLE>
<CAPTION>
4. PROPERTY AND EQUIPMENT:
                                              1999                     1998
                                              ----                     ----
<S>                                      <C>                      <C>
Phones and related equipment             $ 8,994,024              $ 8,288,468
Accumulated depreciation                  (2,446,755)              (2,163,041)
                                         -----------              -----------
                                           6,547,269                6,125,427

Office equipment and
improvements                                 288,535                  291,093
Accumulated depreciation                    (107,310)                 (80,119)
                                         -----------              -----------
                                             181,225                  210,974
                                         -----------              -----------
                                         $ 6,728,494              $ 6,336,401
                                         -----------              -----------
                                         -----------              -----------

</TABLE>

<TABLE>
<CAPTION>
5. NOTES PAYABLE:
                                                          1999         1998
                                                          ----         ----
<S>                                                     <C>           <C>
Note payable, shareholder, interest only at 8.5%.
Convertible to shares of common stock at $5.10 per
share                                                   $350,000     $350,000
                                                        --------     --------
                                                        $350,000     $350,000
                                                        --------     --------
                                                        --------     --------

</TABLE>

<TABLE>
<CAPTION>
6. LONG-TERM DEBT:


                                                                       1999         1998
                                                                       ----         ----
<S>                                                                <C>          <C>
Note payable, Telco West, due in monthly installments of
                                                                                $  564,874
</TABLE>

<PAGE>

<TABLE>
<S>                                                                    <C>                  <C>
$21,342 including interest at 10.25% through July 2001, secured        $  463,335
by equipment.
Note payable, Telecapital, due in monthly installments of $4,452
including interest at 14.5% through April 2002, secured by
equipment.                                                                116,604              138,159
Note payable, bank, due in monthly installments plus interest at
2% above prime rate.                                                    3,191,997            3,495,998
Note payable, bank, revolving credit facility up to $800,000,
convertible to a term note in October 1999.                               800,000              350,000
Capital leases at 9.5%                                                    407,178              551,156
                                                                       ----------           ----------
                                                                        4,979,114            5,114,291
Less current portion                                                    1,485,207            1,222,559
                                                                       ----------           ----------
                                                                       $3,493,907           $3,891,732
                                                                       ----------           ----------
                                                                       ----------           ----------

</TABLE>

<TABLE>
<CAPTION>
Future maturities of long-term debt are as follows:
                                                                          At            At
YEAR ENDING DECEMBER 31,                                             6/30/99      12/31/98
                                                                     -------      --------
<S>                                                                <C>          <C>
1999                                                             $   685,065    $1,222,559
2000                                                               1,433,205     1,232,354
2001                                                               1,178,277       983,837
2002                                                               1,110,432       910,080
2003                                                                 572,135       765,461
                                                                  ----------    ----------
                                                                 $ 4,979,113    $5,114,291
                                                                  ----------    ----------
                                                                  ----------    ----------

</TABLE>

7. COMMITMENTS AND CONTINGENCY:

Phone locations:

   The Company rents phone locations from merchants and property owners under
varying lease terms, usually seven years, generally cancelable by the Company
upon 15 days notice.

Consulting agreement:

   The Company paid a director/shareholder $34,800 and $14,400 for certain
consulting services in 1998 and 1999, respectively.

Leases:

Operating leases:

The Company leases its offices in Minnesota, Oregon and Puerto Rico under
operating leases expiring in May 2000. The Company also leases office space in
Pennsylvania on a month-to-month basis. The leases have renewal options and
require the Company to pay certain common area costs and real estate taxes. Rent
expense under the leases was $101,737 for the year ended December 31, 1998.

Future minimum lease payments are as follows:

<TABLE>
<CAPTION>
              YEAR ENDING DECEMBER 31,                  AMOUNT
              ------------------------                  ------
                   <S>                                <C>
                   1999                               $  83,788
                   2000                                  26,795
                                                      ---------
                                                      $ 110,583

</TABLE>

<PAGE>

Capital leases:

The cost of equipment, included in property and equipment, acquired under
capital leases and the related accumulated depreciation at December 31, 1998, is
as follows:

<TABLE>
<S>                                                    <C>
Cost                                                  $ 934,856
Less accumulated depreciation                           177,858
                                                      ---------
                                                      $ 756,998
                                                      ---------

</TABLE>

The future minimum lease payments under capital leases, at December 31, 1998,
and their net present value are as follows:

<TABLE>
<S>                                                   <C>
Total future minimum lease payments, payable in:
                   1999                               $  355,158
                   2000                                  241,970
                                                      ----------
                                                         597,128
Less amounts representing interest                        45,972
                                                      ----------
Present value of future minimum lease payments        $  551,156
                                                      ----------
                                                      ----------
</TABLE>

Dial-around compensation:

     The Company has recognized revenue for dial-around compensation based
upon rates for such compensation set by the Federal Communications Commission
(FCC). In July, 1997 the U.S. Court of Appeals ruled that the rate set by the
FCC was inappropriate and needed to be reexamined. The FCC on October 9, 1997
issued an order reestablishing a dial-around rate for the two year period
commencing October 6, 1997. The FCC indicated that it planned to address
dial-around compensation for the period from November 6, 1996 through October
6, 1997 in a subsequent order. There can be no assurance when the FCC will
issue another order regarding the rate of dial-around compensation, what that
order will determine, whether such order will be appealed, and what the
determination would be upon any appeal. Accordingly, the Company has
recognized revenue at the previous rate of $6.00 per phone per month for the
period of January 1, 1997 through October 6, 1997. The change in estimate
resulted in an accrual of a $351,000 liability at December 31, 1997 and is
included in accrued expenses.

Effective October 7, 1997 the Company has recognized dial around revenue
based upon estimated dial-around calls per phone. Estimates vary by time of
year and geographic location of the phones. In 1998, The FCC adjusted the per
call dial-around rate to $0.24 retroactive to October 7, 1997. The amount due
from dial-around compensation included in accounts receivable is
approximately $856,000 and $848,000 at December 31, 1998 and June 30, 1999,
respectively. The ultimate resolution of matters related to dial-around
compensation could have a material effect on the Company's results of
operations.

Sales tax contingency:

     After an original contact by ChoiceTel Communications, Inc., the
Minnesota Department of Revenue conducted and audit of the Company's revenues
for calculation of sales taxes which the department asserts are due on
telephone receipts. While the Company does not believe its coin receipts are
subject to Minnesota sales tax and has notified the Minnesota Department of
Revenue of its position, it may have to assert its position in the Minnesota
courts in order to prevail. The financial statements include an accrual
management believes is sufficient to cover this contingency.

<PAGE>

Puerto Rico line charge contingency:

     In March of 1998, the Company received verbal assurances from the Puerto
Rican Telephone Company (PRTC) that payphone lines would be made available and
the charge would be a flat rate of $50.00 per month per line. However, when
phone bills were received in the Company's offices, they included additional
charges ranging from $0.13 to $0.26 per call. At that time, the PRTC and the
Company agreed that until a final decision was reached on a rate case before the
Puerto Rican Regulatory Board (PRRB), the Company would not pay the per call
charges. On May 27, 1998 the PRRB ruled on that rate case and instructed the
PRTC to reduce the per call charges to between $.01 and $.03 per call, depending
upon the routing of the call. The PRTC appealed the ruling to the Court of
Appeals, which upheld the ruling. PRTC has since appealed the ruling to the
Puerto Rico Supreme Court, which has agreed to hear the case and has issued a
stay of execution until the court renders a decision on the appeal. From April
through September 1998, the Company accrued unpaid line charges at the rate of
$0.15 per call. In October 1998, the Company reduced the rate it was accruing
line charges to $0.06 per call based upon progress of this case.

8.   STOCK OPTIONS AND WARRANTS:

     On April 11, 1997, the Company's Board of Directors adopted the 1997
Long-term Incentive and Stock Option Plan (the "Plan"). The Plan provides for
the issuance of incentive stock options and non-qualified stock options to
key employees and directors of the Company. The total number of shares of
common stock authorized and reserved for issuance under the Plan is 100,000
shares. The exercise price for each incentive stock option granted under the
Plan may not be less than the fair market value of the common stock on the
date of the grant, unless, in the case of incentive stock options, the
optionee owns greater than 10% of the total combined voting power of all
classes of capital stock of the Company, in which case the exercise price may
not be less than 110% of the fair market value of the common stock on the
date of the grant. The exercise price for each non-qualified option may not
be less the 85% of the fair market value of the common stock on the date of
the grant. Unless otherwise determined by the Board, incentive options
granted under the Plan have a maximum duration of 10 years, non-qualified
options and awards have a maximum duration of 15 years. Vesting is based on
such terms and conditions as the board shall determine. As of December 31,
1997, no options had been granted under the plan.

During 1998 the Company granted options to employees and non-employee
directors to purchase 70,000 shares through the incentive plan.

Information with respect to options outstanding as of December 31, 1998 and
June 1999, is summarized as follows:

<TABLE>
<CAPTION>
                                                                 1998                                  1999
                                                             -------------                        --------------
                                                              Weighted avg                         Weighted avg
                                               Shares        Exercise Price         Shares        Exercise Price
                                               -------       --------------        -------        --------------
<S>                                            <C>           <C>                   <C>            <C>
Outstanding at the beginning of
the year                                       122,500           $3.37             130,000            $4.34
Granted                                         70,000            4.06             140,588             2.13
Exercised
Forfeited                                       62,500            2.00               6,000             3.50
                                                ------           -----             -------            -----
Outstanding at end of period                   130,000           $4.34             264,588            $3.05
                                                ------           -----             -------            -----
                                                ------           -----             -------            -----
Options exercisable at period
end                                             80,000                             235,588
</TABLE>

<PAGE>
<TABLE>
<S>                                            <C>           <C>                   <C>            <C>
Weighted average remaining life                3.4 years                           3.3 years
</TABLE>

During 1998 the Company issued 150,000 warrants to purchase at any time one
share of common stock, 50,000 of the warrants have an exercise price of $5.00
expiring August 2000, 50,000 of the warrants have an exercise price of $6.00
expiring in August 2001, and 50,000 have an exercise price of $7.00 expiring
in August 2002.

The Company has outstanding the following warrants:

<TABLE>
<CAPTION>
                                                                                              Weighted average
                                                               12/31/98         6/30/99         Exercise price
                                                              ---------       ---------       ----------------
<S>                                                           <C>             <C>             <C>
Issued in public offering                                       800,000         800,000              $9.50
Granted to Underwriter in public offering                       160,000         160,000              $8.95
Granted to investment relations company                         150,000         150,000              $6.00
Outstanding at period end                                     1,110,000       1,110,000              $9.40
Exercisable at period end                                     1,110,000       1,110,000
Weighted average remaining life                               3.8 years       3.2 years
</TABLE>

The warrants granted to the Underwriter consist of one warrant for 80,000
units at $8.40 per unit and is not exercisable until one year after the date
the registration statement is declared effective. Each unit contains a
warrant that entitles the holder to purchase at any time one share of common
stock at an exercise price of $9.50. The warrants expire November 2002.

9. INCOME TAXES:

On January 1, 1997 the Company terminated its status to be treated as an "S"
corporation. The provision for income taxes is as follows:

<TABLE>
<CAPTION>
                                                 1998
                                               ---------
<S>                                            <C>
Current, state                                 $   2,000
Deferred:
    Federal                                       80,000
    State                                         13,000
                                               ---------
                                                $ 95,000
</TABLE>

A reconciliation between the statutory federal income tax rates to the
Company's effective tax rate is as follows:

<TABLE>
<CAPTION>
                                                 1998
                                               --------
<S>                                            <C>
Statutory federal tax rate                      34.0%
State taxes (net of federal tax benefit)         6.0%
Effect of nondeductible expenses                 5.2%
                                               --------
Effective tax rate                              45.2%
                                               --------
                                               --------
</TABLE>

The deferred tax asset and deferred tax liability consists of the following:

<TABLE>
<CAPTION>
                                          December 31, 1998           June 30, 1999
                                          -----------------           -------------
<S>                                       <C>                         <C>
Deferred tax asset:
Sales tax contingency                             $ 545,000               $ 592,000
Accrued expenses                                     25,000                  25,000
Accrued dial-around compensation                    140,000                 140,000
                                                    -------                 -------
                                                  $ 710,000               $ 757,000
</TABLE>
<PAGE>

<TABLE>
<S>                                      <C>                          <C>
Deferred tax liability:
Depreciation                                      $ 839,000              $1,014,000
Amortization                                        (31,000)                (46,000)
Net operating loss carry forward                   (155,000)               (316,000)
                                                  ---------               ---------
                                                  $ 653,000               $ 652,000
                                                  ---------               ---------
                                                  ---------               ---------
</TABLE>


Utilization of the deferred tax asset of $710,000 disclosed above is
dependent on future taxable profits in excess of profits arising from
existing taxable temporary differences. Although there was a reportable
taxable loss for the year ended December 31, 1998 the assets have been
recognized based on management's estimate of future taxable income.

10. FINANCIAL INSTRUMENTS:

     The Company's financial instruments recorded on the balance sheet
include cash and short-term investments, accounts receivable, notes and
accounts payable and debt. Because of their short maturity, the carry amount
of cash, short-term investments, accounts receivable and notes and accounts
payable approximates recorded value based on rates available to the Company
for similar terms and maturities.

11.      SUBSEQUENT EVENTS:

     On July 9, 1999 the Company sold 243 phones located in Idaho and Wyoming
to Alpha Telcom for $400,000, and agreed to sell an additional 820 phones
located in Oregon, Washington, Nevada and Colorado by no later than November
30, 1999. The gain on the sale was not significant.

<PAGE>

ITEM 2.
                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company derives revenue from three principal sources: coin calls,
non-coin calls and Dial-Around calls. Coin calls represent calls paid for
with coins deposited in the telephone. The Company recognizes coin revenue in
the amount deposited net of applicable sales taxes. Non-coin calls are calls
charged to a customer credit card or billed to the called party (collect
calls). These calls are processed by the payphone's computer using "store and
forward" technology or, if a live operator is requested, the call is
processed by an operator service provider ("OSP") such as, for example, AT&T,
MCI or Sprint. Compensation for Dial-Around calls is paid by long-distance
carriers in accordance with rules set by the FCC when consumers access a
long-distance carrier directly by dialing an access number, an 800 number, or
by using a non-billable calling card.

The principal costs related to ongoing operation of the Company's payphones
include telephone line charges, consisting of payments made by the Company to
telephone companies and long-distance carriers for access charges and use of
their networks and commission payments to site providers.

RECENT ACQUISITIONS

     On June 30, 1998, the Company completed an acquisition from Edward
Steven Corporation and Drake Telephone Company of site contracts for 965
payphones located principally in Philadelphia, Pennsylvania and all equipment
located at the respective sites, as well as the trade name "Jay Telephone
Vending". The purchase price for the acquired assets was $4,005,000, and was
financed with a $3,800,000 note payable to the bank.

     During 1998, the Company began researching the Puerto Rican payphone
market. It was determined that although the Puerto Rican Regulatory Board
(PRRB) had not required the Puerto Rican Telephone Company (PRTC) to provide
"competition neutral" service to independent payphone providers at a
"cost-based rate", the Company was confident that the Telecom Act would
eventually correct this situation. In March 1998, the Company hired a Leasing
Manager for Puerto Rico, and began contracting with local businesses to
provide payphone service. In April 1998 the Company received its first
payphone line from the PRTC and installed its first payphones. As of June 30,
1999 the Company had installed 825 payphones and had signed agreements to
install an additional 1,200 payphones.

     In March of 1998, the Company received verbal assurances from the PRTC,
that payphone lines would be made available, and the charge would be a flat
rate of $50.00 per month per line. However, when actually invoiced the bills
included additional charges ranging from $0.13 to $0.26 per call. At that
time, the PRTC and the Company agreed that until a final decision was reached
on a rate case before the PRRB, the Company would not pay the per call
charges. On May 27, 1998 the PRRB ruled on that rate case and instructed the
PRTC to reduce the per call charges to between $0.01 and $0.03 per call,
depending upon the routing of the call. The PRTC appealed the ruling to the
Court of Appeals, which upheld the ruling in December 1998. The PRTC appealed
the ruling to the Puerto Rican Supreme Court, which on January 28, 1999
agreed to hear the case and issued a stay of execution until the court
renders a decision on the appeal. During the second and third quarters of
1998 the Company accrued unpaid line charges at the rate of $0.15 per call.
In the fourth quarter the Company reduced the accrued unpaid line charges to
$0.06 per call. If the Puerto Rican Supreme Court reverses the Court of
Appeals, and reinstates

<PAGE>

the old rates, then the Company estimates it would have unrecorded
liabilities at December 31, 1998, and June 30, 1999 of $45,000 and $175,000
respectively.

     During 1998, the Company began test marketing public internet access
terminals, which allow customers to access the internet while away from their
home or office computer. The customers have the option of paying the charges,
currently $1.00 for 5 minutes, using cash or a credit card. At June 30, 1999
the Company had contracted with site providers to install 10 terminals, of
which 7 were installed. Under the terms of the contracts, the Company
receives all revenues generated by the terminals in return for a commission
payment based upon revenues generated.

     Based on results of testing to date, management has determined to
continue public internet testing in order to determine whether consumer
demand will be sufficient to generate a return on the investment, which
investment currently is approximately $5,000 per terminal. Management is
considering strategies to develop the internet access market, including
bringing into the business joint venture partners that may benefit in owning
part of a network of public internet terminals, with the goals of lowering
the Company's investment per terminal and accelerating the growth of the
network. During the first quarter of 1999, the Company announced it is
assessing its long-term strategic plan, which may include the sale of its
payphone assets and the refocusing of the Company in the public internet
access market.

THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30 1998.

     Total revenue for the three months ended June 30, 1999, increased
approximately $703,000, or 34.9%, compared to the three months ended June 30,
1998. This growth was due primarily to the Company increasing the average
number of pay telephones in service from 3,250 during the 1998 period to
4,800 during the 1999 period, an increase of 47.7%. Coin revenue increased
$484,000 or 32.6% and non coin revenues increased $103,000 or 45.6% compared
to the previous year period. Dial-around compensation increased $115,500 or
37.9%. The Company accrued dial-around compensation at approximately $27.00
per phone per month during the 1998 period compared to $30.00 per phone per
month during the 1998 period.

     Commencing in the fourth quarter of 1998, the Company experienced a
significant decrease in coin revenues in the Midwest region. The Midwest
region includes Minnesota and Wisconsin and represents approximately 44% of
the phones in service at June 30, 1999. During the fourth quarter of 1998,
first quarter 1999, and second quarter 1999, total coin revenues in that
region decreased $129,000 or 11.2%, $210,000 or 18.9%, and $209,000 or 18.7%
respectively. Management attributes the reduction to increased competition
from wireless communication devices.

     Telephone and long-distance charges increased $226,000 or 38.3% as
compared to the previous year period. Site Provider commissions increased
$105,000 or 31.7% over the previous year period. Selling, general and
administrative ("SG&A") expenses increased by $190,000 or 28.3%, due to the
increased spending to open an office in Puerto Rico and maintain the Jay
Telephone Vending office.

     Interest expense increased $88,500 or 271.4% compared to the prior year
due to the Jay Telephone acquisition and route expansion in Puerto Rico.
Depreciation and amortization for the 1999 period increased $70,000 or 24.2%
and was reduced by approximately $75,000 as a result of increasing the
estimated useful life of payphones from 7 years to 10 years effective the
fourth quarter of 1998. Management believes a 10 year useful life is a better
estimate of payphone performance. Without this change, depreciation and
amortization increased $145,000 or 45.2 % over the previous year as a result
of the higher depreciation and amortization associated with the acquired
route.

<PAGE>

     Earnings before interest, tax, depreciation and amortization (EBITDA)
increased $175,000 or 28.3%. Net income after tax increased $23,000 or 138.2%.

SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30 1998.

     Total revenue for the six months ended June 30, 1999, increased
approximately $1,155,000, or 28.9%, compared to the six months ended June 30,
1998. This growth was due primarily to the Company increasing the average
number of pay telephones in service from 3,200 during the 1998 period to
4,700 during the 1999 period, an increase of 46.9%. Coin revenue increased
$823,000 or 28.1% and non coin revenues increased $192,000 or 45.8% compared
to the previous year period. Dial-around compensation increased $140,000 or
21.5%. The Company accrued dial-around compensation at approximately $27.00
per phone per month during the 1998 period compared to $30.00 per phone per
month during the 1998 period.

     Commencing in the fourth quarter of 1998, the Company experienced a
significant decrease in coin revenues in the Midwest region. The Midwest
region includes Minnesota and Wisconsin and represents approximately 44% of
the phones in service at June 30, 1999. During the fourth quarter of 1998,
first quarter 1999, and second quarter 1999, total coin revenues in that
region decreased $129,000 or 11.2%, $210,000 or 18.9%, and $209,000 or 18.7%
respectively. Management attributes the reduction to increased competition
from wireless communication devices.

     Telephone and long-distance charges increased $401,000 or 33.6% as
compared to the previous year period. Site Provider commissions increased
$185,500 or 28.2% over the previous year period. Selling, general and
administrative ("SG&A") expenses increased by $541,500 or 43.9%, due to the
Company's increased spending in Marketing and Acquisition activities, which
includes $371,000 of SG&A in Puerto Rico and $241,000 of SG&A in Pennsylvania.

     Interest expense increased $162,000 or 221.4% compared to the prior year
due to the Jay Telephone acquisition and route expansion in Puerto Rico.
Depreciation and amortization for the 1999 period increased $127,000 or 21.8%
and was reduced by approximately $150,000 as a result of increasing the
estimated useful life of payphones from 7 years to 10 years effective the
fourth quarter of 1998. Management believes a 10 year useful life is a better
estimate of payphone performance. Without this change, depreciation and
amortization increased $277,000 or 45.2 % over the previous year as a result
of the higher depreciation and amortization associated with the acquired
route.

SALES TAX CONTINGENCY.

     The Company, based on its analysis of the published regulations of the
Minnesota Department, of Revenue, has not remitted any sales tax payments to
the State of Minnesota. In 1996, the Company learned that the position of the
Department of Revenue was that calls from payphones were subject to state
sales tax. Management is of the view that the payphone service it provides is
not subject to sales tax and the Company is challenging the imposition of the
tax. Nonetheless, the Company has established a reserve of $1.4 million to
cover the potential of an unsuccessful resolution of this matter.

LIQUIDITY AND CAPITAL RESOURCES

     For the six months ended June 30, 1999, the Company's operating
activities provided $781,000. Investments in equipment and rental agreements
used $742,000 and principal payments on long-term debt used $585,000.
Activities were funded with $450,000 drawn from the credit facility with the
bank, a $325,000 deposit received on a pending sale of payphones, and
collection of $10,000 of subscription receivable, resulting in a $239,000
increase in cash balances.

    On June 30, 1998 the Company entered into a credit agreement with Norwest
Bank Minnesota, pursuant to which the Company borrowed $3,800,000 to purchase
a route of 965 payphones in Philadelphia, Pennsylvania. The Company has
granted the Bank a first lien on all of

<PAGE>

its assets to secure its obligations to the Bank. The agreement provides for
monthly payments of interest and principal. The initial interest rate is 1%
over the banks reference rate and is adjusted annually based upon debt
leverage. The principal balance is scheduled to be repaid 16% in the first
year, 18% in the second year, 20% in the third year, 22% in the fourth year
and 24% in the 5th year. On December 16, 1998 the agreement was amended to
provide the Company a $1,000,000 line of credit to be used to accelerate the
rate of installations in Puerto Rico. The line of credit converts into a
fully amortizing term loan on September 30, 1999 to be amortized over the
following 45 months.

     On June 30, 1999 and continuing as of the date of filing, the Company
was not in compliance with several financial covenants under its Credit
Agreement dated June 30, 1998 as amended, (the "Agreement") with Norwest Bank
Minnesota, N.A. (the "Bank"). The Company has borrowed approximately $4
million under the Agreement and is current in all respects in its payments of
principal and interest to the Bank. On July 29, 1999, the Bank notified the
Company that it was in default for failure to meet the debt service coverage
ratio, fixed charge coverage ratio and operating cash flow requirement. The
Bank also indicated that it had no present intention to exercise its rights
to accelerate the maturity of the indebtedness or to foreclose on its
security interest. Certain officers and directors of the Company are
guarantors of a portion of the Company's obligations under the Agreement.

     In addition, the Bank has advised the Company that the Bank believes the
Company's undertaking to incorporate Public Internet Access Holdings
Corporation ("PIAHC") as a vehicle to continue to test and develop a public
Internet access business through the use of terminals in public facilities,
violates a covenant in the Agreement which prohibits certain investments by
the Company. The Company has initiated discussions with the Bank for the
objective of modifying the Agreement, or obtaining a waiver if necessary, in
order to permit the Company to pursue the Internet terminal business using
the vehicle of PIAHC.

     During the first quarter of 1999, the Company agreed in principle to
sell approximately 1,000 payphones in an all cash transaction. On July 9,
1999 the Company sold 243 phones located in Idaho and Wyoming for $400,000
and agreed to sell an additional 820 phones by no later than November 30,
1999. The Company anticipates that net proceeds will be applied to the
reduction of debt and the installation of payphones in Puerto Rico. The
Company expects to partially offset loss of revenues derived from the assets
to be sold with revenues from the Puerto Rican phones and through reduced
borrowing costs.

<PAGE>


Part II  - Other Information

Item 1. Legal Proceedings - None

Item 6.  Exhibits and Reports on Form 8-K

(a) 27 - Financial Data Schedule

(b) Reports on Form 8-K - None