<PAGE>

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

                                   FORM 10-KSB
(Mark One)
      [X]              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

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

                          Commission File No. 0-230 17

                         CHOICETEL COMMUNICATIONS, INC.
                 (Name of small business issuer in its charter)

             MINNESOTA                                  41-1649949
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)

                   9724 10TH AVENUE NORTH, PLYMOUTH, MN 55441
                    (Address of principal executive offices)

Issuer's telephone number: (612) 544-1260

Securities registered pursuant to Section 12(b) of the Act:   NONE

Securities registered pursuant to Section 12(g) of the Act:

Title of each class:                  Name of each exchange on which registered:
        COMMON STOCK, $.01 PAR VALUE           THE NASDAQ SMALLCAP MARKET
        REDEEMABLE WARRANT                     THE NASDAQ SMALLCAP MARKET

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         The revenues for ChoiceTel Communications, Inc. for the fiscal year
ended December 31, 1998 were $9,344,248.

         The aggregate market value of the voting and non-voting common equity
held by non-affiliates as of March 17, 1999, based on the closing sale price of
the Common Stock on such date as reported on the NASDAQ SmallCap Market, was
$3,240,324.

On March 1, 1999, the Company had outstanding 2,915,006 shares of Common Stock,
par value $.01 per share.

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                       DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the Registrant's Form SB-2, Registration Number 333-29969,
are incorporated by reference into Part II of this Form 10-KSB.

    Portions of the Registrant's Proxy Statement for its 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.

    Transitional Small Business Disclosure Format (Check one): Yes       No  X 
                                                                   ----     ----

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                              TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
                                    PART I
<S>                                                                         <C>
ITEM 1.  DESCRIPTION OF BUSINESS................................................
ITEM 2.  DESCRIPTION OF PROPERTY................................................
ITEM 3.  LEGAL PROCEEDINGS......................................................
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................


                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...............
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..............
ITEM 7.  FINANCIAL STATEMENTS...................................................
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE....................................


                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
         PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.............
ITEM 10. EXECUTIVE COMPENSATION.................................................
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT.........................................................
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.......................................

         SIGNATURES.............................................................

         INDEX TO FINANCIAL STATEMENTS..........................................

         INDEX TO EXHIBITS......................................................
</TABLE>

<PAGE>

                                     PART I
ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         ChoiceTel Communications, Inc. (the "Company") was formed as a
Minnesota corporation in 1989. The Company is the largest independent payphone
service provider ("PSP") in Minnesota. The Company installed its first payphones
in early 1990 and as of December 31, 1998, had an installed phone base of
approximately 4,500 payphones in fourteen states and Puerto Rico. The Company
has grown its business through the installation of pay telephones in new areas
and through strategic asset acquisitions of payphone routes and related assets,
including 270 payphones located in Minnesota acquired from American Amusement
Arcade in 1993; 85 payphones acquired in Nevada from Telco West in 1995; an
additional 1,020 payphones acquired from Telco West in 1997 in Oregon, Idaho,
Colorado, Washington and Wyoming; 586 payphones located in Minnesota and
Wisconsin acquired from Computer Assisted Technologies, Inc. ("CAT"), together
with site contracts only for the installation of an additional 98 payphones in
1997 and 965 phones in Pennsylvania, New Jersey and Delaware from Edward Steven
Corporation and Drake Telephone Company in 1998.

INDUSTRY OVERVIEW

         In 1996, calls made from pay telephones were estimated at $7 billion in
annual revenues to the United States telecommunications industry. Pay telephones
may be "public," meaning they are owned by local exchange carriers ("LECs"), or
"independent," meaning they are owned and operated by companies independent of
the LECs, such as the Company. Of the approximately 2 million pay telephones
operating in the United States in 1996, it is estimated that approximately
350,000 were independent.

         Today's telecommunications marketplace was principally shaped by the
1985 AT&T divestiture of the 22 regional Bell operating companies ("RBOCs"),
which provided local telephone services within their areas of operation. The
AT&T divestiture and the many regulatory changes adopted by the FCC and state
regulatory authorities in response to the AT&T divestiture have resulted in the
creation of new business segments in the telecommunications industry. As a
result of the AT&T divestiture, pay telephones may now be owned and operated
independently.

         As part of the AT&T divestiture, the United States was divided into
geographic areas known as local access transport areas or "LATAs." Telephone
service that both originates and terminates within the same LATA ("intraLATA")
is priced based on tariffs filed with and approved by state regulatory
authorities. LECs provide intraLATA telephone service to, among others,
independent pay telephone companies. LECs are generally prohibited from offering
or deriving revenues or income from services between LATAs ("interLATA"). In
addition, most state regulatory authorities require LECs to provide local access
line service to independent pay telephone companies.   See "Business - 
Government Regulation."

         Long-distance carriers provide interLATA service and, in some
circumstances, may also provide long-distance service within LATAs. An interLATA
long-distance pay telephone call begins with an originating LEC transmitting the
call from the pay telephone that originates the call to a point of connection
with a long-distance carrier. The long-distance carrier, through its owned or
leased switching and transmission facilities, transmits the call across its
long-distance network to the LEC serving the local area in which the recipient
of the call is located. This terminating LEC then delivers the call to the
recipient. Independent PSPs contract with one or more long-distance carriers to
provide long-distance service to their pay telephones.

<PAGE>

BUSINESS STRATEGY

         The Company has focused on identifying payphone sites that have the
potential to achieve a high return on investment ("ROI") after depreciating the
equipment over the life of the phone lease. Although others in the industry have
used shorter leases, the Company's analysis indicated that a long-term lease was
necessary in order to achieve the Company's ROI objective and to offer a
competitive commission to location owners ("Site Providers"). Therefore, most of
the Company's pay telephones are placed with Site Providers under leases having
terms of five years or more.

         The Company's objective has been to grow through additional
acquisitions and internally, thereby achieving economies of scale. There are
approximately 1,500 independent PSPs nationally. The Company believes that there
is a significant opportunity to consolidate the highly fragmented independent
segment of the payphone industry. Further, independent PSPs, as compared to the
RBOCs, generally have a larger percentage of computer-based, or "smart," phones
in their inventory of pay telephones and their payphones are placed in locations
that generate higher revenue per phone.

         During 1998, the Company researched the Puerto Rican payphone market
and determined that if and when the full benefits of the Telecommunications Act
of 1996 are reflected in the Puerto Rican payphone market, Puerto Rico will be
an attractive market for ChoiceTel to operate payphones. ChoiceTel is focusing
its resources in Puerto Rico and does not anticipate any additional acquisitions
of payphone routes in 1998.

OPERATIONS

         The Company operates, services and maintains a system of approximately
4,500 pay telephones, with approximately 86% of its payphones located in
Minnesota, Pennsylvania, Oregon, and Puerto Rico. All of the Company's pay
telephones accept coins as payment for local or long-distance calls and can also
be used to place local or long-distance cashless calls.

         COIN CALLS

         The Company's pay telephones generate coin revenue primarily from local
calls. Until October 1997, the public utilities commissions of the states in
which the Company operated regulated the cost of local coin calls, at that time,
rates were deregulated. Management believes it can maximize payphone coin
revenues by matching the cost of a local call to the market conditions at the
phone. The amount charged for a local call ranges from $0.10 to $0.50, with most
phones charging $0.35.

         Long-distance coin calls are carried by long-distance carriers that
have agreed to provide long-distance service to the Company's telephones. The
majority of the Company's phones sell coin long-distance for a rate of $0.25 per
minute, with a two-minute minimum. This rate is well below U.S. West's rates for
coin long-distance and is significantly less expensive than credit card or
collect long-distance rates. For example, U.S. West charges approximately $3.10
for the first three minutes of a coin long-distance call made in Minnesota, and
AT&T charges $3.30 and $3.50 for the first three minutes of credit card and
collect long-distance calls, respectively, made from public payphones. The
Company offers lower rates to create a better value for price sensitive
consumers and to discourage Dial-Around calling from its phones. Management
believes that its $0.25 per minute long-distance rate results in considerable
goodwill and is a point of differentiation between its phones and its local
exchange carrier ("LEC") competitors.

         NON-COIN CALLS

<PAGE>

         The Company also receives revenue from non-coin, or cashless, calls
made from its pay telephones, including credit card calls, calling card calls,
collect calls and third party billed calls. These calls are processed by the
payphone's computer using store and forward technology, or, if a live operator
is requested, then the call is transferred to the Company's designated operator
service provider ("OSP").

         DIAL-AROUND CALLS

         A Dial-Around call originates from a payphone when the user dials a
non-billable access number such as, for example, 1-800-Collect, 1-800-CallATT or
10-10-333, and thereby dials around the Company's long-distance carrier in order
to reach another long-distance carrier. The user deposits no money for the call
and, prior to 1992, the long-distance provider carrying the call paid no
commission to the payphone owner. Since 1992, payphone owners have been
compensated by long-distance carriers for Dial-Around calls. See "Government
Regulation - Dial-Around Compensation."

         COMPUTER NETWORK AND EQUIPMENT. The Company focused its early efforts
on building a computer processing network that automated many of the operations
of managing a pay telephone enterprise. Specialized software was designed and
written when it was not available from industry suppliers. The Company's smart
phones are part of a centralized network that links all of the Company's phones
in the field with central processors. The system allows the Company to monitor
phone call volume, identify malfunctioning equipment, dispatch repair service,
schedule efficient coin collections, calculate commissions, print checks to Site
Providers, rate and process long-distance calls using store and forward
technology, and generate necessary reports that analyze and monitor
profitability of the phones. Management believes that as the Company grows, this
network can be expanded easily with little additional investment in
infrastructure.

         The Company installs pay telephones which it believes incorporate the
latest technology. The equipment makes use of microprocessors to provide voice
synthesized calling instructions, detect and count coins deposited during each
call, inform the caller at certain intervals of the time remaining on each call,
and identify the need for and the amount of an additional deposit. The pay
telephones can be programmed and reprogrammed from the Company's central
computer facilities to update rate information or to direct different kinds of
calls to particular carriers. The Company's pay telephones can distinguish coins
by size and weight, report to a remote location the total coinage in the coin
box, perform self-diagnosis and automatically report problems to a
pre-programmed service number, and immediately report attempts of vandalism or
theft. Some of the telephones also operate on power available from the telephone
lines, thereby avoiding the need for and reliance upon an additional power
source at the installation location. The telephones are designed to have a
user-friendly appearance and manner of operation similar to LEC-owned pay
telephones.

         The Company's smart phones utilize store and forward technology which
enables the Company to sell credit card, calling card and collect calls through
its own OSP. The store and forward software program provides callers with
instructions communicated by a digitized human voice for entering billing
information, such as a calling card number or a terminating phone number for a
collect call, prior to connecting a call. For example, for a collect call, a
synthesized voice directs the caller to speak his name into the payphone
handset, the caller's response is digitally recorded and played back when the
call is answered at its destination, and the called party is instructed to press
"1" on his or her telephone to accept the call. The software program also
minimizes fraudulent charges for calling card or credit card calls by
automatically communicating with a credit bureau to verify that the card has not
been identified as a lost, stolen or delinquent card. For a collect call, the
software program can also verify that the number being called is not delinquent.
After verifying the 

<PAGE>

call, the payphone will complete the connection using a long-distance 
carrier. When the call is concluded, the software program directs the billing 
information, including the date, time and length of the call, the 
billed-to-number and the charges for the call, to the Company's computer. 
Later, the billing records are sent to a processing agent that bills and 
collects the charges. The processing agent keeps a percentage of the billed 
amount as its processing fee and remits the balance to the Company. The 
Company books the net amount received as non-coin revenue.

         Some of the Company's payphones, primarily those placed in locations
that are not high generators of long-distance calls, do not have store and
forward capability. In addition, customers occasionally request a live operator
even with phones that have the store and forward technology. Examples of calls
requiring live operator assistance include person-to-person calls and calls
billed to a third party. In these situations, the calls are transferred to an
OSP which completes and bills the calls and pays the Company a commission based
on the amount billed. The Company contracts with several OSPs for this 24-hour a
day service. The Company routes all of these calls to designated OSPs to
maximize the commission revenue it receives. There are numerous OSPs available
to the Company and the terms offered by them are highly competitive. In
selecting an OSP, the Company considers numerous factors including the
commission offered, the quality of service and the pricing of calls to
customers.

         PLACEMENT OF PAY TELEPHONES. As of December 31, 1998, the Company's pay
telephone system consisted of approximately 4,500 telephones located in 14
states and Puerto Rico. The following table sets forth certain information as of
the dates indicated concerning the number and location of pay telephones
operated by the Company:

                                   NUMBER OF PAY TELEPHONES

<TABLE>
<CAPTION>
STATE                                                                           DECEMBER 31,     DECEMBER 31,
-----                                                                           ------------     ------------
                                                                                       1997              1998
                                                                                     -------           ------
<S>                                                                             <C>              <C>
Minnesota............................................................                  1,849            1,925
Pennsylvania.........................................................                     --              960
Oregon...............................................................                    714              667
Idaho................................................................                    318              285
Puerto Rico..........................................................                     --              304
Nevada...............................................................                    115               97
Additional phones in 9 states .......................................                    217              265
                                                                                         ---              ---

                                                                     Total             3,213            4,503
</TABLE>

         The Company's ROI focus has enabled it to profile locations based on
the likely profitability of a location. While this methodology is proprietary,
as are the specific locations under contract, the Company's locations include a
wide variety of establishments, such as restaurants, shopping malls, convenience
stores, grocery stores, gas stations and schools. The Company's pay telephone
lease mix includes indoor phones, walk-up outdoor phones and drive-up payphones.
While the Company had a single Site Provider that accounted for more than 5% of
its pay telephones and revenue in the years ended December 31, 1995 and 1996, no
single Site Provider accounted for more than 5% of its pay telephones and
revenues in either of the years ended December 31, 1997, and 1998.

         Agreements with Site Providers to install the Company's pay telephones
(the "Site Agreements") provide for revenue sharing with Site Providers,
typically a commission based on a negotiated percentage of revenue from the pay
telephone. The Site Agreements give the Company the exclusive right to install
pay

<PAGE>

telephones at that location and are generally of a five-year or greater term
with automatic renewal provisions. The Company's Site Agreements normally give
the Company the right to remove poor performing phones. Further, the Company can
typically terminate a Site Agreement on 30 days' notice to the Site Provider.
The Site Provider does not generally have the right to terminate a Site
Agreement.

         PHONE LINE RATES. The Company pays local line charges for each of its
installed payphones. These line charges cover basic service to the telephone as
well as the transport of local calls. The Company's business model has always
been based on ROI and thus is highly influenced by the line rate charged by
LECs, primarily U.S. West. Pay telephones are regulated by state public
utilities commissions ("PUCs") and generally can be connected only to a Public
Access Line ("PAL"). When the Company commenced operations, the PAL rate in
effect was approximately equal to the cost of a standard business line, plus
additional charges based on the number of calls placed at the phone, this
resulted in an average phone bill of about $130 per month per phone.. In April
1996, the Company's wholly owned subsidiary, ChoiceTel, Inc. ("CI"), was
approved to operate as a competitive local exchange carrier "CLEC" in Minnesota.
As a CLEC, CI was able to purchase standard business lines, which U.S. West sold
for $54 per line, and resell them to Payphone companies as PALs, which US West
sold for a higher price. In May 1997, CI entered into an agreement with U.S.
West that provides CI with a 21.5% reseller discount on the pre-tax cost of
telephone lines in Minnesota. Over the years, US West has reduced the cost of a
PAL, so that by April 1998, the cost of a PAL was the same as a standard
business line.

         On March 9, 1998, the FCC issued an order, effective on April 8, 1998,
which would require payphone providers to use LEC-provided PALs in order to
continue to receive dial-around compensation from long-distance carriers after
January 1, 1999. LEC-provided PALs are similar in cost to the lines the Company
purchases from its CLEC, however without the opportunity to earn the resellers'
discount. On February 4, 1999 the Minnesota PUC ordered U.S. West to extend the
21.5% resellers' discount to PALs purchased by resellers. US West has filed for
reconsideration by the Minnesota PUC.

         MARKETING. At December 31, 1998, six of the Company's employees devoted
substantially all of their time to locating and contracting with new Site
Providers in Minnesota, Puerto Rico and Oregon. In addition, the Company engages
independent contractors in Puerto Rico to locate new sites for payphone
installations. Management believes a successful contracting program requires
identifying good locations, selling Site Providers on the benefits of the
Company's payphones, and negotiating favorable Site Agreement terms.

         Identifying good locations for payphones is the most important aspect
of the Company's marketing program, which includes an evaluation of population
density, calling patterns and neighborhood socio-economic factors. The Company
concentrates its efforts towards high traffic locations, lower income
neighborhoods, and venues where people expect to find payphones.

         The Company promotes its payphone program to Site Providers by
emphasizing service and maintenance. Site Providers generally view the payphone
as a customer service rather than a profit center. Providing repair and
collection services during evenings and on weekends and providing live call
placement assistance sometimes is more important in securing the Site Agreement
than the amount of commission paid to the Site Provider.

         SERVICE AND MAINTENANCE. The Company believes it offers many of its
Site Providers a higher level of service than is provided by the LEC
competitors, who typically offer lower commissions and do not monitor payphone
performance. The Company monitors its payphones electronically and offers
evening and weekend repair service. The Company uses 41 full- and part-time
field service technicians, each of whom 

<PAGE>

collects money, cleans phones and responds to trouble calls made by either a 
consumer or by the telephone itself as part of its internal diagnostic 
procedures. Many technicians are also responsible for the installation of new 
telephones. Due to the ability of the field service technicians to perform 
multiple service and maintenance functions, the Company is able to limit the 
frequency of trips to each pay telephone as well as the number of employees 
needed to service the pay telephones.

COMPETITION

         The Company competes for pay telephone locations with LECs and other
independent pay telephone operators. The Company also competes indirectly with
long-distance carriers, which can offer Site Providers commissions on
long-distance calls made from LEC-owned payphones. Most LECs and long-distance
carriers against which the Company competes and some independent pay telephone
companies have substantially greater financial, marketing and other resources
than the Company. In addition, many LECs, faced with competition from the
Company and other independent pay telephone companies, have increased their
compensation arrangements with Site Providers to offer more favorable commission
schedules.

         The Company believes the principal competitive factors in the pay
telephone business are (i) responsiveness to customer service needs, (ii) the
amount of commission payments to a Site Provider and the opportunity for a Site
Provider to obtain commissions on both local and long-distance calls from the
same company, (iii) the quality of service and the availability of specialized
services provided to a Site Provider and telephone users, and (iv) the ability
to serve accounts with locations in several LATAs or states. The Company
believes that independent pay telephone operators have an advantage over LECs in
that they can offer Site Providers commissions on coin and cashless local and
long-distance calls.

         Opening the local telephone markets to competition will likely reduce
telephone line charges, which is the Company's largest operating expense. In
most of the areas where the Company operates, it must purchase local telephone
service from a single regulated monopoly (such as U.S. West). As AT&T, MCI,
Sprint and others compete to offer local telephone service, telephone line
charges are expected to decline. In addition, the Company expects that its high
number of telephone lines will give it the ability to negotiate additional
volume discounts. In 1998, a CLEC in Minnesota began offering PALs priced 25%
below the Company's cost. At December 31, 1998 the Company had converted
approximately 300 lines and has plans to convert additional lines as exchanges
are made available.

         Commencing in the 1998 fourth quarter, the Company began to experience
a negative impact on its revenues, which management believes results from
increased usage of wireless devices, which appear to be reducing consumers'
reliance on payphones. Accordingly, while the means and desire to communicate by
telephone generally increases, the Company anticipates that its payphones may
experience decreased usage, and that the heavy promotion and proliferation of
affordable wireless devices and related service charges may adversely impact its
revenues.

GOVERNMENT REGULATION

         In January 1996, Congress passed the Telecom Act, a comprehensive
telecommunications bill that, in part, dealt with several concerns of the
independent pay telephone industry. Congress stated that its intent was to
create a "pro-competitive, de-regulatory national policy framework designed to
accelerate rapidly private sector deployment of advanced telecommunications and
information technologies and services to all Americans by opening all
telecommunications markets to competition." The Telecom Act, among other things,
requires local telephone companies to eliminate subsidies of their pay telephone
services and to treat their own and independent payphones in a nondiscriminatory
manner. Of particular importance to the 

<PAGE>

Company, the Telecom Act addressed the inherently unfair disadvantage 
independent pay telephone companies have in competing with regulated 
monopolies, the compensation of independent pay telephone companies for calls 
made from their equipment that previously offered no compensation, and the 
issue of price regulation of local calls by the various state PUCs.

         COMPETITION WITH RBOCS. Under the Telecom Act, the RBOCs must operate
their payphone divisions with separate profit and loss statements. The Company
believes that this will likely result in the Company's RBOC competitors being
less aggressive in bidding for locations. It also may result in the RBOCs
removing many low volume pay telephones that collectively compete with the
Company's pay telephones.

         DIAL-AROUND COMPENSATION. Pay telephones are required by the FCC to
provide equal Dial-Around access to all long-distance carriers, either by access
code (such as "10-10-333") or by 800 service. Prior to November 1996, the
Company received $6 per payphone per month from long-distance carriers for
providing this Dial-Around service. The Telecom Act recognized that it is a
burden to payphone companies to provide such access and that the compensation
paid to payphone companies for this access should be greater. Because the
infrastructure to track and compensate for these calls did not exist at that
time, the FCC's 1996 order raised the flat rate of compensation for the
Dial-Around service to approximately $45 per payphone per month, based on $0.35
per call times the national average of 131 monthly Dial-Around calls placed per
payphone. In October 1997, the method of compensating payphone companies was
scheduled to switch to a per call charge of $0.35 to be tracked and paid by the
long-distance carriers and, in November 1998, the per call charge was scheduled
to equal the cost of a local pay telephone call
         The FCC's 1996 order implementing the increased Dial-Around
compensation was appealed, with the intent of decreasing the amount of
Dial-Around compensation mandated by the order. In July 1997, the Court remanded
the matter to the FCC for reconsideration of the rate of Dial-Around
compensation. The Court found that the per call charge of $0.35 was
inappropriate because the FCC did not consider evidence of the differences in
the cost of coin calls and Dial-Around calls. The long-distance carriers then
petitioned the Court to clarify the effect of the Court's July decision and to
vacate the portion of the FCC's 1996 order setting the rate of Dial-Around
compensation pending the FCC's re-examination of the Dial-Around rate. Further,
in a letter to the FCC dated August 15, 1997, AT&T challenged the FCC's
authority to order the long-distance carriers to make any payments during the
pendency of the rate determination and stated its intention to make Dial-Around
payments voluntarily based on its imputed rate of $0.12 per call, subject to
retroactive adjustments, up or down, after the FCC's final order on remand. The
Court agreed with the long-distance carriers. In a decision dated September 16,
1997, the Court vacated the portion of the FCC's 1996 order setting the rate of
Dial-Around compensation pending a new FCC order on remand. Accordingly, the
long-distance carriers were not required to make Dial-Around payments to
payphone service providers until the FCC issued a new order setting the Dial-
Around rate. On October 9, 1997, the FCC issued an order establishing the
Dial-Around rate as of October 7, 1997 at $0.284 per call ($0.35 minus an offset
of $0.066 for expenses unique to coin calls) for the two years beginning October
7, 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 and tentatively concluded that the $0.284 per call rate adopted on a going
forward basis should also govern compensation during the period from November 6,
1996 through October 6, 1997. This would be approximately $37 per payphone per
month. Because the Company could not be certain what the rate of Dial-Around
compensation would be for the period from November 7, 1996 through October 6,
1997, it has determined the amount of its revenue from Dial-Around compensation
for the six months ended June 30, 1997 and going forward through October 6, 1997
based upon the previous rate of $6.00 per payphone per month, and established an
$85,000 liability for revenue accrued in excess of the previous rate during the
period from November 6, 1996 through December 31, 1996. Beginning October 7,
1997, the Company began recognizing revenue from Dial-Around compensation based
upon the Dial-Around rate of 

<PAGE>

$0.284 per call multiplied by an estimated number of dial-around calls per 
phone. On May 15, 1998 the Court again remanded the dial-around rate back to 
the FCC for further justification of the $0.35 starting point. On February 4, 
1999 the FCC issued an order reducing the dial around rate to $0.24 
retroactive to October 7, 1997 and going forward until at least January 31, 
2002. The FCC indicated that it planned to address Dial-Around compensation 
for the period from November 7, 1996 through October 6, 1997 in a subsequent 
order and tentatively concluded that the $0.24 per call rate adopted on a 
going forward basis should also govern compensation during the period from 
November 7, 1996 through October 6, 1997. However, there can be no assurance 
that Dial-Around compensation will not be based on a rate that is less than 
$6.00 per payphone per month for the period from November 7, 1996 through 
October 6, 1997 or that is less than $0.24 per call for the period beginning 
October 7, 1997. The setting of a rate of Dial-Around compensation that is to 
be paid to the Company that is less than the Company's estimate of such rate 
could have an adverse effect on the results of operations and financial 
condition of the Company, which could be material.

         DEREGULATION OF LOCAL PAY TELEPHONE RATES. The FCC also adopted rules
pursuant to the Telecom Act which on October 7, 1997, repealed all rules
regulating the cost of a local call placed at a payphone and allowed the market
to set the rate for local coin calls, unless the state can demonstrate to the
satisfaction of the FCC that there are market failures within the state that
would not allow market-based rates.

EMPLOYEES

         As of December 31, 1998, the Company had 65 employees, 52 of whom were
full-time. No employees are covered by a collective bargaining agreement. The
Company believes that its relationships with employees are good.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Company's corporate offices are located in approximately 5,000
square feet of leased space in Plymouth, Minnesota. The lease for this property
expires in May 2000 and the Company has two successive options to extend the
lease for additional one-year periods. The Company also leases approximately
2,250 square feet of warehouse and office space in Lake Oswego, Oregon. The
lease for this property expires in July 1999 and the Company has an option to
extend the lease for one additional one-year period. The Company also leases
approximately 2,000 square feet of office space in San Juan Puerto Rico. The
lease for this property expires in April 2000 and the Company holds three
successive options to extend the lease for additional one-year periods. The
Company also leases 2,000 square feet of warehouse space in Conshohocken,
Pennsylvania. The Company believes that its current facilities are sufficient
for its needs for the foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS

         MINNESOTA SALES TAX. The Company, based on an 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
opinion of the Department was that coin-operated payphone receipts were subject
to state sales tax. Despite the Department's position, management is still of
the view that the Company is not subject to sales tax, and the Company is
challenging the imposition of the tax. The Company retained special tax counsel
to contest the Department's position that coin-operated payphone receipts are
subject to sales tax. Nonetheless, the Company has established a reserve of
$1,362,000 as of December 31, 1998, to provide for the potential sales tax
liability and will continue to reserve on a monthly basis until a definitive
ruling is obtained.

<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         There were no matters submitted to a vote of security holders during
the 4th quarter of the fiscal year ended December 31, 1998.

<PAGE>

                                 PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's Common Stock and Redeemable Warrants have been quoted on
the NASDAQ SmallCap Market under the symbol "PHON" and "PHONW", respectively,
since November 10, 1997 . The following table sets forth, for the periods
indicated, the range of high and low prices for the Company's Common Stock and
Redeemable Warrants as reported on the NASDAQ SmallCap Market.

<TABLE>
<CAPTION>
                                                                  COMMON STOCK         REDEEMABLE
                                                                  ------------          WARRANTS
                                                                                       ----------
                                                                   High     Low        High      Low
              <S>                                                <C>        <C>        <C>       <C>
              1997:
              Fourth Quarter................................     $6.250     $4.625     $1.375     $0.75

              1998:
              First Quarter.................................     $4.000      $3.25     $0.750     $0.50
              Second Quarter................................     $4.375      $3.50     $0.625     $0.50
              Third Quarter.................................     $5.125      $3.00     $0.563     $0.25
              Fourth Quarter................................     $4.250      $2.50     $0.250     $0.063
</TABLE>

         As of November 30, 1998, there were 300 shareholders of the Company's
Common Stock.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

         EXCEPT FOR HISTORICAL INFORMATION CONTAINED IN THIS REPORT, INFORMATION
CONTAINED IN THIS FORM 10-KSB CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY", "WILL",
"EXPECT", "PLAN", "ESTIMATE", OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THERE ARE CERTAIN IMPORTANT
FACTORS THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED BY
SOME OF THESE FORWARD-LOOKING STATEMENTS, INCLUDING WITHOUT LIMITATION, THE
EFFECTS OF CHANGES IN ECONOMIC CONDITIONS AND THE "RISK FACTORS" ENTITLED "RISKS
ASSOCIATED WITH EXPANSION STRATEGY," "COMPETITION," "PENDING DETERMINATION OF
DIAL-AROUND COMPENSATION RATE," "OTHER REGULATORY FACTORS," "TECHNOLOGICAL
CHANGE AND NEW SERVICES," "DEPENDENCE UPON THIRD-PARTY PROVIDERS," "SERVICE
INTERRUPTIONS; EQUIPMENT FAILURES," "RELIANCE ON SINGLE BRAND OF PAYPHONES,"
"SEASONALITY" AND "RELIANCE ON KEY PERSONNEL" CONTAINED IN THE COMPANY'S
PROSPECTUS DATED NOVEMBER 10, 1997 INCLUDED IN THE REGISTRATION STATEMENT ON
FORM SB-2 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (REGISTRATION NO.
333-29969). SUCH "RISK FACTORS" ARE INCORPORATED HEREIN BY REFERENCE. INVESTORS
ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS INVOLVE RISK AND UNCERTAINTY.

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. 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 when consumers access a long-distance carrier directly
by dialing an access number 

<PAGE>

or 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; commission payments to Site Providers; and service,
repair and maintenance costs.

RESULTS OF OPERATIONS

         The following table presents certain items in the combined statements
of operations as a percentage of revenue for the years ended December 31, 1997
and 1998.

<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:                         1997          1998
                                                      ----          ----
<S>                                                 <C>            <C>
REVENUE:
Coin  revenue............................            78.2%         72.0%
Non-coin revenue.........................             13.8          11.5
Dial-around revenue......................              6.7          14.6
CLEC revenue.............................              1.3           1.9
Total Revenue............................             100%          100%

SERVICE COSTS AND EXPENSES:
Telephone line charges...................            31.4%         26.1%
Commissions..............................             18.3          16.6
Service, repair and maintenance .........              2.9           2.6
Total cost of service....................            52.6%          45.3%

Gross margin.............................            47.4%         54.7%
Selling, general and admin. .............             25.0          32.4
Interest.................................              9.9           3.3
Depreciation and amortization............             13.1          14.1
Sales tax contingency....................              3.4           2.7
Net income (loss) before income tax                 (4.0%)          2.2%
provision................................

Average phones in service................            2,980         3,800
</TABLE>

<PAGE>

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31 1997.

         Total revenue for the year ended December 31, 1998, increased 
approximately $2,263,000, or 32%, compared to the year ended December 31, 
1997. This growth was due in part to the Company increasing the average 
number of pay telephones in service from 2,980 during the 1997 period to 
3,800 during the 1998 period, an increase of 27.5%. Coin revenue increased 
$1,320,000 or 23.8% and non-coin revenues increased $121,000 or 12.4% 
compared to the previous year period. Management believes that lower non-coin 
revenues are due to increased dial-around calls. Dial-around compensation 
increased $918,000 or 194.7%. The Company accrued dial-around compensation at 
approximately $30.50 per phone per month during the 1998 period compared to 
$13.00 per phone per month during the 1997 period. CLEC margin from 
internally reselling local telephone service increased $87,000 or 91.4% 
compared to the previous year period. The Company received a resellers 
discount for the last 6 months of 1997 and for 12 months in 1998.

         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 48% of the phones
in service at December 31, 1998. During the fourth quarter of 1998, despite a 6%
increase in the number of phones in service in the Midwest region, total coin
revenues in that region decreased $129,000 or 11.2% as compared to the fourth
quarter of 1997. Management attributes the reduction to increased competition
from wireless communication devices.

         Telephone and long-distance charges increased $377,000 or 17.0% as
compared to the previous year period. Site Provider commissions increased
$260,000 or 20.1% over the previous year period. Selling, general and
administrative ("SG&A") expenses increased by $1,253,000 or 70.8%, due to the
Company's increased spending in Marketing and Acquisition activities, and also
due to increased costs associated with being a publicly reporting company. This
includes spending approximately $250,000 of marketing, administration and office
expenses to open a leasing office in Puerto Rico, and salaries and
commissions paid to leasing agents who signed approximately 1,600 phone
locations during the period, 300 of which were installed at December 31, 1998.

         Interest expense decreased by $391,000 or 55.8% compared to the prior
year. Depreciation and amortization for the 1998 period increased $389,000 or 
42.0%. The increase is a result of increased depreciation and amortization 
associated with acquiring the Jay Telephone route and is 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 
$464,000 or 50% over the previous year.

YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996

         For the year ended December 31, 1997, total revenue increased
approximately $3,603,000, or 101.2%, compared to the year ended December 31,
1996. This growth was primarily attributable to the increase in the average
number of pay telephones in service from 1,125 during 1996 to 2,980 during 1997.
Coin revenues during the period increased by $2,728,000 or 97.0% and non-coin
revenues increased by $556,500 or 110.8%.

         Telephone charges increased in 1997 by $935,000 or 72.5% above the
previous year's period. The growth in telephone charges was kept below the rate
of growth in payphones primarily due to the Company's subsidiary, CI, receiving
authorization to act as a reseller of telephone service in April 1996, which
ultimately reduced the Company's line charges in Minnesota to $52 per line.

<PAGE>

         Commissions paid to Site Providers increased $714,000 or 123.2% above
the previous year's period, primarily as the result of the growth of phones in
service. Collection, repair and maintenance increased $578,500 or 190.1% above
the previous year period. In the 1997 period, selling, general and
administrative expenses increased approximately $566,000, or 88.1%, from the
prior year's period. Interest expense increased $463,000 or 386.9% compared to
the prior year period due to increased borrowing to finance the acquisition of
routes from Telco West and Computer Assisted Technologies, Inc. ("CAT").
Depreciation and amortization increased in 1997 by $569,500, an increase of
156.1% over the prior year's period, attributable to amortization associated
with the acquired phones and contracts.

EXPANSION INTO PUERTO RICO

         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, the Company hired a Leasing Manager for Puerto Rico 
and began contracting with local businesses to provide payphone service. In 
April the Company received its first payphone lines from the PRTC and 
installed its first payphones. As of December 31, 1998 the Company had 
installed 300 payphones and had signed agreements to install an additional 
1,300 payphones. On March 1, 1999 the Company had 13 fulltime employees in 
Puerto Rico.

         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 the old rates, then the Company estimates it would 
have an unrecorded liability at December 31, 1998 of $45,000.

         On September 21, 1998, hurricane Georges struck Puerto Rico, causing
considerable damage to the Island including widespread loss of telephone
service. Damage to the Company's property was not significant, however the
subsequent interruption in telephone service resulted in considerable down time
at some payphones. For 7 days following the storm, the Company programmed its
payphones to provide free local calls in Puerto Rico. This public service was 
widely broadcast on local radio.

PUBLIC INTERNET ACCESS TERMINALS
         During 1998, the Company began test marketing public internet access
terminals, which allow a customer 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 December 31, 1998
the Company had contracted with site providers to install 10 terminals, of which
5 were installed. Under the terms of the contracts, the Company receives all
revenues generated by the terminals in return for 

<PAGE>

a commission payment based upon revenues generated.

         Based on results of testing through December 31, 1998, 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
currently is approximately $5,000 per terminal. Management is also considering
other strategies to develop the 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.

SALES TAX CONTINGENCY

         Based on its analysis of the published regulations of the Minnesota 
Department of Revenue the Company has not remitted any sales tax payments to 
the State of Minnesota. In 1996, the Company learned that the opinion of the 
Department 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, on December 31, 1996, the Company established a reserve of 
$865,000 for the years prior thereto and has reserved an additional $242,760 
and $253,970 for the year ended December 31, 1997 and 1998 respectively.

LIQUIDITY AND CAPITAL RESOURCES

         For the year ended December 31, 1998, the Company's operating 
activities provided $1,307,000. Investments in equipment and rental 
agreements used $5,419,000 and principal payments on long-term debt and fees 
used $1,179,000. Activities were funded with 4,150,000 in bank debt, the sale 
of $1,151,000 in short-term investments and collections of stock 
subscriptions of $9,000, resulting in a $19,534 increase in cash balances.

         On June 30, 1998, the Company entered into a Credit Agreement with
Norwest Bank (the "Bank") pursuant to which the Company borrowed $3,800,000 to
acquire the Jay Telephone route. The Company granted the Bank a first lien on
all of its assets to secure its obligations to the Bank. The agreement provided
for the payment of interest at an annual rate equal to 1.0% over the "reference"
rate announced from time to time by the Bank. The principal balance is amortized
over 60 months. 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, at December 31, 1998 the Company had drawn $350,000 from the line of 
credit.

         On June 30, 1998 as part of the purchase of the Jay Telephone route,
the Company delivered a performance-based contingent promissory note of $500,000
due October 30, 1999. The principal balance of the note is subject to 
reductions depending upon the performance of the acquired phones during the 
12 months ending June 30, 1999. Based upon performance to date, the Company 
does not anticipate that it will be required to make any payments on the note.

         During the first quarter of 1999, the Company agreed in principle to
sell approximately 1000 payphones in an all cash transaction. The transaction is
subject to completion of due diligence and other customary closing conditions.
The Company anticipates the transaction will be completed in the second quarter
of 1999 and 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 the loss of revenues derived from the assets to be sold with revenues 
from the Puerto Rican phones and through reduced borrowing costs.

RECENT ACQUISITIONS

<PAGE>

         On June 30, 1998 the Company completed its acquisition from Edward 
Steven Corporation and Drake Telephone Company of 965 payphones located 
principally in Philadelphia, Pennsylvania, as well as the trade name "Jay 
Telephone Vending". The purchase price for the acquired assets was $4,005,987 
with the Company paying the purchase in cash of which $3,800,000 was provided 
by a bank loan. An additional amount up to $500,000 may be due based upon the 
performance of acquired phones during the twelve months ending June 30, 1999. 
Based upon performance to date, the Company does not anticipate that it will 
be required to make any additional payments.

ACCOUNTING STATEMENTS

         In 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, EARNINGS PER SHARE. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to Statement 128
requirements.

         In 1997, the FASB issued Statements No. 130, REPORTING COMPREHENSIVE
INCOME, and No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, effective for fiscal years beginning after December 15, 1997. The
adoption by the Company of these Statements in January 1998 is not expected to
have a material impact on the Company's financial statements.

YEAR 2000 ISSUES

         Many existing computer programs use only two digits to identify a year
in the date field, with the result that data referring to the year 2000 and
subsequent years may be misinterpreted by these programs. If present in the
computer applications of the Company and not corrected, this problem could cause
computer applications to fail or to create erroneous results and could cause a
disruption in operations and have a short-term adverse effect on the Company's
business and results of operations. The Company has evaluated its principal
computer systems and has determined that they are substantially Year 2000
compliant. The Company has initiated discussions with its key suppliers to
determine whether they have any Year 2000 issues, and has received assurances
that they do not anticipate any disruption in operations. The Company has not
incurred any material expenses to date in connection with this evaluation and
does not anticipate material expenses in the future, depending on the status of
its suppliers and customers with respect to this issue.

ITEM 7.  FINANCIAL STATEMENTS

         The following financial information of the Company is included as
follows:

<TABLE>
<CAPTION>
                                                                                                          PAGE
                                                                                                          ----
<S>                                                                                                       <C>
Report of Independent Auditors...................................................................
Consolidated Financial Statements:
      Consolidated Balance Sheets for Years Ended December 31, 1998 and 1997.....................
      Consolidated Statements of Operations for Years Ended December 31, 1998                                    
      and 1997...................................................................................
      Consolidated Statements of Shareholders' Equity for Years Ended December 31, 
      1998 and 1997..............................................................................
      Consolidated Statements of Cash Flows for Years Ended December 31, 1998                                    

<PAGE>

      and 1997...................................................................................
      Notes to Consolidated Financial Statements.................................................
</TABLE>

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

      None.

<PAGE>

                                  PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     The information regarding concerning the Directors, Executive Officers,
Promoters and Control Persons is set forth in the Company's definitive Proxy
Statement to be delivered to stockholders in connection with the Company's
Annual meeting of Stockholders to be held on May 25, 1999 (the "Proxy
Statement") under the headings "Election of Directors" and "Executive Officers",
which information is incorporated herein by reference to the Proxy Statement
which the Company intends to file with the Securities and Exchange Commission by
April 19, 1999. The information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 is set forth in the Proxy statement under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance", which
information is incorporated herein by reference.

ITEM 10.  EXECUTIVE COMPENSATION

     The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation", which information is
incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Beneficial
Ownership of Common Stock", which information is incorporated herein by
reference.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information concerning certain relationships and related transaction is
set forth in the Proxy Statement under the heading "Certain Transactions", which
information is incorporated herein by reference.

<PAGE>

                              PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      EXHIBITS.  SEE "EXHIBIT INDEX" ON PAGE FOLLOWING SIGNATURES.

(b)      REPORTS ON FORM 8-K

         The Company filed reports on Form 8-K on November 16, 1998 reporting
the Company's financial results for the third quarter ended September 30, 1998
and on December 21, 1998 reporting anticipated 4th quarter results.

<PAGE>

                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                            CHOICETEL COMMUNICATIONS, INC.

                                            Date: March 30, 1999
                                            By /s/ Gary S. Kohler
                                               ----------------------------
                                                  Gary S. Kohler

         Chairman of the Board of Directors

         In accordance with the Exchange Act, this report has been signed below
  by the following persons on behalf of the registrant and in the capacities and
  on the dates indicated.

                             Power of Attorney

         Each person whose signature appears below constitutes and appoints
  JEFFREY R. PALETZ and JACK S. KOHLER as his true and lawful attorneys-in-fact
  and agents, each acting alone, with full power of substitution and
  resubstitution, for him and in his name, place and stead, in any and all
  capacities, to sign any and all amendments to this Annual Report on Form
  10-KSB and to file the same, with all exhibits thereto, and other documents in
  connection therewith, with the Securities and Exchange Commission, granting
  unto said attorneys-in-fact and agents, each acting alone, full power and
  authority to do and perform each and every act and thing requisite and
  necessary to be done in and about the premises, as fully to all intents and
  purposes as he might or could do in person, hereby ratifying and confirming
  all said attorneys-in-fact and agents, each acting alone, or his substitute or
  substitutes, may lawfully do or cause to be done by virtue thereof.

<TABLE>
             SIGNATURE                                           TITLE                                           DATE
             <S>                                                 <C>                                             <C>
             /s/ Gary S. Kohler                                  Director                                        March 30, 1999
             -----------------------------------------------
             Gary S. Kohler

             /s/ Jeffrey R. Paletz                               President and Director                          March 30, 1999
             -----------------------------------------------
             Jeffrey R. Paletz

             /s/ Melvin Graf                                     Executive Vice President and                    March 30, 1999
             -----------------------------------------------     Director
             Melvin Graf

             /s/ Jack S. Kohler                                  Vice President and Chief Financial              March 30, 1999
             -----------------------------------------------     Officer
             Jack S. Kohler                                      

             /s/ Dustin Elder                                    Vice President                                  March 30, 1999
             -----------------------------------------------
             Dustin Elder

             /s/ Robert A. Hegstrom                              Director                                        March 30, 1999
             -----------------------------------------------
             Robert A. Hegstrom

             /s/ Michael Wigley                                  Director                                        March 30, 1999
             -----------------------------------------------
             Michael Wigley
</TABLE>

<PAGE>

                           SECURITIES AND EXCHANGE COMMISSION
                                     WASHINGTON D.C.
    
                              EXHIBIT INDEX TO FORM 10-KSB
                                           OF
                             CHOICETEL COMMUNICATIONS, INC.
    
                       For the Fiscal Year Ended December 31, 1999
                            Commission File Number: 0-230 17

<TABLE>
<CAPTION>
     EXHIBIT      
       NO.    DESCRIPTION
       ---    -----------
     <C>      <S>
       3.1    Amended and Restated Articles of Incorporation (incorporated by
              reference to Exhibit 3.1 of the Registrant's Registration
              Statement on Form SB-2; Registration No. 333-29969)

       3.2    Bylaws (incorporated by reference to Exhibit 3.2 of the
              Registrant's Registration Statement on Form SB-2; Registration No.
              333-29969)

       4.1    Specimen Certificate representing the Common Stock (incorporated
              by reference to Exhibit 4.1 of the Registrant's Registration
              Statement on Form SB-2; Registration No. 333-29969)

       4.2    Form of Redeemable Warrant Agreement with Norwest Bank Minnesota,
              National Association, including certificate representing the
              Redeemable Warrants (incorporated by reference to Exhibit 4.2 of
              the Registrant's Registration Statement on Form SB-2; Registration
              No. 333-29969)

       10.1*  1997 Long-Term Incentive and Stock Option Plan (incorporated by
              reference to Exhibit 10.1 of the Registrant's Registration
              Statement on Form SB-2; Registration No. 333-29969)

       10.2   Lease Agreement (incorporated by reference to Exhibit 10.2 of the
              Registrant's Registration Statement on Form SB-2; Registration No.
              333-29969)

       10.3*  Bonus Program (incorporated by reference to Exhibit 10.3 of the
              Registrant's Registration Statement on Form SB-2; Registration No.
              333-29969)

       10.4   Amended and Restated Loan Agreement with National City Bank, dated
              as of January 2, 1997 (incorporated by reference to Exhibit 10.4
              of the Registrant's Registration Statement on Form SB-2;
              Registration No. 333-29969)

       10.5   Promissory Note payable to Serence Paletz, dated April 10, 1995
              (incorporated by reference to Exhibit 10.5 of the Registrant's
              Registration Statement on Form SB-2; Registration No. 333-29969)

       10.6   Promissory Note payable to William Opsahl, dated April 18, 1995
              (incorporated by reference to Exhibit 10.6 of the Registrant's
              Registration Statement on Form SB-2; Registration No. 333-29969)

<PAGE>

       10.7   Promissory Note payable to Miriam Graf, dated November 3, 1995
              (incorporated by reference to Exhibit 10.7 of the Registrant's
              Registration Statement on Form SB-2; Registration No. 333-29969)

       10.8   Promissory Note payable to William Opsahl, dated December 2, 1995
              (incorporated by reference to Exhibit 10.8 of the Registrant's
              Registration Statement on Form SB-2; Registration No. 333-29969)

       10.9   Promissory Note payable to Ronald M. Gross and Elaine Weitzman,
              dated December 7, 1995 (incorporated by reference to Exhibit 10.9
              of the Registrant's Registration Statement on Form SB-2;
              Registration No. 333-29969)

       10.10  Promissory Note payable to William B. Topp and Norma Topp, dated
              July 7, 1996 (incorporated by reference to Exhibit 10.10 of the
              Registrant's Registration Statement on Form SB-2; Registration No.
              333-29969)

       10.11  Promissory Note payable to The Topp Family Trust, dated July 27,
              1996 (incorporated by reference to Exhibit 10.11 of the
              Registrant's Registration Statement on Form SB-2; Registration No.
              333-29969)

       10.12  Agreement for Sale and Purchase of Business Assets with Telco
              West, Inc. ("Telco"), dated January 2, 1997 (incorporated by
              reference to Exhibit 10.12 of the Registrant's Registration
              Statement on Form SB-2; Registration No. 333-29969)

       10.13  Installment Collateral Note payable to Telco, dated January 2,
              1997 (incorporated by reference to Exhibit 10.13 of the
              Registrant's Registration Statement on Form SB-2; Registration No.
              333-29969)

       10.14  Installment Collateral Note payable to Telco, dated January 2,
              1997 (incorporated by reference to Exhibit 10.14 of the
              Registrant's Registration Statement on Form SB-2; Registration No.
              333-29969)

       10.15  Agreement for Sale and Purchase of Assets with Computer Assisted
              Technologies, Inc. ("CAT"), dated as of March 14, 1997
              (incorporated by reference to Exhibit 10.15 of the Registrant's
              Registration Statement on Form SB-2; Registration No. 333-29969)

       10.16  Route Service Agreement with CAT, dated as of February 1, 1997
              (incorporated by reference to Exhibit 10.16 of the Registrant's
              Registration Statement on Form SB-2; Registration No. 333-29969)

       10.17* Employment Agreement with Jeffrey R. Paletz, dated as of April 15,
              1997 (incorporated by reference to Exhibit 10.17 of the
              Registrant's Registration Statement on Form SB-2; Registration No.
              333-29969)

       10.18* Employment Agreement with Melvin Graf, dated as of April 15, 1997
              (incorporated by reference to Exhibit 10.18 of the Registrant's
              Registration Statement on Form SB-2; Registration No. 333-29969)

       10.19* Employment Agreement with Jack S. Kohler, dated as of April 15,
              1997 (incorporated by reference to Exhibit 10.19 of the
              Registrant's Registration Statement on Form SB-2; Registration No.
              333-29969)

       10.20* Employment Agreement with Dustin Elder, dated as of August 14,
              1997

       10.21  Agreement for Service Resale with U.S. West Communications, Inc.,
              undated 

<PAGE>

              (incorporated by reference to Exhibit 10.21 of the Registrant's 
              Registration Statement on Form SB-2; Registration No. 333-29969)

       10.22  Agreement for Sale and Purchase of Business Assets with Edward
              Steven Corporation and Drake Telephone Company, dated May 7, 1998
              **

       10.23  Credit Agreement with Norwest Bank Minnesota, dated as of June 30,
              1998 **

       10.24  First Amendment to the Credit Agreement with Norwest Bank
              Minnesota, dated as of December 16, 1998 **

       21     Subsidiaries of Registrant **

       24     Power of Attorney (included on the signature page of this Form
              10-KSB)

       27     Financial Data Schedule (filed with electronic version only)
</TABLE>

              -------------
              *       Management contract or compensatory plan or arrangement.
              **      Filed herewith.

<PAGE>

                                         CONSOLIDATED FINANCIAL STATEMENTS FOR:


                                                      CHOICETEL COMMUNICATIONS,
                                                          INC. AND SUBSIDIARIES



                                                                    Years ended
                                                     December 31, 1998 and 1997


<PAGE>




                         INDEPENDENT AUDITORS' REPORT



Board of Directors
ChoiceTel Communications, Inc.
Minneapolis, Minnesota


We have audited the accompanying consolidated balance sheets of ChoiceTel
Communications, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ChoiceTel
Communications, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.


/s/ Schechter Dokken Kanter Andrews & Selcer Ltd.


Minneapolis, Minnesota
March 16, 1999





<PAGE>

<TABLE>
<CAPTION>

CHOICETEL COMMUNICATIONS, INC.                                                         CONSOLIDATED
AND SUBSIDIARIES                                                                     BALANCE SHEETS
                                                                                        DECEMBER 31
---------------------------------------------------------------------------------------------------
                                                                        1998              1997  
                                                                   -------------      -------------
<S>                                                                <C>                <C>

ASSETS:
    Current assets:
       Cash                                                        $     363,239      $     343,705
       Short-term investments                                                             1,151,215
       Accounts receivable                                             1,080,794            575,313
       Prepaid:
          Rent                                                           176,411             93,357
          Other                                                          487,149            458,509
       Deferred taxes                                                    710,000            601,000
                                                                   -------------      -------------
          Total current assets                                         2,817,593          3,223,099
                                                                   -------------      -------------
    Property and equipment, net                                        6,336,401          4,521,017
                                                                   -------------      -------------
    Other assets:
       Prepaid rents                                                      73,998             92,179
       Rental contracts, net of accumulated amortization
         of $776,333 in 1998 and $355,412 in 1997                      5,501,771          3,212,450
       Deferred financing, net of accumulated
         amortization of $3,000 in 1998                                   27,000                   
                                                                   -------------      -------------
                                                                       5,602,769          3,304,629
                                                                   -------------      -------------
                                                                   $  14,756,763      $  11,048,745
                                                                   -------------      -------------
                                                                   -------------      -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
    Current liabilities:
       Checks outstanding in excess of bank balance                $      74,604      $     139,239
       Notes payable                                                     350,000            350,000
       Current portion of long-term debt                               1,222,559            843,301
       Accounts payable                                                  238,944             48,000
       Accrued expenses                                                2,339,805          2,116,142
                                                                   -------------      -------------
          Total current liabilities                                    4,225,912          3,496,682
                                                                   -------------      -------------
    Long-term liabilities:
       Deferred taxes                                                    653,000            449,000
       Long-term debt, net of current portion                          3,891,732          1,269,985
                                                                   -------------      -------------
                                                                       4,544,732          1,718,985
                                                                   -------------      -------------
    Shareholders' equity                                               5,986,119          5,833,078
                                                                  --------------      -------------
                                                                  $   14,756,763      $  11,048,745
                                                                  --------------      -------------
                                                                  --------------      -------------
</TABLE>

                See notes to consolidated financial statements.

                                                                         2

<PAGE>

<TABLE>
<CAPTION>

CHOICETEL COMMUNICATIONS, INC.                                      CONSOLIDATED
AND SUBSIDIARIES                                        STATEMENTS OF OPERATIONS
                                                        YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
                                                           1998          1997 
                                                      ------------   -----------
<S>                                                   <C>            <C>
Service revenue                                       $  9,344,248   $ 7,081,227
Cost of service                                          4,231,342     3,725,204
                                                      ------------   -----------
Gross margin                                             5,112,906     3,356,023
                                                      ------------   -----------
Selling, general and administrative expenses:
    Salary and benefits                                  1,873,070     1,260,863
    Travel and related                                     196,598       128,115
    Office and overhead                                    952,066       379,711
                                                      ------------   -----------
                                                         3,021,734     1,768,689
                                                      ------------   -----------
Depreciation and amortization                            1,317,051       927,697
Interest                                                   310,081       701,048
Sales tax contingency                                      253,972       242,760
                                                      ------------   -----------
                                                         4,902,838     3,640,194
                                                      ------------   -----------
Income (loss) before income taxes                          210,068      (284,171)
Provision for income taxes (benefit)                        95,000      (150,000)
                                                      ------------   -----------
Net income (loss)                                     $    115,068   $  (134,171)
                                                      ------------   -----------
                                                      ------------   -----------
Earnings per common share:
    Basic                                             $        .04   $      (.06)
                                                      ------------   -----------
                                                      ------------   -----------
    Diluted                                           $        .04   $      (.06)
                                                      ------------   -----------
                                                      ------------   -----------
Weighted average number of common shares outstanding:
    Basic                                                2,915,006     2,114,922
                                                      ------------   -----------
                                                      ------------   -----------
    Diluted                                              2,916,457     2,114,922
                                                      ------------   -----------
                                                      ------------   -----------
</TABLE>

                See notes to consolidated financial statements.

                                                                         3

<PAGE>

<TABLE>
<CAPTION>

CHOICETEL COMMUNICATIONS, INC.                                                                          CONSOLIDATED STATEMENTS 
AND SUBSIDIARIES                                                                                        OF SHAREHOLDERS' EQUITY 
                                                                                                        YEARS ENDED DECEMBER 31, 
----------------------------------------------------------------------------------------------------------------------------------
                                                         COMMON STOCK
                                          ---------------------------------------
                                                                  CHOICETEL
                                             CHOICETEL, INC. COMMUNICATIONS, INC.
                                         ------------------- --------------------
                                          10,000,000 SHARES    15,000,000 SHARES
                                          AUTHORIZED, NO PAR AUTHORIZED, $.01 PAR  ADDITIONAL                                  
                                         ------------------ ---------------------   PAID-IN    ACCUMULATED SUBSCRIPTIONS         
                                          SHARES    AMOUNT    SHARES     AMOUNT     CAPITAL      DEFICIT    RECEIVABLE    TOTAL  
                                         -------- --------- --------- -----------  ----------  ----------- ----------- ----------
<S>                                       <C>     <C>       <C>       <C>          <S>         <C>         <C>         <C>        
Balance, January 1, 1997                  846,508 $  1,000  1,919,266 $ 1,459,473              $ (751,814) $ (44,571)  $  664,088

Contributions of subsidiary stock to 
  parent                                 (846,508)  (1,000)                         $   1,000

Reclassification of S-Corp accumulated 
  deficit                                                                            (751,814)    751,814

Collection of subscription receivable                                                                         25,990       25,990

Conversion to $.01 par value stock                                     (1,440,280)  1,440,280                                     

Issuance of stock as compensation                               9,500          95      37,905                              38,000

Issuance of stock in acquisition                              186,240       1,862     743,098                             744,960

Issuance of 800,000 common shares
 in public offering                                           800,000       8,000   4,486,211                           4,494,211

Net loss                                                                                         (134,171)               (134,171)
                                          ------- --------  --------- -----------  ----------  ----------  ---------   ----------
Balance, December 31, 1997                   -0-      -0-   2,915,006      29,150   5,956,680    (134,171)   (18,581)   5,833,078

Issuance of stock warrants                                                              9,000                               9,000

Issuance of stock options                                                              20,392                              20,392

Collection of subscription receivable                                                                          8,581        8,581

Net income                                                                                        115,068                 115,068
                                          ------- --------  --------- -----------  ----------  ----------  ---------   ----------
Balance, December 31, 1998                        $         2,915,006 $    29,150  $5,986,072  $  (19,103) $ (10,000)  $5,986,119
                                          ------- --------  --------- -----------  ----------  ----------  ---------   ----------
                                          ------- --------  --------- -----------  ----------  ----------  ---------   ----------
</TABLE>

                       See notes to financial statements.

                                                                         4

<PAGE>





<TABLE>
<CAPTION>

CHOICETEL COMMUNICATIONS, INC.                                                    CONSOLIDATED
AND SUBSIDIARIES                                                      STATEMENTS OF CASH FLOWS
                                                                       YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
                                                                           1998         1997  
                                                                      -----------   -----------
<S>                                                                   <C>           <C>
Cash flows from operating activities:
    Net income (loss)                                                 $   115,068   $  (134,171)
    Adjustments to reconcile net income (loss) to net cash provided
      by operating activities:
       Deferred taxes                                                      95,000      (152,000)
       Depreciation                                                       893,129       681,983
       Amortization                                                       423,922       245,714
       Stock based compensation issued                                     29,392        38,000
       Changes in operating assets and liabilities:
       (Increase) decrease in:
          Accounts receivable                                            (505,481)     (402,379)
          Prepaid expenses                                                (93,513)      (54,737)
       Increase (decrease) in:
          Checks outstanding in excess of bank balance                    (64,635)       61,908
          Accounts payable                                                190,944        48,000
          Accrued expenses                                                223,663       929,481
                                                                      -----------   -----------
    Net cash provided by operating activities                           1,307,489     1,261,799
                                                                      -----------   -----------
Cash flows used in investing activities:
    Purchase of:
       Equipment                                                       (1,116,263)   (1,223,657)
       Rental contracts                                                  (296,506)
    Redemption (purchase) of short-term investments                     1,151,215    (1,151,215)
    Payments for acquisitions                                            (205,987)   (2,300,224)
    Advances in connection with acquisition                                            (309,479)
                                                                      -----------   -----------
    Net cash used in investing activities                                (467,541)   (4,984,575)
                                                                      -----------   -----------
Cash flows from financing activities:
    Proceeds from issuance common stock                                               4,494,211
    Payments of subscription receivable                                      8,581       25,990
    Principal payments on long-term debt                                (1,148,995)  (1,046,201)
    Increase in notes payable                                              350,000
    Payments on notes payable                                                          (360,000)
    Loan origination fees                                                  (30,000)             
                                                                      -------------   ----------
    Net cash (used in) provided by financing activities                   (820,414)   3,114,000
                                                                      -------------   -----------

</TABLE>

                See notes to consolidated financial statements.

                                                                         5

<PAGE>

<TABLE>
<CAPTION>

CHOICETEL COMMUNICATIONS, INC.                                                    CONSOLIDATED
AND SUBSIDIARIES                                                      STATEMENTS OF CASH FLOWS
                                                                      YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
                                                                  1998                1997   
                                                               ------------      -----------
<S>                                                            <C>               <C>
Net increase (decrease) in cash                                $     19,534      $  (608,776)

Cash, beginning balance                                             343,705          952,481
                                                               ------------      -----------

Cash, ending balance                                           $    363,239      $   343,705
                                                               ------------      -----------
                                                               ------------      -----------
Supplemental disclosure of cash flow information:
    Cash paid for interest                                     $    340,012      $   714,381
                                                               ------------      -----------
                                                               ------------      -----------
Supplemental cash flows information:

    Details of acquisitions:

       Fair value of assets                                    $  4,005,987      $ 5,810,350

       Liabilities assumed (includes $1,556,500 of
         seller financing)                                                         2,765,166

       Issuance of note                                           3,800,000

       Issuance of stock                                                             744,960
                                                               ------------      -----------
       Cash paid for assets                                    $    205,987      $ 2,300,224
                                                               ------------      -----------
                                                               ------------      -----------
</TABLE>

                See notes to consolidated financial statements.

                                                                         6

<PAGE>

CHOICETEL COMMUNICATIONS, INC.                            NOTES TO CONSOLIDATED
AND SUBSIDIARIES                                           FINANCIAL STATEMENTS
                                         YEARS ENDED DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------

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

Principles of consolidation:
      The consolidated financial statements for 1998 and 1997 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 pay telephone service in fourteen states and Puerto Rico, 
      however, revenue is generated predominantly in Minnesota, Oregon and
      Pennsylvania.

      Choicetel, Inc. was incorporated in 1995 and was dormant until June 1996 
      when operations began. Choicetel, Inc. is a reseller of telephone service
      to pay telephone owners in Minnesota.

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

Short-term investments:
      The Company classifies all of its marketable securities, consisting of
      U.S. Treasury Bills, as available-for-sale. Available-for-sale securities
      are carried at fair value, with the unrealized gains and losses, net of
      income taxes, reported as a component of shareholders' equity.

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, seven
      years, of the related assets. In October 1998, the Company changed the
      estimated useful life of all phones to 10 years based on their experience.
      The effect of this change resulted in $75,000 less depreciation expense
      for 1998. Phone locations including rental contracts are evaluated by
      management to determine if their carrying amounts have been impaired. No
      reduction for impaired assets has occurred.

Prepaid rents:
      Prepaid rents represent incentives paid to phone location merchants and
      property owners to secure long-term contracts at such sites and are being
      amortized as consumed per the rental agreement.

Rental contracts:
      Rental contracts 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
      remaining 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.

                                                                         7

<PAGE>

CHOICETEL COMMUNICATIONS, INC.                            NOTES TO CONSOLIDATED
AND SUBSIDIARIES                                           FINANCIAL STATEMENTS
                                         YEARS ENDED DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   (CONTINUED):

Income taxes:
      Prior to 1997, ChoiceTel Communications, Inc. and Choicetel, Inc., were
      "S" corporations under the Internal Revenue Code. Instead of paying
      corporate income taxes, the shareholders of an "S" corporation are taxed
      individually on their proportionate share of the Company's taxable income
      or loss.

      Effective January 1997, ChoiceTel Communications, Inc.'s "S" corporation
      status terminated and it became subject to federal and state income taxes.

Stock-based compensation:
      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, and related interpretations.  
      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 awards 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.

Earnings (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 were 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 related proceeds. This calculation added 1,451 
      shares to the diluted weighted average shares outstanding in 1998.

      Stock options and warrants of 1,225,000 and 1,082,500, for December 31,
      1998 and 1997, respectively, were not used in the calculation of diluted
      earnings (loss) per share because they were antidilutive.

      Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
      No. 83, stock issued by the Company at prices less than the initial
      offering price during the twelve months immediately preceding the initial
      public offering have been included in the determination of shares used in
      the calculation of historical earnings (loss) per share as if they were
      outstanding for all periods.

Use of estimates:
      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect 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 notes 3 and 7.

                                                                         8

<PAGE>

CHOICETEL COMMUNICATIONS, INC.                            NOTES TO CONSOLIDATED
AND SUBSIDIARIES                                           FINANCIAL STATEMENTS
                                         YEARS ENDED DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------

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 $.01
par value. The shareholders also approved the authorization of 5,000,000 shares
of preferred stock with $.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. No shares of preferred stock were
issued as of December 31, 1998.

In November 1997, the Company completed the issuance of an additional 800,000
shares of common stock through a public offering, resulting in net proceeds
(after deducting issuance costs) of $4,494,211. A portion of the proceeds were
used to retire existing debt and debt acquired in the acquisition of Telco West,
Inc.

3.  ACQUISITIONS:

Jay Telephone Vending:

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 total cost for the acquired assets
was $4,005,987, and was financed by the bank with a $3,800,000 note payable. An
additional amount up to $500,000 may be due based upon the performance of
acquired phones during the twelve months ending June 30, 1999.

The following summarized unaudited pro forma information assumes the
acquisitions had occurred on January 1, 1997.

The pro forma amounts reflect the results of operations for the Company, the
acquired business, and the following purchase acquisition adjustments for the
period presented:

-   Depreciation on fixed assets and amortization of contracts is based on the 
    purchase price allocation.

-   Elimination of the salaries of the officers of the acquired company.

-   Interest expense on additional debt that would have been incurred to 
    finance the acquisition.

                                                                         9

<PAGE>

CHOICETEL COMMUNICATIONS, INC.                            NOTES TO CONSOLIDATED
AND SUBSIDIARIES                                           FINANCIAL STATEMENTS
                                         YEARS ENDED DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------

3.  ACQUISITIONS (CONTINUED):

<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                   235,539    1,552,590
Sales tax contingency            253,972                                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
                             -----------  ----------   -----------  -----------
                             -----------  ----------   -----------  -----------

<CAPTION>
                                 YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)      
                             --------------------------------------------------
                                                        PRO FORMA
                              COMPANY    JAY TELEPHONE  ADJUSTMENTS   COMBINED
                             ----------- ------------- -----------  -----------
<S>                          <C>         <C>           <C>          <C>
Gross margin                 $ 3,356,023  $1,174,122                $ 4,530,145
                             -----------  ----------                -----------
Selling, general and
  administrative               1,768,689   1,078,496      (556,811)   2,290,374
Interest expense                 701,048      25,213       332,500    1,058,761
Depreciation and amortization    927,697     120,221       370,583    1,418,501
Sales tax contingency            242,760                                242,760
                             -----------  ----------   -----------  -----------
Loss before income taxes        (284,171)    (49,808)     (146,272)    (480,251)

Provision for income taxes
   (benefit)                    (150,000)    (17,400)      (58,509)    (225,909)
                             -----------  ----------   -----------  -----------
Net loss after tax           $  (134,171) $  (32,408)  $   (87,763) $  (254,342)
                             -----------  ----------   -----------  -----------
                             -----------  ----------   -----------  -----------
</TABLE>


                                                                         10

<PAGE>

CHOICETEL COMMUNICATIONS, INC.                            NOTES TO CONSOLIDATED
AND SUBSIDIARIES                                           FINANCIAL STATEMENTS
                                         YEARS ENDED DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------

3.  ACQUISITIONS (CONTINUED):

Telco West, Inc.:
    On January 2, 1997 the Company purchased a route of pay telephones in the
    Northwestern United States from Telco West, Inc. (Telco). The purchase price
    was approximately $3,400,000 and was financed primarily with bank and seller
    financing. The Company accounted for the acquisition using the purchase
    method and accordingly the results of operations of the Telco route are
    included in the consolidated financial statements since the date of
    acquisition.

Computer Assisted Technologies Inc.:
    On August 14, 1997 the Company purchased a route of pay telephones in
    Minnesota and Wisconsin from Computer Assisted Technologies, Inc. (CAT). The
    purchase price was approximately $2,400,000, subject to contingent
    compensation and adjustment, and was financed principally through the
    assumption of notes and leases in the aggregate of $1,115,545, issuance of
    stock in the amount of $744,960, and convertible seller financing in the
    amount of $350,000. The purchase agreement included contingent compensation
    in the form of additional stock should the Initial Public Offering price of
    the Company's common stock be less than $8.00 per share. The Company's
    opening price on November 21, 1997 was $7.00 per unit and accordingly the
    Company has recorded the equivalent of the additional compensation of
    $93,121 in accrued expenses.

    Prior to the closing of the purchase in August 1997, the Company entered
    into a Route Service Agreement (Agreement) with CAT on February 1, 1997
    until such time CAT received approval of the sale from the Minnesota and
    Wisconsin Public Utilities Commissions. The Agreement provided for the
    servicing of the CAT pay phone route during the period up to closing. In
    exchange for a monthly lease fee, the Company received all revenues derived
    from the route. The Company accounted for the CAT acquisition using the
    purchase method. The results of operations of the CAT route is included in
    the consolidated financial statements since the inception date of the Route
    Service Agreement through the date of acquisition. This constitutes
    substantially all of CAT's activity for 1997.

    Subsequent to the closing of the sale in August 1997 the Company determined
    that certain location agreements acquired in the sale may not be valid and
    therefore certain adjustments to the original purchase price are necessary.
    Additionally, the Company advanced monies to, and paid certain expenses of
    CAT during 1997 in excess of the required lease payments of the Route
    Service Agreement. Total amounts paid of $309,479 are included in the
    consolidated financial statements as other prepaid expenses. These potential
    adjustments have not been netted against the seller financing by the Company
    although management believes the adjustment to the purchase price and
    advances made substantially satisfy the $350,000 note payable.

4. PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>
                               1998              1997     
                          --------------   ---------------
<S>                       <C>              <C>
Phones and
 related equipment        $    8,288,468   $     5,937,547
Accumulated
 depreciation                 (2,163,041)       (1,469,906)
                          --------------   ---------------
                               6,125,427         4,467,641
                          --------------   ---------------
Office equipment
 and improvements                291,093            96,860
Accumulated
 depreciation                    (80,119)          (43,484)
                          --------------   ---------------
                                 210,974            53,376
                          --------------   ---------------
                          $    6,336,401   $     4,521,017
                          --------------   ---------------
                          --------------   ---------------
</TABLE>

                                                                         11

<PAGE>


CHOICETEL COMMUNICATIONS, INC.                            NOTES TO CONSOLIDATED
AND SUBSIDIARIES                                           FINANCIAL STATEMENTS
                                         YEARS ENDED DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------

5. NOTE PAYABLE:

<TABLE>
<CAPTION>
                                                            1998       1997  
                                                       -----------  ----------
<S>                                                    <C>          <C>
Note payable, Computer Assisted Technology, Inc., 
(CAT) interest only at 8.5% through February 7, 
1998, at which time the principal is due. 
Convertible to shares of common stock at $6.75 plus 
adjustment based on IPO price of stock. The note has 
not been settled due to a dispute between the 
Company and CAT.  See Note 3.                          $   350,000  $  350,000
                                                       -----------  ----------
                                                       -----------  ----------
</TABLE>

6. LONG-TERM DEBT:

<TABLE>
<CAPTION>

                                                            1998       1997  
                                                       -----------  ----------
<S>                                                    <C>          <C>
Note payable, bank, due in increasing monthly 
principal installments starting at $50,667, 
increasing up to $70,000 at July 2002 plus interest 
at a floating rate through June 2003. The interest 
rate at December 31, 1998 was 8.75%. (A) (B)           $ 3,495,998

Note payable, bank, revolving credit facility up to 
$1,000,000, due in increasing monthly principal 
installments beginning October 1999 determined as a 
percent of the amount outstanding on September 30, 
1999. Installments are due beginning October 1999 
through June 2003, plus interest at a floating rate 
(8.75% at December 31, 1998). (B)                          350,000

Note payable, Telco, due in monthly installments of 
$21,342 including interest at 10% through July 2001, 
secured by equipment, subordinated to notes payable, 
bank.                                                      564,874  $  753,452

Note payable, Telco, due in monthly installments of 
$3,042 including interest at 10%.                                      364,884
                                                     

Note payable, Telecapital, due in monthly 
installments of $4,452 including interest at 14.5% 
through April 2002, secured by equipment.                  138,159     169,069


Capital leases, interest at 9.5%                           551,156     825,881

Notes payable, vehicles, due in monthly installments 
of $480 including interest at 8.95% through 
December 2001.                                              14,104
                                                       -----------   ----------
                                                         5,114,291    2,113,286
Less current portion                                     1,222,559      843,301
                                                       -----------   ----------

                                                       $ 3,891,732   $ 1,269,985
                                                      ------------   -----------
                                                      ------------   -----------
</TABLE>


                                                                             12

<PAGE>

CHOICETEL COMMUNICATIONS, INC.                            NOTES TO CONSOLIDATED
AND SUBSIDIARIES                                           FINANCIAL STATEMENTS
                                         YEARS ENDED DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------

6.    LONG-TERM DEBT (CONTINUED):

(A) This note includes some mandatory prepayments based on cash flow and
penalties for other prepayments.

(B) These notes are secured by receivables, equipment, deposit accounts and an
insurance policy and partially guaranteed by certain officers. The Company is
required to maintain certain financial ratios and the notes have certain other
restrictive covenants regarding transactions of the Company.

Included in interest expense for 1997 is approximately $200,000 of interest paid
to Computer Assisted Technologies, Inc. during the Route Service Agreement
period.

Future maturities of long-term debt are as follows:

<TABLE>
<CAPTION>

       YEAR ENDING DECEMBER 31,             AMOUNT  
       -----------------------          ------------
       <S>                              <C>
                    1999                $  1,222,559
                    2000                   1,222,354
                    2001                     983,837
                    2002                     910,080
                    2003                     765,461
                                        ------------
                                        $  5,114,291
                                        ------------
                                        ------------
</TABLE>

7. COMMITMENTS AND CONTINGENCIES:

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 30 days notice.

Consulting agreement:
      The Company paid a director/shareholder $34,800 and $24,000 for certain  
      consulting services in 1998 and 1997, 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
         and $39,831 for the years ended December 31, 1998 and 1997,
         respectively.

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>

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>
<CAPTION>

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

</TABLE>


                                                                            13

<PAGE>


CHOICETEL COMMUNICATIONS, INC.                            NOTES TO CONSOLIDATED
AND SUBSIDIARIES                                           FINANCIAL STATEMENTS
                                         YEARS ENDED DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------

7.    COMMITMENTS AND CONTINGENCIES (CONTINUED):

Capital leases (continued):
     The future minimum lease payments under capital leases and their net
     present value are as follows:

<TABLE>
<CAPTION>

                                                                  AMOUNT
                                                               ----------
         <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>

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.

Dial-around compensation:
    The Company has recognized revenue for dial-around compensation based upon
    rates for such compensation set by the Federal Communication 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 issued an
    order on October 9, 1997, establishing 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 and tentatively concluded that
    the $0.284 per call rate adopted on a going forward basis should also govern
    compensation during the period from November 6, 1996 through October 6,
    1997. This would be approximately $37 per phone per month. 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 reduced its rate for recognizing revenue to the
    previous rate of $6.00 per phone per month effective January 1, 1997 through
    October 6, 1997. The 1997 change in estimate resulted in an accrual of a
    $351,000 liability at December 31, 1997 to reflect an estimated liability
    for the period from November 6, 1996 to October 6, 1997 and is included in
    accrued expenses at December 31, 1998 and 1997.

                                                                            14

<PAGE>


CHOICETEL COMMUNICATIONS, INC.                            NOTES TO CONSOLIDATED
AND SUBSIDIARIES                                           FINANCIAL STATEMENTS
                                         YEARS ENDED DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------

7.  COMMITMENTS AND CONTINGENCIES (CONTINUED):

Dial-around compensation (continued):
    Effective October 7, 1997, the Company began recognizing dial around revenue
    at approximately $37 per phone per month. In 1998, The FCC adjusted the rate
    retroactively from October 7, 1997 to $0.24 per call or $31 per phone a
    month. The rate recorded by the Company for 1998 was $31 per phone month.
    The amount due from dial-around compensation included in accounts receivable
    is approximately $856,000 and $410,000 at December 31, 1998 and 1997,
    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 an audit of the Company's revenues for
    calculation of sales taxes the Department asserts are due on telephone
    receipts. While the Company does not believe its coin receipts are subject
    to 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.

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 than 85% of the fair market value of the
common stock on the date of 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.

During 1998, the Company granted options to employees and non-employee directors
to purchase 70,000 shares through the Incentive Plan. All options granted were
at the fair market value of the stock on the grant date. The employees options
vest over a three year period, the non-employee director options are exercisable
in full at the date of grant. The options have a term of five years.

Stock options were forfeited in the current year, 50,000 options at an exercise
price of $1.50 and 12,500 options at an exercise price of $4.00.

In January and February 1997, the Company granted to certain employees options
to purchase 60,000 shares of the Company's common stock. OP in 1997 were also
granted to non-employees to purchase 12,500 shares of the Company's common
stock.

Utilizing the Black Scholes option pricing model, the Company determined that
the fair value of options granted during 1998 and 1997 would not have affected
net income (loss) or income (loss) per share as reported, and accordingly, the
Company has not provided pro forma income and earnings per share information.


                                                                            15

<PAGE>

CHOICETEL COMMUNICATIONS, INC.                            NOTES TO CONSOLIDATED
AND SUBSIDIARIES                                           FINANCIAL STATEMENTS
                                         YEARS ENDED DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------

8.   STOCK OPTIONS AND WARRANTS (CONTINUED):

Information with respect to options outstanding as of December 31 is summarized
as follows:

<TABLE>
<CAPTION>

                                                   1998                    1997     
                                      -------------------------  ---------------------------
                                                       WEIGHTED-                   Weighted-
                                                        AVERAGE                    average
                                                       EXERCISE                    exercise
                                           SHARES       PRICE        Shares           price  
                                      ---------------  --------     ---------      ---------
<S>                                   <C>              <C>       <C>             <C>
Outstanding at beginning of year              122,500  $   3.37         50,000      $  1.50

Granted                                        70,000      4.06         72,500         4.66
Exercised
Forfeited                                      62,500      2.00    
                                      ---------------            --------------

Outstanding at end of year                    130,000  $   4.34        122,500       $  3.37
                                      ---------------  --------  ---------------    ---------
                                      ---------------  --------  ---------------    ---------

Range of exercise prices of options
  outstanding at December 31           $3.38 TO $6.75             $1.50 to $6.75

Options exercisable at year end                80,000                     92,500

Weighted average remaining life              3.4 YEARS                   2 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. The remaining 50,000 have an exercise price of $7.00
expiring in August 2002.

At December 31, the Company has outstanding the following warrants:

<TABLE>
<CAPTION>

                                              Weighted
                                              Average
                                              exercise
                     1998           1997       price 
                   ---------    ----------   ----------
<S>                <C>          <C>       <C>
Issued as part
  of units in
  public offering    800,000    800,000      $  9.50

Granted to
  Underwriter
  in public
  offering           160,000    160,000         8.95

Grant to
  investment
  relations
  company            150,000                    6.00
                   ---------    ----------  

Outstanding
  at end
  of year           1,110,000   960,000      $  9.40
                   -----------  ---------    ---------
                   -----------  ---------    ---------

Warrants
  exercisable
  at year end        1,110,000      800,000

Weighted
  average
  remaining
  life                3.8 YEARS   4.9 years

</TABLE>


                                                                         16

<PAGE>

CHOICETEL COMMUNICATIONS, INC.                            NOTES TO CONSOLIDATED
AND SUBSIDIARIES                                           FINANCIAL STATEMENTS
                                         YEARS ENDED DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------

8.    STOCK OPTIONS AND WARRANTS (CONTINUED):

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>

                                 1998             1997    
                            -------------   --------------
<S>                         <C>             <C>
Current, state              $       2,000   $        2,000
Deferred:
    Federal                        80,000          (90,000)
    State                          13,000          (16,000)
Effect of change in
  tax status                                       (46,000)
                            -------------   --------------
                            $      95,000   $     (150,000)
                            -------------   --------------
                            -------------   --------------

</TABLE>

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

<TABLE>
<CAPTION>

                                 1998             1997    
                            -------------   --------------
<S>                         <C>             <C>
Statutory federal tax
  rate                             34.0%           34.0%

State taxes (net of
  federal tax benefit)              6.0%            6.0%

Effect of nondeductible
  expenses                          5.2%            5.0%

Effect of change in tax
  status                                            7.8%
                               --------         -------
Effective tax rate                 45.2%           52.8%
                               --------         -------

</TABLE>

The deferred tax asset and deferred tax liability consist of the following at
December 31:

<TABLE>
<CAPTION>

                                 1998             1997    
                            -------------   --------------
<S>                         <C>             <C>
Deferred tax asset:
    Sales tax
      contingency           $     545,000   $      444,000
    Accrued expenses               25,000           17,000
    Accrued dial-around
      compensation                140,000          140,000
                            -------------   --------------
                            $     710,000   $      601,000
                            -------------   --------------
                            -------------   --------------
Deferred tax liability:
    Depreciation            $     839,000   $      448,000
    Amortization                  (31,000)           1,000
    Net operating loss
      carryforward               (155,000)                
                            -------------   --------------
                            $     653,000   $      449,000
                            -------------   --------------
                            -------------   --------------
</TABLE>

The Company has federal and state net operation loss carryforwards of $388,000
expiring in years 2012 and 2013.

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 reported taxable loss for the year
ended December 31, 1998 the assets have been recognized based on management's
estimate of future taxable income.


                                                                         17

<PAGE>


CHOICETEL COMMUNICATIONS, INC.                             NOTES TO CONSOLIDATED
AND SUBSIDIARIES                                            FINANCIAL STATEMENTS
                                          YEARS ENDED DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------

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 carrying amount of cash, short-term
investments, accounts receivable and notes and accounts payable approximates
fair value. Fair value of long-term debt approximates recorded value based on
rates available to the Company for similar terms and maturities.

11. SUBSEQUENT EVENT:

The Company entered into an agreement in February 1999 to sell all phones in the
northwest region for $2,940,000 which generated approximately $1.9 million of
revenue in both 1998 and 1997. The sale is contingent upon certain due diligence
on the part of the buyer and the buyer's ability to obtain sufficient financing.

The proceeds from the sale will be used to pay off the long-term debt of 
$564,874 which is secured by the equipment.

                                                                        18