TABLE OF CONTENTS




|                              |                                                                                               |                                                                                                                            |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|Part I. Financial Information
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | Consolidated Balance Sheets                                                                                               
|                              |                                                                                               | Consolidated Statements of Operations                                                                                     
|                              |                                                                                               | Statements of Changes in Mandatorily Redeemable Preferred Stock                                                           
|                              |                                                                                               | Statements of Changes in Non-mandatorily Redeemable Preferred Stock,
Common Stock and Other Shareholders Equity (Deficit)
|                              |                                                                                               | Consolidated Statements of Cash Flows                                                                                     
|                              |                                                                                               | Notes to Consolidated Financial Statements                                                                                
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|Part II. Other Information   
|                              | Item 3.Defaults Upon Senior Securities                                                       
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|Signatures                   



---



U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549Form 10-Q

(Mark One)

| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | [X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the quarterly period ended September 30, 1999



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | [  ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from_______ to__________ .

Commission file number 0-16715

PhoneTel Technologies, Inc.

(Exact Name of Registrant as Specified in Its Charter)

|                                                                    |  |                                                
|------------------------------------------------------------------- |  | -----------------------------------------------
|Ohio
(State or Other Jurisdiction of Incorporation or Organization) |  | 34-1462198
(I.R.S. Employer Identification No.)

|                                                                    |  |           
|------------------------------------------------------------------- |  | ----------
|North Point Tower, 7th Floor, 1001 Lakeside Avenue, Cleveland, Ohio |  | 44114-1195
|(Address of Principal Executive Offices)                            |  | (Zip Code)

(216) 241-2555
(Issuers Telephone Number, Including Area Code)

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

Yes  X  No __

Applicable only to Corporate Issuers

Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date: As of November 10,
1999, 18,754,133 shares of the registrants Common Stock, $.01 par value, were
outstanding.





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##### Table of Contents



PhoneTel Technologies, Inc. and Subsidiary
Form 10-Q
As of and for the Nine and Three Months Ended September 30, 1999

INDEX

|                              |  |                                                                                                                                                                                                              |  |          |    | 
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------- | -- | 
|                              |  |                                                                                                                                                                                                              |  | Page No.
|                              |  |                                                                                                                                                                                                              |  |         
|Part I. Financial Information
|Item 1.                       |  | Financial Statements                                                                                                                                                                                        
|                             
|                             
|                             
|                             
|                              |  | Consolidated Balance Sheets as of December 31, 1998 and September 30, 1999                                                                                                                                   |  |          | 3  | 
|                             
|                             
|                             
|                             
|                              |  | Consolidated Statements of Operations for the Nine and Three
Months Ended September 30, 1998 and 1999                                                                                                        |  |          | 4  | 
|                             
|                             
|                             
|                             
|                              |  | Statements of Changes in Mandatorily Redeemable Preferred
Stock for the Year Ended December 31, 1998 and
the Nine Months Ended September 30, 1999                                                            |  |          | 5  | 
|                             
|                             
|                             
|                             
|                              |  | Statements of Changes in Non-mandatorily Redeemable Preferred
Stock, Common Stock and Other Shareholders Equity (Deficit)
for the Year Ended December 31, 1998 and
the Nine Months Ended September 30, 1999 |  |          | 6  | 
|                             
|                             
|                             
|                             
|                              |  | Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1999                                                                                                                  |  |          | 7  | 
|                             
|                             
|                             
|                             
|                              |  | Notes to Consolidated Financial Statements                                                                                                                                                                   |  |          | 8  | 
|                             
|                             
|                             
|                             
|Item 2.                       |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations                                                                                                                        |  |          | 18 | 
|                             
|                             
|                             
|                             
|Item 3.                       |  | Quantitative and Qualitative Disclosures about
Market Risk.                                                                                                                                                  |  |          | 26 | 
|                             
|                             
|                             
|                             
|Part II. Other Information   
|                             
|                             
|                             
|                             
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                                                                                                              |  |          | 27 | 
|                             
|                             
|                             
|                             
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                                                                                                             |  |          | 27 | 
|                             
|                             
|                             
|                             
|Signatures                    |  |                                                                                                                                                                                                              |  |          | 28 | 

2



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##### Table of Contents









Part I. Financial Information







Item 1. Financial Statements

Phonetel Technologies, Inc. and Subsidiary







|                                                                                                   |                                                                                              |                                 |                           |         |             |         |              |        |             |        | 
|-------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------- | ------------------------- | ------- | ----------- | ------- | ------------ | ------ | ----------- | ------ | 
|                                                                                                   |                                                                                              |                                 |                           |         |             |         |              |        | (Unaudited)
|                                                                                                   |                                                                                              |                                 |                           |         | December 31 |         | September 30
|                                                                                                   |                                                                                              |                                 |                           |         | 1998        |         | 1999        
|                                                                                                   |                                                                                              |                                 |                           |         |             |         |             
|Assets                                                                                            
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Current assets:                                                                                   
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Cash                                                                                         |                                 | $                         | 5,768   |             |         | $            | 6,327  |            
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Accounts receivable, net of allowance for doubtful
accounts of $935 and $1,182, respectively |                                 |                           | 14,021  |             |         |              | 12,070 |            
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Other current assets                                                                         |                                 |                           | 1,389   |             |         |              | 1,572  |            
|                                                                                                   |                                                                                              |                                 |                           |         |             |         |              |       
|                                                                                                   |                                                                                              | Total current assets            |                           |         | 21,178      |         |              |        | 19,969      |       
|                                                                                                   |                                                                                              |                                 |                           |         |             |         |              |       
|Property and equipment, net                                                                        |                                                                                              |                                 | 27,837                    |         |             |         | 22,669       |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Intangible assets, net                                                                             |                                                                                              |                                 | 101,073                   |         |             |         | 80,177       |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Other assets                                                                                       |                                                                                              |                                 | 586                       |         |             |         | 562          |       
|                                                                                                   |                                                                                              |                                 |                           |         |             |         |              |       
|                                                                                                   |                                                                                              | $                               | 150,674                   |         |             | $       | 123,377      |       
|                                                                                                   |                                                                                              |                                 |                           |         |             |         |              |       
|Liabilities and Equity (Deficit)                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Current liabilities:                                                                              
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Senior 12% Notes                                                                             |                                 | $                         | 125,000 |             |         |              |       |            
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Current portion of long-term debt and other liabilities                                      |                                 |                           | 41,691  |             |         | $            | 24     |            
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Accounts payable                                                                             |                                 |                           | 11,254  |             |         |              | 7,924  |            
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Accrued expenses:                                                                           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                              | Location commissions            |                           |         | 2,756       |         |              |        | 3,057       |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                              | Personal property and sales tax |                           |         | 3,145       |         |              |        | 2,602       |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                              | Interest                        |                           |         | 8,728       |         |              |        | 437         |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                              | Salaries, wages and benefits    |                           |         | 335         |         |              |        | 493         |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                              | Other                           |                           |         | 251         |         |              |        | 143         |       
|                                                                                                   |                                                                                              |                                 |                           |         |             |         |              |       
|                                                                                                   |                                                                                              |                                 | Total current liabilities |         |             | 193,160 |              |        |             | 14,680 | 
|                                                                                                   |                                                                                              |                                 |                           |         |             |         |              |       
|Long-term debt and other liabilities                                                               |                                                                                              |                                 |                          |         |             |         | 46,927       |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Obligation for Senior 12% Notes, net of deferred financing costs,
to be converted to common equity |                                                                                              |                                 |                          |         |             |         | 137,900      |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Commitments and contingencies                                                                      |                                                                                              |                                 |                          |         |             |         |             |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Mandatorily Redeemable Preferred Stock,
to be converted to common equity                           |                                                                                              |                                 | 9,112                     |         |             |         | 10,322       |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Non-mandatorily Redeemable Preferred Stock,
Common Stock and Other Shareholders Equity (Deficit)  |                                                                                              |                                 | (51,598                   | )       |             |         | (86,452      | )     
|                                                                                                   |                                                                                              |                                 |                           |         |             |         |              |       
|                                                                                                   |                                                                                              | $                               | 150,674                   |         |             | $       | 123,377      |       
|                                                                                                   |                                                                                              |                                 |                           |         |             |         |              |       

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

3



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##### Table of Contents



Phonetel Technologies, Inc. and Subsidiary







Consolidated Statements of Operations

(In Thousands Except for Share and Per Share Amounts)

|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |        |  
|---------------------------------------------------------------- | -------------------------------------------------- |  | ----------------- | ------- | ------------------ |  | ---------- | ------- | ---- |  | ---------- | ------ | - |  | ---------- | ------ | -
|                                                                 |                                                    |  | (Unaudited)       |         | (Unaudited)       
|                                                                 |                                                    |  | Nine Months Ended |         | Three Months Ended
|                                                                 |                                                    |  | September 30      |         | September 30      
|                                                                 |                                                    |  |                   |         |                   
|                                                                 |                                                    |  | 1998              |         | 1999               |  | 1998       |         | 1999
|                                                                 |                                                    |  |                   |         |                    |  |            |         |     
|Revenues:                                                       
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Coin calls                                         |  | $                 | 40,513  |                    |  | $          | 31,374  |      |  | $          | 13,578 |   |  | $          | 10,511 |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Non-coin telecommunication services                |  |                   | 34,777  |                    |  |            | 28,766  |      |  |            | 12,300 |   |  |            | 9,934  |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Other                                              |  |                   | 105     |                    |  |            | 204     |      |  |            | 66     |   |  |            | 135    |  
|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |       
|                                                                 |                                                    |  | 75,395            |         |                    |  | 60,344     |         |      |  | 25,944     |        |   |  | 20,580     |       
|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |       
|Operating Expenses:                                             
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Line and transmission charges                      |  |                   | 22,163  |                    |  |            | 15,757  |      |  |            | 7,531  |   |  |            | 4,866  |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Telecommunication and validation fees              |  |                   | 8,816   |                    |  |            | 7,256   |      |  |            | 2,960  |   |  |            | 2,603  |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Location commissions                               |  |                   | 10,726  |                    |  |            | 9,951   |      |  |            | 4,167  |   |  |            | 3,549  |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Field operations                                   |  |                   | 16,591  |                    |  |            | 15,706  |      |  |            | 6,057  |   |  |            | 5,167  |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Selling, general and administrative                |  |                   | 9,610   |                    |  |            | 7,670   |      |  |            | 3,177  |   |  |            | 2,565  |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Depreciation and amortization                      |  |                   | 19,126  |                    |  |            | 19,366  |      |  |            | 6,464  |   |  |            | 6,458  |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Other unusual charges and contractual settlements  |  |                   | 2,386   |                    |  |            | 1,287   |      |  |            | 1,392  |   |  |            | 1,214  |  
|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |       
|                                                                 |                                                    |  | 89,418            |         |                    |  | 76,993     |         |      |  | 31,748     |        |   |  | 26,422     |       
|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |       
|Loss from operations                                             |                                                    |  | (14,023           | )       |                    |  | (16,649    | )       |      |  | (5,804     | )      |   |  | (5,842     | )     
|                                                                
|                                                                
|                                                                
|                                                                
|Other Income (Expense):                                         
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Interest expense  related parties                 |  |                   | (1,036  | )                  |  |            |        |      |  |            |       |   |  |            |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Interest expense  others                          |  |                   | (13,009 | )                  |  |            | (15,057 | )    |  |            | (4,906 | ) |  |            | (5,132 | )
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Interest income                                    |  |                   | 125     |                    |  |            | 115     |      |  |            | 51     |   |  |            | 47     |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Other                                              |  |                   | 291     |                    |  |            | 41      |      |  |            | 55     |   |  |            | (1     | )
|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |       
|                                                                 |                                                    |  | (13,629           | )       |                    |  | (14,901    | )       |      |  | (4,800     | )      |   |  | (5,086     | )     
|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |       
|Loss before extraordinary item                                   |                                                    |  | (27,652           | )       |                    |  | (31,550    | )       |      |  | (10,604    | )      |   |  | (10,928    | )     
|                                                                
|                                                                
|                                                                
|                                                                
|Extraordinary item:                                             
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Loss on early extinguishment of debt               |  |                   |        |                    |  |            | (2,094  | )    |  |            |       |   |  |            | (2,094 | )
|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |       
|Net Loss                                                         |                                                    |  | ($27,652          | )       |                    |  | ($33,644   | )       |      |  | ($10,604   | )      |   |  | ($13,022   | )     
|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |       
|Earnings Per Share Calculation, Basic and Diluted:              
|                                                                
|                                                                
|                                                                
|                                                                
|Loss before extraordinary item                                   |                                                    |  | ($27,652          | )       |                    |  | ($31,550   | )       |      |  | ($10,604   | )      |   |  | ($10,928   | )     
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Preferred dividend payable in kind                 |  |                   | (261    | )                  |  |            | (13     | )    |  |            | (48    | ) |  |            | (5     | )
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Accretion of 14% Preferred to its redemption value |  |                   | (764    | )                  |  |            | (1,197  | )    |  |            | (308   | ) |  |            | (416   | )
|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |       
|Loss before extraordinary item applicable to
common shareholders |                                                    |  | (28,677           | )       |                    |  | (32,760    | )       |      |  | (10,960    | )      |   |  | (11,349    | )     
|                                                                
|                                                                
|                                                                
|                                                                
|Extraordinary item  loss on early extinguishment of debt        |                                                    |  |                  |         |                    |  | (2,094     | )       |      |  |           |        |   |  | (2,094     | )     
|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |       
|Net loss applicable to common shareholders                       |                                                    |  | ($28,677          | )       |                    |  | ($34,854   | )       |      |  | ($10,960   | )      |   |  | ($13,443   | )     
|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |       
|Loss per common share before extraordinary item                  |                                                    |  | ($1.72            | )       |                    |  | ($1.75     | )       |      |  | ($0.65     | )      |   |  | ($0.61     | )     
|                                                                
|                                                                
|                                                                
|                                                                
|Extraordinary item  loss on early extinguishment of debt        |                                                    |  |                  |         |                    |  | (0.11      | )       |      |  |           |        |   |  | (0.11      | )     
|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |       
|Net Loss Per Common Share                                        |                                                    |  | ($1.72            | )       |                    |  | ($1.86     | )       |      |  | ($0.65     | )      |   |  | ($0.72     | )     
|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |       
|Weighted average number of shares, basic and diluted             |                                                    |  | 16,624,356        |         |                    |  | 18,754,133 |         |      |  | 16,736,633 |        |   |  | 18,754,133 |       
|                                                                 |                                                    |  |                   |         |                    |  |            |         |      |  |            |        |   |  |            |       

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

4



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##### Table of Contents



Phonetel Technologies, Inc. and Subsidiary







Statements of Changes in Mandatorily Redeemable Preferred Stock
(In Thousands Except for Share Amounts)

|                                               |                                                                              |  |  |                   |         |                    |   |        |       |        |  |         |         |  |   |       |        | 
|---------------------------------------------- | ---------------------------------------------------------------------------- |  |  | ----------------- | ------- | ------------------ | - | ------ | ----- | ------ |  | ------- | ------- |  | - | ----- | ------ | 
|                                               |                                                                              |  |  |                   |         | (Unaudited)       
|                                               |                                                                              |  |  | Year Ended        |         | Nine Months Ended 
|                                               |                                                                              |  |  | December 31, 1998 |         | September 30, 1999
|                                               |                                                                              |  |  |                   |         |                   
|                                               |                                                                              |  |  | Shares            |         | Amount             |   | Shares |       | Amount
|                                               |                                                                              |  |  |                   |         |                    |   |        |       |       
|14%   Cumulative Convertible Preferred
Stock 
|                                               | Mandatorily Redeemable,
to be Converted to Common Equity                    
|                                              
|                                              
|                                              
|                                              
|                                               | Balance at beginning of year                                                 |  |  | 138,147           |         |                    | $ | 7,716  |       |        |  | 158,527 |         |  | $ | 9,112 |       
|                                              
|                                              
|                                              
|                                              
|                                               | Dividends payable-in-kind                                                    |  |  | 20,380            |         |                    |   | 268    |       |        |  | 17,234  |         |  |   | 13    |       
|                                              
|                                              
|                                              
|                                              
|                                               | Accretion of carrying value to amount
payable at redemption on June 30, 2000 |  |  |                  |         |                    |   | 1,128  |       |        |  |        |         |  |   | 1,197 |       
|                                               |                                                                              |  |  |                   |         |                    |   |        |       |        |  |         |         |  |   |      
|                                              
|                                              
|                                              
|                                              
|                                               | Balance at end of year                                                       |  |  |                   | 158,527 |                    |   | $      | 9,112 |        |  |         | 175,761 |  |   | $     | 10,322 | 
|                                               |                                                                              |  |  |                   |         |                    |   |        |       |        |  |         |         |  |   |      

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

5



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##### Table of Contents



Phonetel Technologies, Inc. and Subsidiary







Statements of Changes in Non-mandatorily Redeemable Preferred Stock,Common Stock and Other Shareholders Equity (Deficit)(In Thousands Except for Share Amounts)

|                                             |                                                                        |  |  |            |                   |  |                    |          |        |  |        |            |             |  |   |          |   |  | 
|-------------------------------------------- | ---------------------------------------------------------------------- |  |  | ---------- | ----------------- |  | ------------------ | -------- | ------ |  | ------ | ---------- | ----------- |  | - | -------- | - |  | 
|                                             |                                                                        |  |  |            |                   |  |                    |          |        |  |        |            | (Unaudited)
|                                             |                                                                        |  |  |            | Year Ended        |  | Nine Months Ended 
|                                             |                                                                        |  |  |            | December 31, 1998 |  | September 30, 1999
|                                             |                                                                        |  |  |            |                   |  |                   
|                                             |                                                                        |  |  |            | Shares            |  | Amount             |          | Shares |  | Amount
|                                             |                                                                        |  |  |            |                   |  |                    |          |        |  |       
|Series A Special Convertible Preferred Stock
|                                            
|                                            
|                                            
|                                            
|                                             | Balance at beginning of year                                           |  |  |           |                   |  |                    |         |        |  |        |           |             |  |   |         |  
|                                            
|                                            
|                                            
|                                            
|                                             | Exercise of warrants                                                   |  |  | 100,875    |                   |  | $                  | 20       |        |  |        |           |             |  |   |         |  
|                                            
|                                            
|                                            
|                                            
|                                             | Conversion to common stock                                             |  |  | (100,875   | )                 |  |                    | (20      | )      |  |        |           |             |  |   |         |  
|                                             |                                                                        |  |  |            |                   |  |                    |          |        |  |        |            |             |  |   |          |   | 
|                                             | Balance at end of period                                               |  |  |           |                   |  |                    |         |        |  |        |           |             |  |   |         |  
|                                             |                                                                        |  |  |            |                   |  |                    |          |        |  |        |            |             |  |   |          |   | 
|Common Stock                                
|                                            
|                                            
|                                            
|                                            
|                                             | Balance at beginning of year                                           |  |  | 16,360,829 |                   |  |                    | 164      |        |  |        | 18,754,133 |             |  | $ | 188      |  
|                                            
|                                            
|                                            
|                                            
|                                             | Exercise of warrants and options                                       |  |  | 375,804    |                   |  |                    | 4        |        |  |        |           |             |  |   |         |  
|                                            
|                                            
|                                            
|                                            
|                                             | Conversion of Series A Preferred                                       |  |  | 2,017,500  |                   |  |                    | 20       |        |  |        |           |             |  |   |         |  
|                                             |                                                                        |  |  |            |                   |  |                    |          |        |  |        |            |             |  |   |          |   | 
|                                             | Balance at end of period                                               |  |  | 18,754,133 |                   |  |                    | 188      |        |  |        | 18,754,133 |             |  |   | 188      |  
|                                             |                                                                        |  |  |            |                   |  |                    |          |        |  |        |            |             |  |   |          |   | 
|Additional Paid-in Capital                  
|                                            
|                                            
|                                            
|                                            
|                                             | Balance at beginning of year                                           |  |  |            |                   |  |                    | 62,600   |        |  |        |            |             |  |   | 61,233   |  
|                                            
|                                            
|                                            
|                                            
|                                             | Exercise of warrants and options                                       |  |  |            |                   |  |                    | 25       |        |  |        |            |             |  |   |         |  
|                                            
|                                            
|                                            
|                                            
|                                             | Exercise of warrants  Series A Preferred                              |  |  |            |                   |  |                    | (20      | )      |  |        |            |             |  |   |         |  
|                                            
|                                            
|                                            
|                                            
|                                             | Put under warrants issued for Series A Preferred                       |  |  |            |                   |  |                    | (1,452   | )      |  |        |            |             |  |   |         |  
|                                            
|                                            
|                                            
|                                            
|                                             | Other issuances of stock                                               |  |  |            |                   |  |                    | 80       |        |  |        |            |             |  |   |         |  
|                                             |                                                                        |  |  |            |                   |  |                    |          |        |  |        |            |             |  |   |          |   | 
|                                             | Balance at end of period                                               |  |  |            |                   |  |                    | 61,233   |        |  |        |            |             |  |   | 61,233   |  
|                                             |                                                                        |  |  |            |                   |  |                    |          |        |  |        |            |             |  |   |          |   | 
|Accumulated Deficit                         
|                                            
|                                            
|                                            
|                                            
|                                             | Balance at beginning of year                                           |  |  |            |                   |  |                    | (66,806  | )      |  |        |            |             |  |   | (113,019 | )
|                                            
|                                            
|                                            
|                                            
|                                             | Net loss for the period                                                |  |  |            |                   |  |                    | (44,817  | )      |  |        |            |             |  |   | (33,644  | )
|                                            
|                                            
|                                            
|                                            
|                                             | 14% Preferred dividends payable-in-kind
and accretion                  |  |  |            |                   |  |                    | (1,396   | )      |  |        |            |             |  |   | (1,210   | )
|                                             |                                                                        |  |  |            |                   |  |                    |          |        |  |        |            |             |  |   |          |   | 
|                                             | Balance at end of period                                               |  |  |            |                   |  |                    | (113,019 | )      |  |        |            |             |  |   | (147,873 | )
|                                             |                                                                        |  |  |            |                   |  |                    |          |        |  |        |            |             |  |   |          |   | 
|Total Non-Mandatorily Redeemable            
|                                            
|                                            
|                                            
|                                            
|                                             | Preferred Stock, Common Stock and
other Shareholders Equity (Deficit) |  |  |            |                   |  |                    | ($51,598 | )      |  |        |            |             |  |   | ($86,452 | )
|                                             |                                                                        |  |  |            |                   |  |                    |          |        |  |        |            |             |  |   |          |   | 

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

6



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##### Table of Contents



Phonetel Technologies, Inc. and Subsidiary







Consolidated Statements of Cash Flows
(In Thousands)

|                                             |                                                                               |                                                                            |        |                                |        |      |        |          |        |  
|-------------------------------------------- | ----------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------ | ------------------------------ | ------ | ---- | ------ | -------- | ------ | -
|                                             |                                                                               |                                                                            |        | (Unaudited)                   
|                                             |                                                                               |                                                                            |        | Nine Months Ended September 30
|                                             |                                                                               |                                                                            |        |                               
|                                             |                                                                               |                                                                            |        | 1998                           |        | 1999
|                                             |                                                                               |                                                                            |        |                                |        |     
|Cash Flows Used in Operating Activities:    
|                                            
|                                            
|                                            
|                                            
|                                             | Net loss                                                                      |                                                                            |        | ($27,652                       | )      |      |        | ($33,644 | )     
|                                            
|                                            
|                                            
|                                            
|                                             | Adjustments to reconcile net loss to net cash flow from
operating activities:
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                               | Depreciation and amortization                                              |        |                                | 19,126 |      |        |          | 19,366 |  
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                               | Extraordinary loss on early extinguishment of debt                         |        |                                |       |      |        |          | 2,094  |  
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                               | Write-off of intangible assets  location contracts                        |        |                                |       |      |        |          | 864    |  
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                               | Increase in allowance for doubtful accounts                                |        |                                | 715    |      |        |          | 589    |  
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                               | Gain on disposal of assets                                                 |        |                                | (292   | )    |        |          | (41    | )
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                               | Changes in current assets                                                  |        |                                | (4,760 | )    |        |          | 1,179  |  
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                               | Changes in current liabilities, net of reclassifications
to long-term debt |        |                                | 7,050  |      |        |          | 7,737  |  
|                                             |                                                                               |                                                                            |        |                                |        |      |        |         
|                                             |                                                                               |                                                                            | (5,813 | )                              |        |      | (1,856 | )       
|                                             |                                                                               |                                                                            |        |                                |        |      |        |         
|Cash Flows Used in Investing Activities:    
|                                            
|                                            
|                                            
|                                            
|                                             | Purchases of property and equipment                                           |                                                                            |        | (3,202                         | )      |      |        | (1,158   | )     
|                                            
|                                            
|                                            
|                                            
|                                             | Acquisitions                                                                  |                                                                            |        | (2,466                         | )      |      |        |         |       
|                                            
|                                            
|                                            
|                                            
|                                             | Deferred charges  commissions and signing bonuses                            |                                                                            |        | (737                           | )      |      |        | (373     | )     
|                                            
|                                            
|                                            
|                                            
|                                             | Proceeds from sale of assets                                                  |                                                                            |        | 413                            |        |      |        | 62       |       
|                                            
|                                            
|                                            
|                                            
|                                             | Change in other assets                                                        |                                                                            |        | (233                           | )      |      |        | 23       |       
|                                             |                                                                               |                                                                            |        |                                |        |      |        |         
|                                             |                                                                               |                                                                            | (6,225 | )                              |        |      | (1,446 | )       
|                                             |                                                                               |                                                                            |        |                                |        |      |        |         
|Cash Flows Provided by Financing Activities:
|                                            
|                                            
|                                            
|                                            
|                                             | Proceeds from debt issuances                                                  |                                                                            |        | 15,092                         |        |      |        | 47,975   |       
|                                            
|                                            
|                                            
|                                            
|                                             | Principal payments on borrowings                                              |                                                                            |        | (617                           | )      |      |        | (42,717  | )     
|                                            
|                                            
|                                            
|                                            
|                                             | Debt financing and restructuring costs                                        |                                                                            |        | (1,642                         | )      |      |        | (1,397   | )     
|                                            
|                                            
|                                            
|                                            
|                                             | Proceeds from warrant and option exercises                                    |                                                                            |        | 29                             |        |      |        |         |       
|                                             |                                                                               |                                                                            |        |                                |        |      |        |         
|                                             |                                                                               |                                                                            | 12,862 |                                |        |      | 3,861  |         
|                                             |                                                                               |                                                                            |        |                                |        |      |        |         
|Increase in cash                             |                                                                               |                                                                            | 824    |                                |        |      | 559    |         
|                                            
|                                            
|                                            
|                                            
|Cash at beginning of period                  |                                                                               |                                                                            | 6,519  |                                |        |      | 5,768  |         
|                                             |                                                                               |                                                                            |        |                                |        |      |        |         
|Cash at end of period                        |                                                                               | $                                                                          | 7,343  |                                |        | $    | 6,327  |         
|                                             |                                                                               |                                                                            |        |                                |        |      |        |         

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

7



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##### Table of Contents



PhoneTel Technologies, Inc. and Subsidiary







Notes to Consolidated Financial Statements (Unaudited)
As of and for the Nine and Three Months Ended September 30, 1999(In thousands of dollars except for installed public pay telephone, per call, share and per share amounts)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included and all intercompany balances and transactions have been
eliminated. Operating results for the nine and three months ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999. The consolidated balance sheet information at
December 31, 1998 was derived from the audited financial statements included in
the Companys Annual Report on Form 10-K. These interim financial statements
should be read in conjunction with that Form 10-K report.

Certain amounts relating to 1998 have been reclassified to conform to
the current quarter presentation. The reclassifications have had no impact on
total assets, shareholders equity (deficit) or net loss as previously reported.

2. Debt Restructuring and Chapter 11 Bankruptcy Filing

In January 1999, the Company announced that it had reached an agreement
in principle with an Unofficial Committee of Noteholders (the Unofficial
Committee) of its $125,000 aggregate principal amount 12% Senior Notes, due
2006 (the Senior Notes) providing for the conversion through a prepackaged
plan of reorganization (the Prepackaged Plan) of the Senior Notes and accrued
interest into 95% of a new issue of common stock, $0.01 par value per share
(New Common Stock) of the reorganized Company (the Restructuring).

The Company solicited acceptances of the Prepackaged Plan from the
holders of the Senior Notes and the 14% Cumulative Redeemable Convertible
Preferred Stock (the 14% Preferred) in anticipation of the commencement of a
case under chapter 11 of the Bankruptcy Code (the Case). Effective June 11,
1999, the Company obtained acceptances of the Prepackaged Plan from holders of
99.9 percent of the Senior Notes and 100 percent of the 14% Preferred shares
voting in response to the solicitation. Such acceptances substantially exceeded
the levels required to confirm the Prepackaged Plan.

On July 14, 1999, the Company commenced the Case in the U.S. Bankruptcy
Court in the Southern District of New York (the Court) and thereafter
continued to operate its business as a debtor-in-possession. The Company also
obtained an order from the Court which allowed the Company to pay prepetition
and postpetition claims of employees, trade and other creditors, other than the
Senior Note claims, in the ordinary course of business.

On October 20, 1999, the Court confirmed the Prepackaged Plan. Pursuant
to the terms of the Prepackaged Plan, claims of employees, trade and other
creditors of the Company, other than holders of the Senior Notes are to be paid
in full in the ordinary course, unless otherwise agreed, with the Company
retaining its rights and defenses with respect to such claims. Holders of the
Senior Notes will receive 9.5 million shares of the New Common Stock in exchange
for the Senior Notes. In addition, the Unofficial Committee representing
a majority in principal amount of the Senior Notes will appoint four of
the five members of the Board of Directors of the Company (the New Board).
Peter G. Graf, will continue to serve as a Director on the New Board for a
period of one year following the consummation of the Prepackaged Plan.

Holders of the 14% Preferred will receive 325,000 shares of New Common
Stock and warrants to purchase up to 722,200 shares of New Common Stock at an
exercise price of $10.50 per share which expire three years from the date of
grant (New Warrants). Holders of existing common stock will receive 175,000
shares of New Common Stock and New Warrants to purchase up to 388,900 shares of
New Common Stock. Options and warrants to purchase existing common stock will be
extinguished pursuant to the Prepackaged Plan.

8



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The equity interests issued in connection with the Prepackaged Plan are
subject to dilution by certain other equity issuances, including issuances to
certain financial advisors of the Company for services rendered in connection
with the reorganization, and issuances resulting from the exercise of certain
options to purchase up to 5% of New Common Stock to be issued by the New Board
pursuant to the terms of a management incentive plan (Management Incentive
Plan) included as part of the Prepackaged Plan.

Upon consummation of the Prepackaged Plan, the total amount of New
Common Stock outstanding will be 10,205,000 shares. In addition, 1,111,100
shares of New Common Stock are reserved for future issuance upon the exercise of
the New Warrants, and an amount equal to 5% of the shares of New Common Stock is
reserved for issuance pursuant to the terms of the Management Incentive Plan.
Under its Amended and Restated Articles of Incorporation confirmed as part of
the Prepackaged Plan, the total authorized capital stock of the Company is
15,000,000 shares of New Common Stock.

The Company will consummate the Prepackaged Plan in the fourth quarter
of 1999 and thereby complete the Restructuring which will result in an
extraordinary gain on early extinguishment of debt of approximately $70,000 and
a material increase in stockholders equity. In addition, cash flow required for
debt service will be reduced by $15,000 annually upon conversion of the Senior
Notes to New Common Stock. Upon implementation of the Restructuring, management
believes, but cannot assure, that cash flow from operations (including
substantial collections of accounts receivable from dial-around compensation) or
from additional financing will allow the Company to sustain its operations and
meet its obligations through the year 2000.

3. Accounts Receivable and Dial-Around Compensation

A dial-around call occurs when a non-coin call is placed from the
Companys public pay telephone which utilizes any carrier other than the
presubscribed carrier (the Companys dedicated provider of long distance and
operator assisted calls). Dial-around calls include 1-800 subscriber calls, as
well as 1010xxx calls to access a long distance carrier or operator service
provider selected by the caller. The Company receives revenues from such
carriers and records those revenues based upon the per-phone or per-call rate
(dial around compensation) in effect under certain orders issued by the
Federal Communications Commission (the FCC). Retroactive changes in the
dial-around compensation rate resulting from said orders have been accounted for
as changes in accounting estimates and have been recorded as adjustments to
revenues at the beginning of the most recent period prior to the announcement of
such change. At December 31, 1998 and September 30, 1999, accounts receivable
included $13,095 and $11,483, respectively, arising from dial-around
compensation. Such receivables are typically received on a quarterly basis at
the beginning of the second quarter following the quarter in which such revenues
are recognized.

For the nine months ended September 30, 1998 and 1999, revenues from
non-coin telecommunication services included $14,474 and $11,524, respectively,
for dial-around compensation. Revenues for the nine months ended September 30,
1998 have not been restated to reflect the retroactive reduction in dial-around
compensation recorded in the fourth quarter of 1998 as discussed below. If
revenues from dial-around compensation had been recorded at the revised rate in
the first nine months of 1998 ($0.238 per call or $31.18 per month based on an
estimated 131 calls per month), revenues from dial-around compensation would
have been $12,132 for the nine months ended September 30, 1998.

Effective November 6, 1996, pursuant to the rules and regulations
promulgated by the FCC under section 276 of the Telecommunications Act (the
1996 Payphone Order), the FCC directed a two-phase transition to achieve fair
compensation for dial-around calls through deregulation and competition. In the
first phase, November 6, 1996 to October 6, 1997, the FCC prescribed flat-rate
compensation payable to payphone providers by interexchange carriers (IXCs) in
the amount of $45.85 per month per payphone (as compared with a fee of $6.00 per
installed payphone per month in periods prior to November 6, 1996). This rate
was arrived at by determining that the deregulated local coin rate was a valid
market-based surrogate for dial-around calls. The FCC applied a market-based
deregulated coin rate of $0.35 per call to a finding from the record that there
were a monthly average of 131 compensable dial-around calls per payphone. This
total included both carrier access code calls dialed for the

9



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##### Table of Contents



purpose of reaching
a long distance company other than the one designated by the payphone provider,
as well as 800 subscriber calls. The monthly per phone flat-rate compensation of
$45.85 was to be assessed only against IXCs with annual toll-call revenues in
excess of $100 million and allocated among such IXCs in proportion to their
gross long-distance revenues. During the second phase of the transition to
deregulation and market-based compensation (initially from October 1997 to
October 1998, but subsequently extended in a later order by one year to October
1999), the FCC directed the IXCs to pay payphone service providers, on a
per-call basis for dial-around calls at the assumed deregulated coin rate of
$0.35 per call. At the conclusion of the second phase, the FCC set the
market-based local coin rate, determined on a payphone-by-payphone basis, as the
default per-call compensation rate in the absence of a negotiated agreement
between the payphone provider and the IXC. To facilitate per-call compensation,
the FCC required the payphone providers to transmit payphone-specific coding
digits that would identify each call as originating from a payphone (Flex Ani)
and required the local exchange carriers (LECs) to make such coding available
to the payphone providers as a transmit item included in the local access line
service.

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

In response to the remand by the Appeals Court, the FCC issued a new
order implementing section 276 in October 1997 (the 1997 Payphone Order). The
FCC determined that distinct and severable costs of $0.066 were attributable to
a coin call that did not apply to the costs incurred by the payphone providers
in providing access for a dial-around call. Accordingly, the FCC adjusted the
per call rate during the second phase of interim compensation to $0.284 (which
is $0.35 less $0.066). While the FCC tentatively concluded that the $0.284
default rate (or $37.20 per payphone per month based on 131 calls per month)
should be utilized in determining compensation during the first phase and
reiterated that payphone providers were entitled to compensation for each and
every call during the first phase, it deferred for later decision the precise
method of allocating the initial interim period flat-rate payment obligation
among the IXCs and the number of calls to be used in determining the total
amount of the payment obligation. In the third quarter of 1997, the Company
recorded an adjustment of $2,361 to reduce dial-around compensation recorded in
prior quarters for the decrease in rate from $45.85 to $37.20 per payphone per
month. Of this adjustment amount, $395 related to the prior year.

On March 9, 1998, the FCC issued a Memorandum Opinion and Order, FCC
98-48 1, which extended and waived certain requirements of certain LECs
regarding the provision of Flex Ani, which identify a call as originating from a
payphone. Without the transmission of Flex Ani, some of the interexchange
carriers have claimed they are unable to identify a call as a payphone call
eligible for dial-around compensation. With the stated purpose of assuring the
continued payment of dial-around compensation the FCC, by Memorandum and Order
issued on April 3, 1998, left in place the requirement for payment of per-call
compensation for payphones on lines that do not transmit the requisite Flex Ani
designation, but gave the IXCs a choice for computing the amount of compensation
for payphones on LEC lines not transmitting Flex Ani of either accurately
computing per-call compensation from their databases or paying per-phone,
flat-rate compensation computed by multiplying the $0.284 per call rate by the
nationwide average number of 800 subscriber and access code calls placed from
RBOC payphones for corresponding payment periods. Accurate payments made at the
flat rate are not subject to subsequent adjustment for actual call counts from
the applicable payphone.

On May 15, 1998, the Appeals Court again remanded the per-call
compensation rate to the FCC for further explanation without vacating the $0.284
per call rate mandated by the 1997 Payphone Order. The Appeals Court stated that
the FCC had failed to explain adequately its derivation of the $0.284 default
rate. The Appeals Court stated that any resulting overpayment would be subject
to refund and directed the FCC to conclude its proceedings within a six-month
period ending on November 15, 1998. On June 19, 1998, the FCC solicited comments
from interested parties on the issues remanded. In initial and reply comments,
certain IXCs and members of the paging industry had urged the FCC to abandon its
efforts to derive a market-based rate from surrogates and either require the
caller to pay dial-around compensation by coin deposit or adopt a cost-based
rate at levels substantially below the $0.284 rate.

10



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On February 4, 1999, the FCC issued its Third Report and Order, and
Order on Reconsideration of the Second Report and Order (the 1999 Payphone
Order) wherein it adjusted the default rate from $0.284 to $0.238, retroactive
to October 7, 1997. In adjusting the default rate, the FCC shifted its
methodology from the market-based method utilized in the 1997 and 1998 Payphone
Orders to a cost-based method, citing technological impediments that it viewed
as inhibiting the marketplace and the unreliability of certain assumptions
underlying the market-based method as a basis for altering its analysis. In
setting the cost-based default rate, the FCC incorporated its prior treatment of
certain payphone costs as well as reexamined new estimates of payphone costs
submitted as part of the proceeding. Pursuant to the 1999 Payphone Order, the
$0.24 amount ($0.238 plus 0.2 cents for amounts charged by LECs for providing
Flex Ani) will serve as the default per-call compensation rate for coinless
payphone calls from March 1999 through January 31, 2002, at which time parties
may petition the FCC regarding the default amount, related issues pursuant to
technological advances and the expected resultant market changes.

The 1999 Payphone Order deferred a final ruling on the initial interim
period (November 7, 1996 to October 6, 1997) treatment of dial-around
compensation to a later, as yet unreleased order; however, it appears from the
1999 Payphone Order that the $0.238 per-call rate will be applied to the initial
interim period. Upon establishment of said rate, the FCC has further ruled that
a true-up will be made for all payments or credits, together with applicable
interest due and owing between the IXCs and the payphone service providers for
the payment period November 7, 1996 through the effective date of the $0.24
rate. In the fourth quarter of 1998, the Company recorded an adjustment to
reduce revenues previously recognized for the period from November 7, 1996 to
September 30, 1998 due to the further decrease in the dial-around compensation
rate from $0.284 to $0.238 per call. This adjustment of $6,075 included $2,342
recorded as revenue in the first nine months of 1998 and $3,733 recorded as
revenue in prior years.

The 1999 Payphone Order has been appealed by various parties, including
but not limited to, the trade association which represents the interests of
various pay telephone providers throughout the United States. The Appeals Court
is expected to hear oral arguments on this matter on November 17, 1999. Based on
the information available, the Company believes that the minimum amount it is
entitled to as fair compensation under the Telecommunications Act for the period
from November 7, 1996 through March 31, 1999 is $31.18 per pay telephone per
month based on $0.238 per call and 131 calls per pay telephone per month ($31.44
per month based on $0.24 per call after March 1999). Further, the Company does
not believe that it is reasonably possible that the amount will be materially
less than $31.18 per pay telephone per month ($31.44 per month after March
1999).

4. Senior 12% Notes

On December 18, 1996, the Company completed a public debt offering of
the Senior Notes, with interest payable semiannually on June 15 and December 15.
The indenture to the Senior Notes, as amended, contains covenants which, among
other things, limit the Companys ability to incur additional indebtedness or
pay dividends and which require the Company, in the event of a change in control
of the Company, to offer to purchase the Senior Notes for 101% of their
aggregate outstanding principal value plus accrued and unpaid interest.

11



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##### Table of Contents



The Company has not paid the semiannual interest payments which were due
December 15, 1998 and June 15, 1999 on the Senior Notes and, pursuant to the
terms of the indenture, the Company is in default on the Senior Notes. Under
certain circumstances, such obligations could become immediately due and
payable. Accordingly, as of December 31, 1998, the principal balance due was
classified as a current liability in the accompanying consolidated balance
sheets. As discussed in Note 2, the Company has commenced a case under chapter
11 of the U.S. Bankruptcy Code and has obtained confirmation of its Prepackaged
Plan by the Court. Under the terms of the Prepackaged Plan, the Senior Notes and
accrued interest will be converted into 9,500,000 shares of New Common Stock of
the reorganized Company. At September 30, 1999, the net obligation relating to
the Senior Notes to be converted into New Common Stock upon consummation of the
Plan is as follows:

|                                                |  |   |         |  
|----------------------------------------------- |  | - | ------- | -
|Senior 12% Notes                                |  | $ | 125,000 |  
|                                               
|                                               
|                                               
|                                               
|Accrued interest                                |  |   | 19,500  |  
|                                               
|                                               
|                                               
|                                               
|Less deferred financing and
restructuring costs |  |   | (6,600  | )
|                                                |  |   |        
|                                                |  | $ | 137,900 |  
|                                                |  |   |        

5. Long-Term Debt and Other Liabilities

Long-term debt and other liabilities consisted of the following:

|                                                                                                                                                                                     |  |             |         |              |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | ------- | ------------ |  | - | ------ | -
|                                                                                                                                                                                     |  | December 31 |         | September 30
|                                                                                                                                                                                     |  | 1998        |         | 1999        
|                                                                                                                                                                                     |  |             |         |             
|Related Party Debt and Credit Agreement, contractually due May 8, 2001,
with interest payable monthly
at 2% above the Lenders reference rate                                        |  | $           | 40,014  |              |  |   |       |  
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|Debtor-in-Possession Loan Agreement, contractually due November 15, 1999
with interest payable monthly at 3% above the base rate (3.75%
above the base rate after
November 12, 1999) |  |             |        |              |  | $ | 45,475 |  
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|Warrant Put Obligation                                                                                                                                                               |  |             | 1,452   |              |  |   | 1,452  |  
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|Other notes payable                                                                                                                                                                  |  |             | 225     |              |  |   | 24     |  
|                                                                                                                                                                                     |  |             |         |              |  |   |        |  
|                                                                                                                                                                                     |  |             | 41,691  |              |  |   | 46,951 |  
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|Less current maturities                                                                                                                                                              |  |             | (41,691 | )            |  |   | (24    | )
|                                                                                                                                                                                     |  |             |         |              |  |   |        |  
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|                                                                                                                                                                                    
|                                                                                                                                                                                     |  | $           |        |              |  | $ | 46,927 |  
|                                                                                                                                                                                     |  |             |         |              |  |   |        |  

Related Party Debt and Credit Agreement

On May 30, 1997, the Company entered into an agreement (the Credit
Agreement) with various lenders (collectively referred to as the Lenders).
ING (U.S.) Capital Corporation (ING) was Agent for the Lenders and
Transamerica Business Credit Corporation and Finova Capital Corporation were
Co-Agents for the Lenders. ING is a significant shareholder of the Companys
common equity. The Credit Agreement provided a $75,000 commitment of which
$60,000 was to be utilized for future acquisitions (Expansion Loan
Commitment), and $15,000 was to be utilized for general working capital
requirements (Revolving Credit Commitment). Borrowings accrued interest at the
ING Alternate Base Rate (as defined in the Credit Agreement) plus 1.50%. The
Credit Agreement was originally scheduled to mature on May 20, 2000 and all of
the Companys assets, including the installed public pay telephones, were
pledged as collateral.

The Credit Agreement included covenants which, among other things,
required the Company to maintain ratios as to fixed charges, debt to earnings,
current ratio and interest coverage (all as defined in the Credit Agreement).
Other covenants limited incurrence of additional long-term debt, the level of
capital expenditures, the incurrence of lease obligations and permitted
investments.

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On February 24, 1998, the Credit Agreement was amended to increase the
Revolving Credit Commitment to $20,000 and to decrease the Expansion Loan
Commitment to $55,000 (the First Amendment). The amount available for letters
of credit under the Revolving Credit Commitment was reduced from $5,000 to
$3,000 and certain covenants therein were modified. On the same date, the
Company was permitted to borrow an additional $3,000 for working capital
purposes under the Revolving Credit Commitment. On March 31, 1998, the Credit
Agreement was further amended (the Second Amendment) to modify certain
financial covenants.

On May 8, 1998, the Company amended the Credit Agreement (the Third
Amendment) and Foothill Capital Corporation (Foothill), as replacement Agent
and Lender, assumed all of the rights and obligations of the former Lenders.
Under the Third Amendment, the Revolving Credit Commitment remained at $20,000
and the Expansion Loan Commitment was reduced to $20,000. Interest was payable
monthly in arrears at 2% above the Lenders reference rate (as defined in the
Third Amendment) and the maturity date of the Credit Agreement was extended to
May 8, 2001. The Third Amendment provided for a prepayment penalty and modified
certain financial covenants contained in the Credit Agreement. The Company
incurred $1,174 in fees and expenses in connection with the Third Amendment, of
which $328 was included in other unusual charges and contractual settlements in
the Companys consolidated statements of operations in the second quarter of
1998.

During the second quarter of 1998, the Company borrowed $10,547 under
the Revolving Credit Commitment for interest payments due under the Senior
Notes, to fund acquisition and financing costs and for working capital. On July
3, 1998, the Company borrowed an additional $1,453, the remaining amount
available under the Credit Agreement, to finance the cost of equipment upgrades
relating to the installed pay telephones acquired from TDS Telecommunications
Corporation on May 18, 1998.

Beginning December 31, 1998, the Company was not in compliance with
certain financial covenants and was in default under the Credit Agreement.
Accordingly, the Company classified the amounts due under the Credit Agreement
as a current liability at December 31, 1998. In addition, beginning April 1,
1999, the Company was required to pay the default rate of interest which was two
percent per annum higher than the otherwise applicable rate (11.75% through July
21, 1999).

In April 1999, the Company requested and received an additional advance
of $2,500 which increased the principal balance outstanding under its Revolving
Credit Commitment to $22,500. Proceeds of the advance were used for the payment
of professional fees and expenses, loan fees and certain accounts payable. The
Company also received a commitment from the Lenders to provide $45,900 in
debtor-in-possession financing (D.I.P. financing) in anticipation of the Case
described in Note 2. The Company incurred $250 in fees relating to the
additional advance and a $250 fee for the D.I.P. financing commitment.

On July 21, 1999, the outstanding balance of the Credit Agreement was
paid from the proceeds of the D.I.P. financing, the terms of which are described
below. The Company incurred an extraordinary loss from early extinguishment of
debt of $2,094 due to the write-off of deferred financing costs related to the
Credit Agreement.

Debtor-in-Possession Loan Agreement

On July 14, 1999, the Company entered into a D.I.P. financing agreement
(D.I.P. Agreement) with Foothill. The D.I.P. Agreement provides a $45,900
revolving credit commitment, which was used to pay the outstanding balance,
including accrued interest, due under the Credit Agreement on July 21, 1999. The
Company also received advances totaling $2,649 for working capital purposes and
at September 30, 1999 had an additional $425 available for the payment of legal
and other costs associated with the Case.

Interest on the D.I.P. Agreement is payable monthly in arrears at 3%
above the base rate (as defined therein) through November 12, 1999 and 3.75%
above the base rate thereafter. The loan is secured by substantially all of the
assets of the Company. The D.I.P. Agreement includes covenants which limits the
incurrence of additional debt, capital leases, liens and the disposition of
assets. The D.I.P. Agreement matures on the earliest of the date on which the
Company emerges from the Case, converts to a case under chapter 7 of the
Bankruptcy Code or November 15, 1999. On or about November 15, 1999, the Company
expects to refinance the D.I.P. Agreement with its current lenders from the
proceeds of the post reorganization loan described below. Accordingly, the
D.I.P. Agreement has been classified as long-term in the accompanying
consolidated balance sheet.

13



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##### Table of Contents



Post Reorganization Loan Agreement

The Company has obtained a commitment from Foothill and expects to
execute an agreement for post reorganization financing (Exit Agreement) on or
about November 15, 1999. The Exit Agreement provides for a $46,000 revolving
credit commitment (the Maximum Amount), excluding interest and fees
capitalized as part of the principal balance. The Exit Agreement is secured by
substantially all of the assets of the Company and matures two years after
execution of the Exit Agreement.

The Exit Agreement provides for various fees aggregating $9,440 over
the term of the loan, including a $1,150 deferred line fee, which is payable one
year from the date of closing, and a $10 servicing fee which is payable each
month. At the option of the Company, payment of other fees, together with
interest due thereon, may be deferred and added to the then outstanding
principal balance. Fees due pursuant to the Exit Agreement are subject to
certain reductions for early prepayment, providing the Company is not in default
on the Exit Agreement.

The Exit Agreement provides for interest on the outstanding principal
balance at 3% above the base rate (as defined in the Exit Agreement), with
interest on the Maximum Amount payable monthly in arrears. The Exit Loan
includes covenants, which among other things, require the Company to maintain
ratios as to fixed charges, debt to earnings, current ratio, interest coverage
and minimum levels of earnings, payphones and operating cash (all as defined in
the Exit Agreement). Other covenants limit the incurrence of long-term debt, the
level of capital expenditures, the payment of dividends, and the disposal of a
substantial portion of the Companys assets.

Warrant Put Obligation

In 1996, the Company issued warrants to purchase shares of Series A
Special Convertible Preferred Stock (the Series A Warrants) to two former
lenders, at an exercise price of $0.20 per share. Each share of Series A Special
Convertible Preferred Stock was convertible into 20 shares of common stock. On
October 13, 1998, the Company received notice from a former lender which
purported to exercise its put right as defined in the agreement for the Series A
Warrants (the Warrant Agreement), with respect to 89,912 Series A Warrants and
124,300 common shares. The Warrant Agreement specifies that the Company is to
redeem Series A Warrants that are convertible into shares of common stock (or
shares of common stock obtained from such conversion) at a value determined by a
formula, subject to certain limitations, set forth therein. In 1998, the Company
recorded an accrued liability and a charge to additional paid-in capital of
$1,452 relating to this purported put exercise. The Company was not permitted to
make payment pursuant to this purported exercise of a put right under the
indenture for the Senior Notes and state law applicable to equity distributions.

On October 18, 1999, in connection with the Prepackaged Plan, the
Company reached an agreement with the former lender to settle the claim for
$1,000, subject to certain reductions for early payment, which is payable
together with deferred interest at 5% per annum in five years. In addition, the
former lender agreed to forfeit its shares of New Common Stock and New Warrants
which would have been issued to it under the Prepackaged Plan. The adjustment to
reduce the amount of the warrant put obligation to $1,000 and to credit
additional paid-in capital will be recorded by the Company in the fourth quarter
of 1999. At September 30, 1999, the warrant put obligation has been reclassified
from current to long-term liabilities based on the above payment terms.

14



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##### Table of Contents



5. Mandatorily Redeemable Preferred Stock

Mandatorily redeemable preferred stock consisted of the following:

|                                                                                                                                                                                                                |  |             |       |              |  |   |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----- | ------------ |  | - | ------ | 
|                                                                                                                                                                                                                |  | December 31 |       | September 30
|                                                                                                                                                                                                                |  | 1998        |       | 1999        
|                                                                                                                                                                                                                |  |             |       |             
|14% Cumulative Redeemable Convertible Preferred Stock; $60 stated value
- 200,000 shares authorized; 107,918 shares issued and outstanding,
cumulative dividends issuable of 50,609 shares at December 31, 1998
|                                                                                                                                                                                                               
|                                                                                                                                                                                                               
|                                                                                                                                                                                                               
|                                                                                                                                                                                                               
|(valued at $1,118) and 67,843 shares at September 30, 1999 (valued at
$1,131); mandatory redemption amount of $10,546 due June 30, 2000                                                                         |  | $           | 9,112 |              |  | $ | 10,322 | 

The Company records dividends, declared and undeclared, at their fair
market value and recognizes the difference between the carrying value of the 14%
Preferred and the mandatory redemption amount, through monthly accretions, using
the interest method. For the nine months ended September 30, 1999, the carrying
value of the 14% Preferred was increased by $1,197 through accretions. Each
share of 14% Preferred was entitled to receive a quarterly dividend of 0.035
shares of 14% Preferred. Each share of 14% Preferred was convertible into 10
shares of common stock.

Upon consummation of the Prepackaged Plan, holders of the 14% Preferred
will receive 325,0000 shares of New Common Stock and New Warrants to purchase up
to 722,200 shares of New Common Stock in exchange for their preferred shares.
The New Warrants will have an exercise price of $10.50 per share and expire
three years from the date of grant.

6. Non-mandatorily Redeemable Preferred Stock, Common Stock and Other Shareholders Equity (Deficit)

Non-mandatorily redeemable preferred stock, common stock, and other
shareholders equity (deficit) consisted of the following:

|                                                                                                                                                    |  |             |          |              |  |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | -------- | ------------ |  | - | -------- | -
|                                                                                                                                                    |  | December 31 |          | September 30
|                                                                                                                                                    |  | 1998        |          | 1999        
|                                                                                                                                                    |  |             |          |             
|Series A Special Convertible Preferred Stock ($0.20 par value, $0.20
stated value - 250,000
shares authorized; no shares outstanding)               |  |             |         |              |  |   |         |  
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Common Stock
($0.01 par value - 50,000,000 shares authorized;
18,754,133 shares issued and outstanding at
December 31, 1998 and September 30, 1999) |  | $           | 188      |              |  | $ | 188      |  
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Additional paid-in capital                                                                                                                          |  |             | 61,233   |              |  |   | 61,233   |  
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Accumulated deficit                                                                                                                                 |  |             | (113,019 | )            |  |   | (147,873 | )
|                                                                                                                                                    |  |             |          |              |  |   |          |  
|                                                                                                                                                    |  |             | ($51,598 | )            |  |   | ($86,452 | )
|                                                                                                                                                    |  |             |          |              |  |   |          |  

In January 1999, the Company granted options to purchase 35,000 shares
of common stock pursuant to an employment arrangement with a former officer at
an exercise price of $0.8125 per share. No compensation expense was recognized
as a result of this transaction.

In January 1998, warrants for 190,678 shares of common stock, including
warrants to purchase 179,996 shares of common stock with an exercise price of
$0.01 per share (Nominal Value Warrants) were exercised by their holders. The
Company received proceeds of $27 as a result of the exercise of these warrants.
In April 1998, the Company granted warrants to purchase 100,000 shares of common
stock to its four non-employee Directors with an aggregate value of $80 and an
exercise price of $1.875 per share, as compensation for services during the
1997-98 service year. During the second quarter of 1998, Nominal Value Warrants
for 185,126 shares of common stock were exercised by their holders, including
Nominal Value Warrants for 89,998 shares of common stock held by a Director of
the Company. The Company received proceeds of $2 as a result of the exercise of
these Nominal Value Warrants.

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##### Table of Contents



On November 13, 1998, a former lender exercised Series A Warrants and
immediately converted its Series A Special Convertible Preferred Stock to common
stock. This exercise resulted in the issuance of 2,017,500 shares of common
stock, net of common stock not issued in lieu of cash payment.

Upon consummation of the Prepackaged Plan, the following number of
shares of New Common Stock will be issued and outstanding: 9,500,000 shares in
exchange for the Senior Notes, 325,000 shares to the holders of the 14%
Preferred, 175,000 shares to the holders of existing common stock and 205,000
shares as financial advisory fees for a total amount of New Common Stock
outstanding of 10,205,000. Thereafter, certain shares of New Common
Stock (and New Warrants) will be canceled in connection with an agreement with a former lender to
settle a claim, as set forth in Note 4. In addition, 1,111,100 shares of New
Common Stock are reserved for future issuance upon the exercise of the New
Warrants, and an amount equal to 5% of the shares of New Common Stock is reserved
for issuance pursuant to the Management Incentive Plan. Under its Amended and
Restated Articles of Incorporation confirmed as part of the Prepackaged Plan,
the total authorized capital stock of the Company is 15,000,000 shares of New
Common Stock.

7. Termination of Merger with Davel Communications Group, Inc.

On June 11, 1998, the Company entered into an Agreement and Plan of
Merger and Reorganization (the Davel Merger Agreement) with Davel
Communications Group, Inc., a publicly held, independent pay telephone provider
(Davel). On July 5, 1998, Peoples Telephone Company, Inc., a then publicly held,
independent pay telephone provider (Peoples), also entered into a merger
agreement (the Peoples Merger Agreement) with Davel.

On September 29, 1998, the Company received a letter from Davel
purporting to terminate the Davel Merger Agreement. Thereafter, a complaint
against the Company was filed in the Court of Chancery of New Castle County,
Delaware by Davel, which was subsequently amended, alleging, among other things,
equitable fraud and breach of contract relating to the Davel Merger Agreement.
On October 27, 1998, the Company filed its answer to the amended complaint
denying the substantive allegations contained therein and filed a counterclaim
against Davel for breach of contract. At the same time, the Company filed a
third party claim against Peoples for tortuous interference with contract
alleging that Peoples induced Davel to not comply with the terms of the Davel
Merger Agreement. In December 1998, Peoples and Davel consummated the
transaction contemplated by the Peoples Merger Agreement.

The Company is seeking specific performance from Davel, which would
require Davel to comply with the terms of the Davel Merger Agreement or,
alternatively, for compensatory damages and costs of an unspecified amount.
During the pendency of the Case, the litigation surrounding the Davel Merger
Agreement was automatically stayed, pursuant to the rules and regulations of the
Court. The Company is also seeking injunctive relief enjoining Peoples from
further tortuous interference with contract and for compensatory damages and
costs of an unspecified amount. Management believes the claims against the
Company are without merit and is vigorously pursuing its claims against Davel
and Peoples.

8. Contingencies

The Company, in the course of its normal operations, is subject to
regulatory matters, disputes, claims and lawsuits. In managements opinion, all
such outstanding matters of which the Company has knowledge, have been reflected
in the financial statements or will not have a material adverse effect on the
Companys financial position, results of operations or cash flows.

16



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##### Table of Contents



9. Condensed Consolidating Financial Statement Data

The Companys wholly-owned subsidiary, Cherokee Communications, Inc.
(Cherokee) which was acquired January 1, 1997, is a guarantor of the Senior
Notes. The following are the condensed consolidating financial statements of
PhoneTel and Cherokee as of September 30, 1999, and for the nine months ended
September 30, 1999.

Condensed Consolidating Financial Statements

Balance Sheet, at September 30, 1999

|                                                                      |  |          |          |             |  |              |         |              |  |  |          |   |  |   |          |  
|--------------------------------------------------------------------- |  | -------- | -------- | ----------- |  | ------------ | ------- | ------------ |  |  | -------- | - |  | - | -------- | -
|                                                                      |  | PhoneTel |          | Cherokee(a) |  | Eliminations |         | Consolidated
|                                                                      |  |          |          |             |  |              |         |             
|Current assets                                                        |  | $        | 14,897   |             |  | $            | 5,072   |              |  |  |         |   |  | $ | 19,969   |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Property and equipment, net                                           |  |          | 19,671   |             |  |              | 2,998   |              |  |  |         |   |  |   | 22,669   |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Intangible assets, net                                                |  |          | 42,755   |             |  |              | 37,422  |              |  |  |         |   |  |   | 80,177   |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Other non-current assets                                              |  |          | 65,791   |             |  |              |        |              |  |  | ($65,229 | ) |  |   | 562      |  
|                                                                      |  |          |          |             |  |              |         |              |  |  |          |   |  |   |          |  
|Total                                                                 |  | $        | 143,114  |             |  | $            | 45,492  |              |  |  | ($65,229 | ) |  | $ | 123,377  |  
|                                                                      |  |          |          |             |  |              |         |              |  |  |          |   |  |   |          |  
|                                                                     
|Current liabilities                                                   |  | $        | 10,878   |             |  | $            | 3,802   |              |  |  |         |   |  | $ | 14,680   |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Intercompany debt                                                     |  |          |         |             |  |              | 65,229  |              |  |  | ($65,229 | ) |  |   |         |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Long-term debt                                                        |  |          | 169,332  |             |  |              | 15,495  |              |  |  |         |   |  |   | 184,827  |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|14% Preferred stock                                                   |  |          | 10,322   |             |  |              |        |              |  |  |         |   |  |   | 10,322   |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Other equity (deficit)                                                |  |          | (47,418  | )           |  |              | (39,034 | )            |  |  |         |   |  |   | (86,452  | )
|                                                                      |  |          |          |             |  |              |         |              |  |  |          |   |  |   |          |  
|Total                                                                 |  | $        | 143,114  |             |  | $            | 45,492  |              |  |  | ($65,229 | ) |  | $ | 123,377  |  
|                                                                      |  |          |          |             |  |              |         |              |  |  |          |   |  |   |          |  
|                                                                     
|Statement of Operations, for the
Nine Months Ended September 30, 1999
|                                                                     
|Total revenues                                                        |  | $        | 43,752   |             |  | $            | 16,592  |              |  |  |         |   |  | $ | 60,344   |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Operating expenses                                                    |  |          | 59,021   |             |  |              | 17,972  |              |  |  |         |   |  |   | 76,993   |  
|                                                                      |  |          |          |             |  |              |         |              |  |  |          |   |  |   |          |  
|Loss from operations                                                  |  |          | (15,269  | )           |  |              | (1,380  | )            |  |  |         |   |  |   | (16,649  | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Other income (expense), net                                           |  |          | (9,046   | )           |  |              | (5,855  | )            |  |  |         |   |  |   | (14,901  | )
|                                                                      |  |          |          |             |  |              |         |              |  |  |          |   |  |   |          |  
|Loss before extraordinary item                                        |  |          | (24,315  | )           |  |              | (7,235  | )            |  |  |         |   |  |   | (31,550  | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Extraordinary item                                                    |  |          | (1,552   | )           |  |              | (542    | )            |  |  |         |   |  |   | (2,094   | )
|                                                                      |  |          |          |             |  |              |         |              |  |  |          |   |  |   |          |  
|Net loss                                                              |  |          | ($25,867 | )           |  |              | ($7,777 | )            |  |  |         |   |  |   | ($33,644 | )
|                                                                      |  |          |          |             |  |              |         |              |  |  |          |   |  |   |          |  

(a) The Cherokee separate financial statement data reflect the push
down of the Companys debt, related interest expense and allocable debt
issue costs associated with the Companys acquisition of Cherokee.

17



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##### Table of Contents









Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(In thousands of dollars except for public pay telephones, per call, share and per share amounts)

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

Statements, other than historical facts, contained in this Form 10-Q
are forward looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and section 21E of the Securities Exchange
Act of 1934, as amended. Although the Company believes that its forward looking
statements are based on reasonable assumptions, it cautions that such statements
are subject to a wide range of risks and uncertainties with respect to the
Companys operations in fiscal 1999 as well as over the long term such as,
without limitation: (i) a downturn in the public pay telephone industry which is
dependent on consumer spending and subject to the impact of domestic economic
conditions, changes in technology, and regulations and policies regarding the
telecommunications industry; (ii) the ability of the Company to accomplish its
strategic objectives with respect to external expansion through selective
acquisitions and internal expansion; and (iii) changes in the dial-around
compensation rate and the coin drop rate. Any or all of these risks and
uncertainties could cause actual results to differ materially from those
reflected in the forward looking statements. These forward looking statements
are based on certain assumptions and analyses made by the Company in light of
its experience and its perception of historical trends, current conditions,
expected future developments and other factors it believes are appropriate in
the circumstances. In addition, such statements are subject to a number of
assumptions, risks and uncertainties, including, without limitation, the risks
and uncertainties identified in this report, general economics and business
conditions, the business opportunities (or lack thereof) that may be presented
to and pursued by the Company, changes in laws or regulations and other factors,
many of which are beyond the control of the Company. Investors and prospective
investors are cautioned that any such statements are not guarantees of future
performance and that actual results or developments may differ materially from
those projected in the forward looking statements.

Results of Operations

Nine months ended September 30, 1999 compared to nine months ended September 30, 1998

Revenues

Total revenues decreased by $15,051 or 20.0%, from $75,395 for the
first nine months of 1998 to $60,344 for the first nine months of 1999. This
decrease is primarily due to a decline in call volume, offset in part by an
increase in the coin long distance call rates, the decrease in the average
number of installed pay telephones and the decrease in the dial-around
compensation rate as discussed below. The average number of installed pay
telephones decreased from 43,223 for the nine months ended September 30, 1998 to
41,091 for the nine months ended September 30, 1999, a decrease of 2,132 or
4.9%, principally due to the timing of expiring location contracts and the
competition for payphone locations in the marketplace, and to a lesser degree,
the removal of less performing pay telephones.

Revenues from coin calls decreased by $9,139 or 22.6%, from $40,513 for
the nine months ended September 30, 1998 to $31,374 for the nine months ended
September 30, 1999. The decrease is due in part to the decrease in the number
and duration of coin long distance calls resulting from rate increases
implemented at the end of November 1998, including the elimination of the
Companys program which offered customers a four minute long distance call
anywhere in the continental United States for $1.00. Based on the results of
that change, the Company reinstated its old rates in the first quarter of 1999,
including the four minutes for a $1.00 program. In addition, coin revenue has
been adversely affected by the decrease in long distance and local call volumes
caused by the growth in wireless communication services, which serves as a
competitive alternative to payphone usage. Coin revenue has also declined due to
the decrease in the average number of installed pay telephones compared to the
first nine months of 1998.

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Revenues from non-coin telecommunication services decreased by $6,011
or 17.3% from $34,777 for the nine months ended September 30, 1998 to $28,766
for the nine months ended September 30, 1999. Of this decrease, long distance
revenues from operator service providers decreased by $3,061 principally due to
continuing aggressive dial-around advertising by long distance carriers such as
AT&T and MCI Communications Corporation. Long distance revenues from operator
service providers have also been adversely affected by the growth in wireless
communications and the decrease in the average number of installed pay
telephones compared to 1998. In addition, revenues from dial-around compensation
decreased by $2,950, from $14,474 in the first nine months of 1998 to $11,524 in
the first nine months of 1999, due to the decrease in the average number of
installed pay telephones and certain regulatory changes which, among other
things, retroactively reduced the rate of compensation for dial-around calls
from $0.284 to $0.238 per call. Revenues for the nine months ended September 30,
1998 have not been restated to reflect the retroactive reduction in dial-around
compensation recorded in the fourth quarter of 1998 as discussed below. If
revenues from dial-around compensation had been recorded at the revised rate in
the first nine months of 1998 ($0.238 per call or $31.18 per month based on an
estimated 131 calls per month), revenues from dial-around compensation would
have been $12,132 for the nine months ended September 30, 1998.

Effective November 6, 1996, pursuant to the rules and regulations
promulgated by the FCC under section 276 of the Telecommunications Act (the
1996 Payphone Order), the FCC directed a two-phase transition to achieve fair
compensation for dial-around calls through deregulation and competition. In the
first phase, November 6, 1996 to October 6, 1997, the FCC prescribed flat-rate
compensation payable to payphone providers by interexchange carriers in the
amount of $45.85 per month per payphone (as compared with a fee of $6.00 per
installed payphone per month in periods prior to November 6, 1996). This rate
was arrived at by determining that the deregulated local coin rate was a valid
market-based surrogate for dial-around calls. The FCC applied a market-based,
deregulated coin rate of $0.35 per call to a finding from the record that there
were a monthly average of 131 compensable dial-around calls per payphone. This
total included both carrier access code calls dialed for the purpose of reaching
a long distance company other than the one designated by the payphone provider,
as well as 800 subscriber calls. The monthly per phone flat-rate compensation of
$45.85 was to be assessed only against IXCs with annual toll-call revenues in
excess of $100 million and allocated among such IXCs in proportion to their
gross long-distance revenues. During the second phase of the transition to
deregulation and market-based compensation (initially from October 1997 to
October 1998, but subsequently extended in a later order by one year to October
1999), the FCC directed the IXCs to pay payphone service providers, on a
per-call basis for dial-around calls at the assumed deregulated coin rate of
$0.35 per call. At the conclusion of the second phase, the FCC set the
market-based local coin rate, determined on a payphone-by-payphone basis, as the
default per-call compensation rate in the absence of a negotiated agreement
between the payphone provider and the IXC. To facilitate per-call compensation,
the FCC required the payphone providers to transmit payphone-specific coding
digits that would identify each call as originating from a payphone and required
the local exchange carriers to make such coding available to the payphone
providers as a transmit item included in the local access line service.

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

In response to the remand by the Appeals Court, the FCC issued a new
order implementing section 276 in October 1997 (the 1997 Payphone Order). The
FCC determined that distinct and severable costs of $0.066 were attributable to
a coin call that did not apply to the costs incurred by the payphone providers
in providing access for a dial-around call. Accordingly, the FCC adjusted the
per call rate during the second phase of interim compensation to $0.284 (which
is $0.35 less $0.066). While the FCC tentatively concluded that the $0.284
default rate (or $37.20 per payphone per month based on 131 calls per month)
should be utilized in determining compensation during the first phase and
reiterated that payphone providers were entitled to compensation for each and
every call during the first phase, it deferred for later decision the precise
method of allocating the initial interim period flat-rate payment obligation
among the IXCs and the number of calls to be used in determining the total
amount of the payment obligation. In the third quarter of 1997, the Company
recorded an adjustment of $2,361 to reduce dial-around compensation recorded in
prior quarters for the decrease in rate from $45.85 to $37.20 per payphone per
month. Of this adjustment amount, $395 related to the prior year.

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On March 9, 1998, the FCC issued a Memorandum Opinion and Order, FCC
98-48 1, which extended and waived certain requirements of certain LECs
regarding the provision of Flex Ani, which identify a call as originating from a
payphone. Without the transmission of Flex Ani, some of the interexchange
carriers have claimed they are unable to identify a call as a payphone call
eligible for dial-around compensation. With the stated purpose of assuring the
continued payment of dial-around compensation the FCC, by Memorandum and Order
issued on April 3, 1998, left in place the requirement for payment of per-call
compensation for payphones on lines that do not transmit the requisite Flex Ani
designation, but gave the IXCs a choice for computing the amount of compensation
for payphones on LEC lines not transmitting Flex Ani of either accurately
computing per-call compensation from their databases or paying per-phone,
flat-rate compensation computed by multiplying the $0.284 per call rate by the
nationwide average number of 800 subscriber and access code calls placed from
RBOC payphones for corresponding payment periods. Accurate payments made at the
flat rate are not subject to subsequent adjustment for actual call counts from
the applicable payphone.

On May 15, 1998, the Appeals Court again remanded the per-call
compensation rate to the FCC for further explanation without vacating the $0.284
per call rate mandated by the 1997 Payphone Order. The Appeals Court stated that
the FCC had failed to explain adequately its derivation of the $0.284 default
rate. The Appeals Court stated that any resulting overpayment would be subject
to refund and directed the FCC to conclude its proceedings within a six-month
period ending on November 15, 1998. On June 19, 1998, the FCC solicited comments
from interested parties on the issues remanded. In initial and reply comments,
certain IXCs and members of the paging industry had urged the FCC to abandon its
efforts to derive a market-based rate from surrogates and either require the
caller to pay dial-around compensation by coin deposit or adopt a cost-based
rate at levels substantially below the $0.284 rate.

On February 4, 1999, the FCC issued its Third Report and Order, and
Order on Reconsideration of the Second Report and Order (the 1999 Payphone
Order) wherein it adjusted the default rate from $0.284 to $0.238, retroactive
to October 7, 1997. In adjusting the default rate, the FCC shifted its
methodology from the market-based method utilized in the 1997 and 1998 Payphone
Orders to a cost-based method, citing technological impediments that it viewed
as inhibiting the marketplace and the unreliability of certain assumptions
underlying the market-based method as a basis for altering its analysis. In
setting the cost-based default rate, the FCC incorporated its prior treatment of
certain payphone costs as well as reexamined new estimates of payphone costs
submitted as part of the proceeding. Pursuant to the 1999 Payphone Order, the
$0.24 amount ($0.238 plus 0.2 cents for amounts charged by LECs for providing
Flex Ani) will serve as the default per-call compensation rate for coinless
payphone calls from March 1999 through January 31, 2002, at which time parties
may petition the FCC regarding the default amount, related issues pursuant to
technological advances and the expected resultant market changes.

The 1999 Payphone Order deferred a final ruling on the initial interim
period (November 7, 1996 to October 6, 1997) treatment of dial-around
compensation to a later, as yet unreleased order; however, it appears from the
1999 Payphone Order that the $0.238 per-call rate will be applied to the initial
interim period. Upon establishment of said rate, the FCC has further ruled that
a true-up will be made for all payments or credits, together with applicable
interest due and owing between the IXCs and the payphone service providers for
the payment period November 7, 1996 through the effective date of the $0.24
rate. In the fourth quarter of 1998, the Company recorded an adjustment to
reduce revenues previously recognized for the period from November 7, 1996 to
September 30, 1998 due to the further decrease in the dial-around compensation
rate from $0.284 to $0.238 per call. This adjustment of $6,075 included $2,342
recorded as revenue in the first nine months of 1998 and $3,733 recorded as
revenue in prior years.

The 1999 Payphone Order has been appealed by various parties, including
but not limited to, the trade association which represents the interests of
various pay telephone providers throughout the United States. The Appeals Court
is expected to hear oral arguments on this matter on November 17, 1999. Based on
the information available, the Company believes that the minimum amount it is
entitled to as fair compensation under the Telecommunications Act for the period
from November 7, 1996 through March 31, 1999 is $31.18 per pay telephone per
month based on $0.238 per call and 131 calls per pay telephone per month ($31.44
per month based on $0.24 per call after March 1999). Further, the Company does
not believe that it is reasonably possible that the amount will be materially
less than $31.18 per pay telephone per month ($31.44 per month after March
1999).

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Operating Expenses.

Total operating expenses decreased $12,425, or 13.9%, from $89,418 for
the nine months ended September 30, 1998 to $76,993 for the nine months ended
September 30, 1999. The decrease was due to a reduction in substantially all
expense categories other than depreciation and amortization, due in part to the
decrease in the average number of installed pay telephones and personnel in 1999
compared to the first nine months of 1998, and the reduction in expenses that
vary with payphone revenues and call volumes.

Line and transmission charges decreased $6,406, or 28.9%, from $22,163
for the nine months ended September 30, 1998 to $15,757 for the nine months
ended September 30, 1999. Line and transmission charges represented 29.4% of
total revenues for the nine months ended September 30, 1998 and 26.1% of total
revenues for the nine months ended September 30, 1999, a decrease of 3.3%. The
dollar decrease was due to the decrease in the average number of installed pay
telephones, the decrease in local and long distance line charges that are based
upon call volumes and duration and lower line charges resulting from the use of
competitive local exchange carriers (CLECs). In 1999, the Company also
recovered approximately $500 of current and prior year line charges resulting
from cost-based rate reductions ordered by state regulators and $524 of
promotional allowances. The decrease as a percentage of revenues is primarily
due to the lower line charges from CLECs and amounts recovered as a result of
cost-based rate cases and promotional allowances.

Telecommunication and validation fees (consisting primarily of
processing costs relating to operator services) decreased $1,560, or 17.7%, from
$8,816 for the nine months ended September 30, 1998 to $7,256 for the nine
months ended September 30, 1999. As a percentage of total revenue,
telecommunication and validation fees increased slightly from 11.7% of total
revenues for the nine months ended September 30, 1998 to 12.0% for the nine
months ended September 30, 1999. The dollar decrease was primarily the result of
the decrease in operator service revenues compared to the first nine months of
1998.

Location commissions decreased $775, or 7.2%, from $10,726 for the nine
months ended September 30, 1998 to $9,951 for the nine months ended September
30, 1999. Location commissions represented 14.2% of total revenues for the nine
months ended September 30, 1998 and 16.5% of total revenues for the nine months
ended September 30, 1999, an increase of 2.3%. The dollar decrease is due to the
reduction in revenues in the first nine months of 1999 compared to 1998 offset
by increases in commission rates necessary to meet competition for new location
providers as well as the renewal of location contracts with existing location
providers. The increase as a percentage of total revenues is principally due to
the increase in commission rates.

Field operations (consisting principally of field operations personnel
costs, rents and utilities of the local service facilities and repair and
maintenance of the installed public pay telephones), decreased $885, or 5.3%
from $16,591 for the nine months ended September 30, 1998 to $15,706 for the
nine months ended September 30, 1999. Field operations represented 22.0% of
total revenues for the nine months ended September 30, 1998 and 26.0% of total
revenues for the nine months ended September 30, 1999, an increase of 4.0%. The
dollar decrease was due in part to lower sales taxes resulting from lower coin
revenue in 1999 and state sales tax assessments in 1998 and lower costs of
repair parts due to the decrease in the average number of payphones. The
increase as a percentage of total revenues was a result of the lower revenues
during the first nine months of 1999.

Selling, general and administrative (SG&A) expenses decreased $1,940,
or 20.2%, from $9,610 for the nine months ended September 30, 1998 to $7,670 for
the nine months ended September 30, 1999. SG&A expenses represented 12.8% of
total revenues for the nine months ended September 30, 1998 and 12.7% of total
revenues for the nine months ended September 30, 1999, a decrease of 0.1%. The
dollar and percentage decreases were primarily due to the reduction in personnel
and related costs, a decrease in telephone expense, and decreases in other
expenses due to cost reduction efforts during the fourth quarter of 1998 and in
1999.

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Depreciation and amortization increased $240, or 1.3%, from $19,126 for
the nine months ended September 30, 1998 to $19,366 for the nine months ended
September 30, 1999. Depreciation and amortization represented 25.4% of total
revenues for the nine months ended September 30, 1998 and 32.1% of total
revenues for the nine months ended September 30, 1999, an increase of 6.7%. The
dollar and percentage increases were primarily due to the increase in
depreciation resulting from additions to the Companys public pay telephone base
and the reduction in total revenues.

Other unusual charges and contractual settlements decreased $1,099 or
46.1% from $2,386 for the nine months ended September 30, 1998 to $1,287 for the
nine months ended September 30, 1999. For the nine months ended September 30,
1999, other unusual charges and contractual settlements consisted of: (i) costs
associated with the removal of approximately 2,000 unprofitable payphones
including the write-off of related location contracts and office closing costs
for two district field offices, $927; (ii) legal and professional fees relating
to the Companys chapter 11 case, $235; and (iii) other litigation and
contractual matters, $125. For the nine months ended September 30, 1998, other
unusual charges and contractual settlements consisted of: (i) costs incurred in
connection with the Davel Merger Agreement which has been terminated, $1,141;
(ii) certain fees relating to amendments to the Companys Credit Agreement,
$314; (iii) costs to settle an operator service agreement, $545; and (iv) legal
and professional fees relating to other litigation and contractual matters,
$386.

Other Income (Expense)

Other income (expense) is comprised principally of interest expense
incurred on debt and interest and other income. Total interest expense increased
$1,012, or 7.2%, from $14,045 for the nine months ended September 30, 1998 to
$15,057 for the nine months ended September 30, 1999. Interest expense
represented 18.6% of total revenues for the nine months ended September 30, 1998
and 25.0% of total revenues for the nine months ended September 30, 1999, an
increase of 6.4%. The dollar and percentage increases were a result of the
additional borrowings under the Companys Credit Agreement and D.I.P. Loan
Agreement during 1998 and 1999, primarily for working capital purposes and
additions to the Companys pay telephone base. In 1999, the Company was also
required to pay a higher rate of interest on the Companys Credit Agreement and
D.I.P. Loan Agreement. The percentage increase was also due to the decrease in
total revenues. Other income decreased $250 primarily due to the gain on the
sale of the Companys Jacksonville, Texas land and building and certain other
assets during 1998.

Extraordinary Item

The Company had an extraordinary loss of $2,094 in the third quarter of
1999 relating to the refinancing of the Companys Credit Agreement. The loss
from early extinguishment of debt was due to the write-off of the unamortized
balance of deferred financing costs incurred in connection with the Credit
Agreement.

EBITDA

EBITDA (income before interest income, interest expense, taxes,
depreciation and amortization, other unusual charges and contractual settlements
and extraordinary item) decreased $3,485, or 46.5%, from $7,489 for the nine
months ended September 30, 1998 to $4,004 for the nine months ended September
30, 1999. EBITDA represented 9.9% of total revenues for the nine months ended
September 30, 1998 and 6.6% of total revenues for the nine months ended
September 30, 1999, a decrease of 3.3%. The dollar and percentage decreases are
primarily due to the decreases in coin and non-coin telecommunication revenues
(including dial-around compensation) offset in part by decreases in operating
expenses. As previously discussed, results for the first nine months of 1998
have not been restated to reflect the retroactive reduction in dial-around
compensation recorded in the fourth quarter of 1998. If revenues from
dial-around compensation had been recorded at the revised rate in the first nine
months of 1998, EBITDA would have been $5,147 for the nine months ended
September 30, 1998.

EBITDA is not intended to represent an alternative to operating income
(as defined in accordance with generally accepted accounting principles) as an
indicator of the Companys operating performance, or as an alternative to cash
flows from operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity. The Company believes
that EBITDA is a meaningful measure of performance because it is commonly used
in the public pay telephone industry to analyze comparable public pay telephone
companies on the basis of operating performance, leverage and liquidity. See
Liquidity and Capital Resources for a discussion of cash flows from operating,
investing and financing activities.

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Liquidity and Capital Resources

Cash Flows from Operating Activities

The Company had working capital of $5,289 at September 30, 1999
compared to a working capital deficiency, excluding long-term debt classified as
current liabilities, of $5,291 at December 31, 1998, an increase of $10,580. Net
cash used in operating activities during the nine months ended September 30,
1998 and 1999 were $5,813 and $1,856, respectively. Net cash used in operating
activities resulted mainly from the net loss for the nine months ended September
30, 1999, offset by non-cash charges for depreciation and amortization and the
change in current liabilities resulting from reclassification of accrued
interest relating to the Companys Senior Notes to long-term.

Cash Flows from Investing Activities

Cash used in investing activities during the nine months ended
September 30, 1998 and 1999 were $6,225 and $1,446, respectively. In the first
nine months of 1998 and 1999, cash used in investing activities consisted mainly
of purchases of telephones and other property and equipment, including the cost
incurred in 1998 for the equipment and upgrades relating to installed pay
telephones acquired from TDS Telecommunication Corporation on May 18, 1998.

Cash Flows from Financing Activities

Cash flows provided by financing activities during the nine months
ended September 30, 1998 and 1999 were $12,862 and $3,861, respectively, which
in 1998 consisted primarily of borrowings under the Companys Credit Agreement
for capital expenditure and working capital purposes offset by principal
payments on borrowings and debt financing costs. Cash flows used in financing
activities during the nine months ended June 30, 1999 consisted primarily of
additional borrowings under the Companys Credit Agreement and D.I.P. Loan
Agreement offset by debt financing costs and expenditures for professional fees
for the restructuring of the Companys Senior Notes.

Debt Restructuring and Chapter 11 Bankruptcy Filing

In January 1999, the Company announced that it had reached an agreement
in principle with the Unofficial Committee providing for the
conversion through the Prepackaged Plan of the Senior Notes and
accrued interest into 95% of the New Common Stock of the reorganized Company.

The Company solicited acceptances of the Prepackaged Plan from the
holders of the Senior Notes and the 14% Preferred in anticipation of the
commencement of a case under chapter 11 of the Bankruptcy Code. Effective June
11, 1999, the Company obtained acceptances of the Prepackaged Plan from holders
of 99.9 percent of the Senior Notes and 100 percent of the 14% Preferred shares
voting in response to the solicitation. Such acceptances substantially exceeded
the levels required to confirm the Prepackaged Plan.

On July 14, 1999, the Company commenced the Case in the U.S. Bankruptcy
Court in the Southern District of New York and thereafter continued to operate
its business as a debtor-in-possession. The Company also obtained an order from
the Court which allowed the Company to pay prepetition and postpetition claims
of employees, trade and other creditors, other than the Senior Note claims, in
the ordinary course of business.

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On October 20, 1999, the Court confirmed the Prepackaged Plan. Pursuant
to the terms of the Prepackaged Plan, claims of employees, trade and other
creditors of the Company, other than holders of the Senior Notes are to be paid
in full in the ordinary course, unless otherwise agreed, with the Company
retaining its rights and defenses with respect to such claims. Holders of the
Senior Notes will receive 9.5 million shares of New Common Stock of the
reorganized company in exchange for the Senior Notes. In addition, the
Unofficial Committee representing a majority in principal amount of the
Senior Notes will appoint four of the five members of the Board of Directors of
the Company. Peter G. Graf, will continue to serve as a Director on the New
Board for a period of one year following the consummation of the Prepackaged
Plan.

Holders of the 14% Preferred will receive 325,000 shares of New Common
Stock and New Warrants to purchase up to 722,200 shares of New Common Stock at an
exercise price of $10.50 per share which expire three years from the date of
grant. Holders of existing common stock will receive 175,000 shares of New
Common Stock and New Warrants to purchase up to 388,900 shares of New Common
Stock. Options and warrants to purchase existing common stock will be
extinguished pursuant to the Prepackaged Plan.

The equity interests issued in connection with the Prepackaged Plan are
subject to dilution by certain other equity issuances, including issuances to
certain financial advisors of the Company for services rendered in connection
with the reorganization, and issuances resulting from the exercise of certain
options to purchase up to 5% of New Common Stock to be issued by the New Board
pursuant to the terms of the Management Incentive Plan included as part of the
Prepackaged Plan.

Upon consummation of the Prepackaged Plan, the total amount of New
Common Stock outstanding will be 10,205,000 shares. In addition, 1,111,100
shares of New Common Stock are reserved for future issuance upon the exercise of
the New Warrants, and an amount equal to 5% of the shares of New Common Stock is
reserved for issuance pursuant to the terms of the Management Incentive Plan.
Under its Amended and Restated Articles of Incorporation confirmed as part of
the Prepackaged Plan, the total authorized capital stock of the Company is
15,000,000 shares of New Common Stock.

The Company will consummate the Prepackaged Plan in the fourth quarter
of 1999 and thereby complete the Restructuring which will result in an
extraordinary gain on early extinguishment of debt of approximately $70,000 and
a material increase in stockholders equity. In addition, cash flow required for
debt service will be reduced by $15,000 annually upon conversion of the Senior
Notes to New Common Stock. Upon implementation of the Restructuring, management
believes, but cannot assure, that cash flow from operations (including
substantial collections of accounts receivable from dial-around compensation) or
from additional financing will allow the Company to sustain its operations and
meet its obligations through the year 2000.

Credit Facility

Beginning December 31, 1998, the Company was not in compliance with
certain financial covenants and was in default under the Credit Agreement.
Accordingly, the Company classified the amounts due under the Credit Agreement
as a current liability at December 31, 1998. In addition, beginning April 1,
1999, the Company was required to pay the default rate of interest which is two
percent per annum higher than the otherwise applicable rate (11.75% through July
21, 1999).

In April 1999, the Company requested and received an additional advance
of $2,500 which increased the principal balance outstanding under its Credit
Agreement to $42,500. Proceeds of the advance were used for the payment of
professional fees and expenses, loan fees and certain accounts payable. The
Company also received a commitment from the Lenders to provide $45,900 in D.I.P.
financing in anticipation of the Case described above. The Company incurred $250
in fees relating to the additional advance and a $250 fee for the D.I.P.
financing commitment.

On July 21, 1999, the outstanding balance of the Credit Agreement was
paid from the proceeds of the D.I.P. financing, the terms of which are described
below. The Company incurred an extraordinary loss from early extinguishment of
debt of $2,094 due to the write-off of deferred financing costs related to the
Credit Agreement.

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Debtor-in-Possession Loan Agreement

On July 14, 1999, the Company entered into the D.I.P. Agreement with
Foothill. The D.I.P. Agreement provides a $45,900 revolving credit commitment,
which was used to pay the outstanding balance, including accrued interest, due
under the Credit Agreement on July 21, 1999. The Company also received advances
totaling $2,649 for working capital purposes and at September 30, 1999 had an
additional $425 available for the payment of legal and other costs associated
with the Case.

Interest on the D.I.P. Agreement is payable monthly in arrears at 3%
above the base rate (as defined therein) through November 12, 1999 and 3.75%
above the base rate thereafter. The loan is secured by substantially all of the
assets of the Company. The D.I.P. Agreement includes covenants which limits the
incurrence of additional debt, capital leases, liens and the disposition of
assets. The D.I.P. Agreement matures on the earliest of the date on which the
Company emerges from its Case, converts to a case under chapter 7 of the
Bankruptcy Code or November 15, 1999. On or about November 15, 1999, the Company
expects to refinance the D.I.P. Agreement with its current lenders from the
proceeds of the post reorganization loan described below. Accordingly, the
D.I.P. Agreement has been classified as long-term in the accompanying
consolidated balance sheets.

Post Reorganization Loan Agreement

The Company has obtained a commitment from Foothill and expects to
execute an agreement for post reorganization financing on or about November 15,
1999. The Exit Agreement provides for a $46,000 revolving credit commitment (the
Maximum Amount), excluding interest and fees capitalized as part of the
principal balance. The Exit Agreement is secured by substantially all of the
assets of the Company and matures two years after execution of the Exit
Agreement.

The Exit Agreement provides for various fees aggregating $9,440 over
the term of the loan, including a $1,150 deferred line fee, which is payable one
year from the date of closing, and a $10 servicing fee which is payable each
month. At the option of the Company, payment of other fees, together with
interest due thereon, may be deferred and added to the then outstanding
principal balance. Fees due pursuant to the Exit Agreement are subject to
certain reductions for early prepayment, providing the Company is not in default
on the Exit Agreement.

The Exit Agreement provides for interest on the outstanding principal
balance at 3% above the base rate (as defined in the Exit Agreement), with
interest on the Maximum Amount payable monthly in arrears. The Exit Agreement
includes covenants, which among other things, require the Company to maintain
ratios as to fixed charges, debt to earnings, current ratio, interest coverage
and minimum levels of earnings, payphones and operating cash (all as defined in
the Exit Agreement). Other covenants limit the incurrence of long-term debt, the
level of capital expenditures, the payment of dividends, and the disposal of a
substantial portion of the Companys assets.

Capital Expenditures

For the nine months ended September 30, 1999, the Company had capital
expenditures of $1,158, which were financed by cash flows from operating
activities and proceeds from the Companys debt agreements. Capital expenditures
are principally for replacement and expansion of the Companys installed public
pay telephone base and include purchases of telephones, related equipment,
operating equipment and computer hardware.

Seasonality

The seasonality of the Companys historical operating results has been
affected by shifts in the geographic concentrations of its public pay telephones
resulting from acquisitions and other changes to the Companys customer mix.
Historically, first quarter revenues and related expenses have been lower than
other quarters due to weather conditions that affect pay telephone usage.

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Impact of the Year 2000 Issue

The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Companys computer hardware or software that is used to process date-sensitive
data may recognize a date using 00 as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send commissions, or engage in similar normal business activities.

The Company has completed a detailed assessment of the Year 2000 Issue
and has developed a plan for compliance. In the fourth quarter of 1998, the
Company began to implement its plan relating to its accounting, business
operations and corporate telephone systems. Complete implementation of the
Companys plan is dependent upon obtaining and installing the remaining
equipment to operate updated versions of proprietary software from a pay
telephone manufacturer. The Company has not incurred any significant costs to
date and the cost to achieve full compliance is currently estimated to be less
than $100.

Management believes the Company will be able to complete its plan and
achieve full Year 2000 compliance before the end of 1999. Management does not
believe the Year 2000 issue will have a material effect on future financial
results or cause reported financial information not to be necessarily indicative
of future operating results or future financial condition.







Item 3. Quantitative and Qualitative Disclosures about Market Risk
            (In thousands of dollars)

In the normal course of business, the financial position of the Company
is subject to a variety of risks. In addition to the market risk associated with
movements in interest rates on the Companys outstanding debt, the Company is
subject to a variety of other types of risk such as the collectibility of its
accounts receivable and the recoverability of the carrying values of its
long-term assets. As of September 30, 1999, the Companys long-term obligations
primarily consist of the Senior Notes and its $45,900 borrowings under the
Companys D.I.P. Agreement. The D.I.P. Agreement is expected to be refinanced
with the proceeds of the Companys $46,000 Exit Agreement on or about November
15, 1999. As discussed in Note 2 to the Companys consolidated financial
statements, the Court has confirmed the Prepackaged Plan and the Senior Notes
are converted to New Common Stock as part of its plan of reorganization.

The Companys earnings and cash flows are subject to market risk
resulting from changes in the interest rates with respect to its borrowings
under the Companys D.I.P. Agreement and Exit Agreement. The Company does not
presently enter into any transactions involving derivative financial instruments
for risk management or other purposes due to the stability in interest rates in
recent times and because management does not consider the potential impact of
changes in interest rates to be material.

The Companys available cash balances are invested on a short-term
basis (generally overnight) and, accordingly, are not subject to significant
risks associated with changes in interest rates. Substantially all of the
Companys cash flows are derived from its operations within the United States
and the Company is not subject to market risk associated with changes in foreign
exchange rates.

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Part II. Other Information







Item 3.    Defaults Upon Senior Securities

                (In thousands of dollars)

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|(a) | The Company has not paid the semiannual interest payments in the amount
of $7,500 each which were due December 15, 1998 and June 15, 1999 on
the Companys Senior Notes and, pursuant to the terms of the indenture,
the Company is in default on the Senior Notes. As discussed in Note 2,
the Companys Prepackaged Plan has been confirmed by the Bankruptcy
Court and the Senior Notes and accrued interest are converted under the
Prepackaged Plan into New Common Stock.







Item 6.    Exhibits and Reports on Form 8-K

|     |                                                                                                                                                                                                                                                                     | 
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|(a)  | Exhibits:                                                                                                                                                                                                                                                          
|    
|    
|    
|    
|    
|10.1 | Loan and Security Agreement by and among PhoneTel Technologies, Inc. and Cherokee Communications, Inc.
as Borrower and the Financial Institutions that are Signatories Hereto and Foothill Capital Corporation
as Agent dated July 14, 1999.                       
|    
|    
|    
|    
|    
|(27) | Financial Data Schedule                                                                                                                                                                                                                                            
|    
|    
|    
|    
|    
|(b)  | Reports on Form 8-K                                                                                                                                                                                                                                                
|    
|    
|    
|    
|     | The Company filed a report on Form 8-K dated November 4, 1999,
reporting under Item 3, Bankruptcy or Receivership, the confirmation of
the Companys plan of reorganization by the U.S. Bankruptcy Court for
the Southern District of New York on October 20, 1999.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|                  |  |                                                                                                                                       
|----------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|                  |  | PHONETEL TECHNOLOGIES, INC.                                                                                                           
|                 
|November 15, 1999 |  | By: /s/  John D. Chichester
President and Chief
Executive Officer                                                                     
|                 
|November 15, 1999 |  | By: /s/ Richard P. Kebert
Richard P. Kebert
Chief Financial Officer and
Treasurer
(Principal Financial Officer and
Accounting Officer)

28